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Goodbye to IR35 from FLC

New (non-IR35) world order courtesy of IPSE

The Association of Independent Professionals and the Self-Employed (IPSE), formerly known as the PCG, are trumpeting an idea dreamt up on the fringe of a Labour Party conference.

This is the Freelancer Limited Company (FLC), a business model that would allow contractors to work IR35 free but not totally released from the shackles of employment status.

Features of the FLC would be:

  • Only one shareholder, that being the person who generates profits for the business.
  • Contractor would be required to join a freelancing register.
  • Agreement by the contractor to extract profits by way of a fixed fair salary-dividend split.
  • Automatic recognition as a genuine business and therefore exempt from IR35.
  • Employment status would still be an issue but less onerous, as tests such as substitution and multiple/concurrent clients would be dispensed with.
  • Simplified accounting.
  • Ability to register for benefits between contracts.
  • Entitlement to tax credits for sickness, maternity, paternity and other leave.

Although the FLC would provide an IR35 free environment, there would still be a need to demonstrate that the freelancer’s contract was one for services, i.e. self-employed, so the issue of employment status would not vanish. The model would therefore remain subject to existing tax legislation, with the exception of IR35 of course, and also employment law.

The IPSE are not suggesting that all contractors should be forced into an FLC but offer the FLC model as an alternative and to compliment the traditional personal service company. Contractors would therefore be able to continue to run their own PSCs and live with IR35 as they have been doing for the last 14 years.

This idea may appeal to the more safe minded or lower paid freelancers but for those skilled professionals who are able to command generous fees, the model would appear to stifle their ability and choice to reward themselves in the most tax efficient manner they desire. Does it therefore have sufficient appeal to the freelancing community or would the opportunity to be free from the shadow of IR35 be reward enough?

The FLC was one of four taxation proposals set out in the IPSE’s September manifesto, titled, ‘Britain’s Secret Weapon’, that the next Government must implement. The other three being:

  • Harmonisation of income tax and NIC. This would be the most effective way of signalling the end of IR35 but it is a massive and complex undertaking and we may still be some way off seeing this happen.
  • Establishment of an independent body of experts to bring about the merger of income tax and NIC. This would be comprised of experts from Government and industry who would set out a framework and timetable for achieving this aim.
  • Abolition of the 24 month rule for contractors. The travel expenses rules are cumbersome and unclear and iniquitous as they apply to ordinary employees and independent professionals without recognising that those in the latter category have to be flexible and are running their own businesses.

I am with the IPSE all the way with the above three proposals but not so much with the FLC. It may