The push for employees to become a "Consultant, freelancer or independent contractor" was the hope from companies that they could unload many costs of business to their ex-employees. Things like phone rental, insurance, car running costs, tools, etc.
However, people quickly learnt that unless the remuneration was increased in proportion, then the ex-employee was much worse of.
Plus the Tax Man quickly got involved and ruled that many Contracting arrangements were actually a sham.
There are now a list of standard tests to determine if a supposed contractor is actually an employee.
> There are now a list of standard tests to determine if a supposed contractor is actually an employee.
Not in the UK there's not.
HMRC refuse to provide a definitive list or say how they determine if a contractor is "acting as a disguised employee" (BTW you're still not an "employee" even if you're working Inside the IR35 regulations).
Instead they provide a vague tool that gives you some suggestions but reserve the right to arbitrarily decided later who is and isn't an independent contractor. They can, and have, retrospectively change the rules even for accepted tax returns.
That puts a lot of risk on anyone doing contract work. When the government changed the rules to shift some of that risk the customer, many customers just decided to drop small external contractors all together rather than work to a vague set of suggestions that they can't definitively say if they're complying with.
For small contractors it's difficult to get insurance for IR35 risks because of this. You can get it but it's not cheap or easy compared to other liabilities.
The contract market in the UK has been slowly dying since the tabloids first decided that contractors where another group they could demonise and the Tories gleefully went along with it.
IR35 is an absolute clusterfuck and I'm glad I left the UK and contract in Australia now.
It's a huge financial risk being held over your head at every turn. If HMRC decide to investigate that can cost you and you're likely to be on the hook for all sorts of legal fees to fight them.
If the courts side with them and decide that you are, in fact, caught by the legislation, they don't seem to work out liabilities based on what you paid in corporation tax, dividend tax etc, and what would have been owed under PAYE and NI, no, you get sicced with the whole lot again AFAICT. Neither does your determination as an employee entitle you to the employment benefits you would have had - pension contributions, paid time off etc - under that status. The whole thing is a big "fuck you" to the contractor.
IMHO it only exists because of the imbalance in taxes in the UK between earned and invested income. The system is broken and in response, instead of fixing it, they decided to fuck over small players by putting them in jeopardy.
IR35 was full of good intentions. Businesses were abusing the system by forcing low paid workers into self employment and contracting. This allowed them avoid paying national insurance or any normal employment benefits.
Unfortunately highly paid consultants have been swept up into very badly implemented legislation.
You are assuming there were good intentions. The real reason for this legislation was the fact that big consultancies were losing talent. Why should someone work through a big consultancy if they could work with the client directly.
Like, why earn £50k at consultancy if you can make £500 a day without them. It's a no brainer.
So these big firms lobbied Treasury and government and they used tax avoidance as a vehicle for the "reform". It's funny though how the fact that big consultancies are actually avoiding paying tax is never brought in.
Like tax yield from a big consultancy employee on £50k is substantially lower than from a contractor on £500 a day, even if they pay themselves the mythical low salary + dividend (which is a result of PAYE being not fit for purpose, but I digress).
Currently IR35 actually _enables_ abuse of low paid workers, because they can get hired on inside IR35 and can't get any employment protections.
Yeah I don't disagree entirely with the intent - stop tax dodging by dodgy companies and by dodgy contractors.
But the implementation, my god, it's a mess, and it seems to put the liability all in the wrong place, on the weakest party in the relationship.
And as I said elsewhere, the root cause of the difference in taxation for the contractor is that investment income is taxed less than earned income, something I find pretty hard to accept in principle.
The intention was to sweep up the consultants. They even bragged about getting an extra £1 billion out of these people.
It was mostly about enforcing a clearer class distinction between dirty workers and good clean capitalists (who are handed a lower tax bill).
The list of rules actually has an interesting historical parallel - the Soviet Union would deport peasants ruled "outside ir35" to siberia and confiscate their assets in a process known as dekulakization.
It really is a disaster for innovation. If a startup wants to launch or a company want to start a new product then they need a flexible workforce. They are going to end up with system integrators or nothing.
forgive me if I am wrong. what I can see from rudimentary search on IR35 is that it is meant to make people pay the same tax whether. employed or working as a contractor.
personally I find that reasonable. the government should subsidize contractors.
so if a contractor just sets aside the same amount as they would have had to pay in a salaried job (including employers contribution) then all should be good?
obviously this should be factored into the cost of doing business, but if a person deems themselves fit for contracting, then they are also fit for this administrative overhead.
> forgive me if I am wrong. what I can see from rudimentary search on IR35 is that it is meant to make people pay the same tax whether. employed or working as a contractor.
It's not that you're wrong, it's that what you're suggesting is naive.
There is no "equivalent" tax rate when working through a limited company and when IR35 applies per contract and not per worker.
That's just not how tax works here. Instead you pay an accountant to estimate your accounts, hand them to HMRC and they either accept them as correct or hold a tax investigation.
HMRC can't and won't tell you what you should pay, they just say yes or no to the estimate you provide them.
There is no way to know what a potential future fine might be because they could reopen all previous year's tax returns.
If they can't tell you then how can anyone else know what they should set aside?
I have also worked as a contractor (In Denmark, though). Working as a contractor in software development is rather forgiving, as there are only insignificant expenses. Therefore I can report most / all of my revenue as profits and pay full income tax. Knowing the basics of the Danish tax code, I can estimate my contribution and just pay it on a monthly basis to SKATs (Danish IRS) bank account. EOY I will report all my deductions, banks report all my capital gains, etc. and SKAT calculates the tax true rate and automatically pays me back within a week. If I forgot something, I can change merely change my reporting and everything is recalculated instantly.
However, hearing about the systems in other countries makes me appreciate the Danish system.
> forgive me if I am wrong. what I can see from rudimentary search on IR35 is that it is meant to make people pay the same tax whether. employed or working as a contractor.
Yes, it is meant to, and that's perfectly reasonable as a starting point. That's how things are here in Australia AFAICT, without the need for this sort of legislation. If you are found to be inside the equivalent legislation in Aus, it mostly just affects what sort of expenses you can claim.
In the UK though, there is a legitimate question about why tax should be different if (for example) I go into business selling my skills and sell them to a client company vs IBM selling my skills to a client company. Why should the big firm get to pay its people a salary with a part of their fees, then give profits to its shareholders as dividends, if a one-person operation cannot do the same?
Also, as a contractor I am not an employee. I do not get employment benefits. I do not get pension contributions. I do not get paid leave or cover for illness. Does this mean I should pay less tax? Perhaps not, but it does mean that the concerns are different.
That all said, in general, I agree with you, the same rough tax rate should apply. I didn't do contracting/consultancy as a tax dodge.
The root cause of the issue that the government is addressing here, very badly, is that the tax rates are badly coded and favour investment income over earned income, something which I think is deeply wrong in UK society anyway. Normalise these and the whole issue goes away.
> so if a contractor just sets aside the same amount as they would have had to pay in a salaried job (including employers contribution) then all should be good?
No, as I called out in my comment above, the outcomes of status investigations are not "make up the difference", it's "pay all the tax without taking into account anything that's already been paid". And that's before we get into legal and accountancy fees, the fact that expenses incurred in doing business will be re-evaluated and likely denied as ineligible, and you won't get any of the benefits you would have been owed by the business or by the government as an employee. You'd have to put a lot more aside than the difference, it ruins people. And it costs a lot more people money - there are a variety of forms of insurance people take out to cover the costs of investigations, court proceedings and even the eventual liabilities.
As written elsewhere, I can appreciate the differencen between the tax codes in different countries.
When I contribute to my tax-exempt pension in Denmark, I can deduct that in whatever income I have, whether that is from an employment or profits of my own company.
> forgive me if I am wrong.
I think I need to defer to this one. I am completely ignorant on these things.
> what I can see from rudimentary search on IR35 is that it is meant to make people pay the same tax whether. employed or working as a contractor.
Yes, this is used as a vehicle to make this legislation palatable to the voter. The truth is, big consultancies who operate the same business model as a contractor are exempt from the legislation. So if big consultancy charges £500 a day for a worker, they don't have to pay PAYE on that £500, even though their worker work as de facto employees at the client's, but contractor would have to.
Being able to substitute staff. If you can accept a contract and then send your next door neighbour to do the work then that is a strong signal that you are outside IR35.
This is entirely irrelevant unfortunately. You could be able to send substitute and still be in-scope of IR35. It's ultimately down to the client's risk appetite.
They can't provide a definitive list because case law can always overturn it.
I guess the best they can offer is "if you do this, we will choose not to go after you". But even that can change, as you point out. They don't have the resouces to chase even close to everyone, so they have to rely on media messaging to do a lot of the policing for them (hence going after high-profile targets like TV presenters).
Scam Contacting is just another way of extending the Gig Economy.
Some professional people may be better off as contractors, but huge numbers of young people are being ripped off by being forced into irregular hours and trying to juggle multiple jobs.
It's not the left wing or the Unions who are behind the recent explosion of insecure work.
A good accountant will make suggestions about things like control over work and deliverables but they can't tell you for sure if a contract is Inside or Outside.
They don't know that because HMRC don't publish that information and their online tool only makes suggestions that you maybe inside or you maybe outside.
You might think "just operate like a business not an individual" but that's not as easy as you might think.
IR35 applies per contract not per worker. So having multiple concurrent customers doesn't protect you.
If, say, you set up deliverables for a piece of software, deliver it to schedule and provide support during a testing period.
Is that Inside or Outside IR35?
The work has deliverables so that sounds like you're operating Outside. Hang on though, it also has a time-base component where you're providing support. I'm afraid time-base is probably Inside.
Your accountant does not know for sure and they won't provide you with any real form of indemnity for their advice because of that.
Netherland also still doesn't have clear rules about that. A couple of years ago they tried several things, and people and companies rebelled against some of those, and now they're mostly ignoring the whole issue again, I think.
At least in my field, where contractors are paid far better than employees. There are also obvious, blatant cases where companies do use this as a loophole to reduce costs. And sometimes they do that with permission from the tax service, even! PostNL, the Dutch postal service fired all their mail deliverers and hired them back as contractors, but they still had to follow the schedules set by PostNL, wear their uniform, etc. Yet the tax service approved that.
I don't get it. I think that's a blatant case of the abuse they're supposed to fight. But at least they're leaving me alone for now. I think the unspoken rule is that if you're paid well, it's probably fine, and they're focusing on cases where people are underpaid and unable to save up for retirement. Because those are the cases where this is going to cause problems.
In Netherland, being a consultant, freelancer or independent contractor is the only way to get paid your worth. Salaries for programmers are often terrible. Well, maybe not terrible, but lower than they should be.
I had a project at a bank, where I created the initial prototype for a new, vague idea and guided the project (through constantly changing product owners and other team changes) to become very successful. Because the tax service was being difficult about the difference between a self-employed contractor and an employee, the bank had a rule that self-employed contractors couldn't stay for more than two years, but after two years, I wasn't done with that project yet. So I became an employee.
The bank has pay scales for employees, and I had to fit in there. Software engineers could have a pay scale from 8-12, product owners, scrum masters, business architects and other people I worked with had pay scales from 10-13. One freelancer-turned-employee that I spoke to came from a very similar hourly rate to scale 12 (as product owner). I figured I was worth scale 12 too, but it turned out they had no programmers in scale 11 or 12 at all, and 10 was the maximum that was used, despite the fact that 10 was the minimum for pretty much every other job at that department.
Later at a department-wide meeting, the manager had the gall to complain that all their senior engineers would leave.
Many other companies pay similar rates for programmers as employees, but have no problem paying much more for you when you're a contractor or freelancer of some sort.
It is not that simple and varies country to country. Here Finland best software developers usually go consulting/freelancing in their later career because that is where big money is in our software ecosystem and it has some rather big tax benefits.
Here in the Netherlands I've seen this too. It's somewhat confusing to speak about freelancers as a single group because they stretch all the way from doordash drivers making minimum wage (and sometimes less) to well-paid someware developers making about twice what a employed senior dev would. One of those is economically precarious and needs (government) assistance, the other is doing just fine.
also I should note for being a consultant to make any sense you should really make twice as much as a permanent employee since you have to take care of your own pension, vacation, often have to pay for meals where employees get them paid for, and have the chance of going some months without work when a contract gets over.
Also sick days, public holidays etc. Yeah, twice the rate is just about right to compensate all the added stress and potential to have 0 income for months, without much of a social safety net. Good year and you will come on top easily, a bad one can literally wipe you off the face of Earth. Also depending on given system pension savings can be minimal.
Once you have kids and whole family to feed and pay various expenses for, the pressure to keep earning is non-trivial. There is some envy from perm employees towards better paid contractors, but I always tell them to try that. A lot of 'but but XYZ' reasoning for why it can't be done now happens afterwards.
> a bad one can literally wipe you off the face of Earth
This is where living in western Europe helps a lot. But yes, you have to take care of more things yourself. If you cannot maintain a financial buffer of at least a few months, I would not advise starting off on your own just yet.
I live in The Netherlands and work as a contractor. I would have to sell my house, my car and eat through all of my savings including most of my retirement fund before I am eligible for long-term unemployment (bijstand). And there isn't any other form of safety net for contractors. Not really an option for me.
We do have private insurance so that you don't bankrupt yourself in case you get cancer.
Because much of Western Europe has a better social safety net (especially healthcare) than many other places, a lot of people seem to think that being out of work for an extended period really isn't a big deal.
Even in western Europe, being self-employed means you're opting out of a lot of the things that are so well-arranged for employees. No paid sick leave, no paid vacation days, no unemployment benefits, you have to save up for your own retirement and get your own disability insurance.
And yet, for me it works. I'm much happier this way somehow.
I write this from Western Europe perspective, it goes all downhill on social help from there anywhere else you look :)
You don't have that much of social safety net when working on your own, thats mostly for perm employees. Financial buffer is obvious, but what if you end up with some horrible accident or illness that will drain it and need more. The amount of continuous stress is much higher compared to perm employees, additional bureaucracy, the need to chase next employment, overall insecurity etc.
Depends on the domain. IME there are niches outside of CRUD where you can be backlogged for years: you'll have to solve hard problems though which is not a good fit/WLB for everyone.
Same in Germany. You can get about twice the pay (if you manage to stay fully booked), though you don't save anything in taxes -- unless you count in VAT free equipment purchases and avoiding the public pension scheme.
Are you saying you can't get any of your business revenue classified as capital gains, or that capital gains are not taxed lighter than salaries in Germany?
In Finland, you actually have to participate in the public pension scheme even as an enterpreneur - this is part of the mandatory social security system.
In Finland, the first part of the dividend is taxed very lightly. That's not the case in Germany, where all dividends are taxed at the regular capital gains rate. Which yes is generally lower than your income tax rate.
But you're also paying corporation tax, which pushes the tax rate a bit above what you'd pay if you just paid the regular income tax. And then you're in another level of bureaucracy and accounting.
That was the rough situation when I was considering incorporation and abandoned the idea. Others have taken the company route and may have found ways to make it work for them.
Agree to an extent. Contractor relationships are abused at many companies, but this is usually the case with mid to low level positions. People who make it through senior ranks and go on to become consultants get treated very differently. The latter is also incredibly lucrative.
Can confirm. Senior consultants are also very valuable to companies because they can say and do things that are necessary but politically taboo within the organisation. - Like pointing out underperforming teams and managers to upper management.
> Plus the Tax Man quickly got involved and ruled that many Contracting arrangements were actually a sham.
That's not entirely true. The tax man was lobbied by big consultancies that were losing talent. Because quite often, an employee of consultancy would have found they could make more money by working with the consultancy client directly and cutting out the middleman.
If these arrangements were "a sham" then tax man would have included big consultancies in the scope of relevant legislation, like IR35 here in the UK.
> people quickly learnt that unless the remuneration was increased in proportion
I mean, not only is this my experience, but that's the trope, no? You get fired and then hired back as a consultant for twice the cost? Regardless, if that isn't happening, this doesn't seem like a problem we should be fixing using government. No matter how you are classified, you need to make sure the net compensation you are receiving for doing the job is worth all the costs (which includes not only any time and materials you are supposed to be bringing to the job yourself, but also indirect stuff like occupational risk exposure).
To put this story in reverse: somehow in the United States we've pawned off the problems we SHOULD be solving using government--stuff like health care, retirement planning, and disability leave--to private companies to each separately manage for their individual pool of employees, which has resulted in a system that privileges larger companies that can have larger and more amortized employee pools and has created this ridiculous idea that there is this concept of an "employee" that must be mandated and enforced. It is all a massive misdirection that helps lock in and prevent collective action.
That’s easily remedied. Many companies will not work with 1099 contractors and will only work with third party consulting companies.
When I was a dev lead, my manager wanted “another me”. I had a friend looking for work and he wanted $80/hour. My manager didn’t have a problem with the hourly rate. He was willing to pay $110 per hour to the consulting agency we were going through so they could hire him and we could work through them.
True. Germany has strict rules against scheinselbständigkeit (shadow employment) as well. However many intrepid consultants find ways to skirt around it.
> However, people quickly learnt that unless the remuneration was increased in proportion, then the ex-employee was much worse of.
People who have only ever been employees are often ignorant of how much money is spent on them that they never see. It can be quite a shock when they become self-employed and are required to pay these costs directly. Although that's nothing compared to the shock when they learn they now have to pay taxes quarterly, and in advance of each quarter.
My (very rough, US-based) rule of thumb is that I need to bring in revenues between 50 and 100% greater than what I want to "take home" in terms of personal income.
Which tax man in what countries? Based on your vague description I see a picture of labor protection asking employers to pay their fair share, not the tax man.
Yes that's the problem. People often work exclusively for a single employer but call this contracting because supposedly it's a deal between two companies (a real company, and a one-person shop). But no, that's still an employment contract, this is determined by the nature of the relationship, not by specific words written in the contract or rituals such as issuing an invoice.
The core difference is contract of service vs contract for service (in the UK anyway). How many employees you have, or how many clients you have, doesn't enter into it because the decision is made on a per-contract basis.
If you think the length of the contract should be the determinant of the relationship, I have to ask what you think the maximum should be? I assume you still want to be able to hire a builder for three weeks to build an extension without going to the trouble of paying his tax for him, but you think three months for an IT contract turns you into a disguised employee. So where's the line?
Probably around the 3 months, maybe 6 months. It's also not just about time. Smarter people than me would have to answer, but the general principle, following the spirit of employment law, seems rather obvious.
Imagine I started a warming-up business, where you could sign a short contract for warm french fries and warm cooked meat. But I'd insist it's not a restaurant, so that any hygene rules do not apply to me.
They have! Lawmakers and judges that are better at this than both of us put together have been wrangling over it for decades. The spirit (and letter) of the law is pretty clear that length of service is not a consideration here - in fact, HMRC don't include it in their CEST tool, which is very maximalist.
The actual tests, in law, are supervision direction or control, mutuality of obligation and right of substitution. IT contractors are generally weakest on substitution - it's written in to contracts as a fig leaf, but very seldom triggered. If a court finds that actual working practices differ from what's written in the contract they'll prioritise working practices in determining employment status. The clause I had to modify most often was one attempting to control working hours - because that would point to supervision direction or control. It's amazing how many agency contracts had that baked in.
Is this a problem though? I a lot of countries you can open a 1 shop company, and any two companies can sign whatever they agree on into the contract. Of course some higher level laws may void (parts of) the contract.
Do you think that “nature of the relationship” is more important than wording of contract? Why?
If countries hate the idea of 1 person shop contractors they can still ban the “shadow employment” via higher level laws. If they don’t I don’t understand how this is a problem.
> If countries hate the idea of 1 person shop contractors they can still ban the “shadow employment” via higher level laws. If they don’t I don’t understand how this is a problem.
They do. The problem is deciding whether you are a contractor or an employee under such laws, and the risk that the tax man (and employment insurance system including health care and pensions) will retroactively deem you a factual employee, thus creating a large set of potential liabilities for all involved.
Not currently in Poland. There were attempts to do so though. All in all certain presumptions can trigger red flags for the tax office, all and any of the following: 40h a week, paid days off (especially 20/26 days), work in the same place, at the same time, under supervision. With IT its safest to contract for a company without entity in Poland. Also you’ll find many people who still cover a lot of the above and never been bothered by the tax man. So I’d say its just being extra careful.
Not in all of EU: at least in Finland, the tax office clarified a long time ago that if the papers (business registration, contracts, insurances etc.) are done properly, the number of clients doesn't matter.
However, people quickly learnt that unless the remuneration was increased in proportion, then the ex-employee was much worse of.
Plus the Tax Man quickly got involved and ruled that many Contracting arrangements were actually a sham.
There are now a list of standard tests to determine if a supposed contractor is actually an employee.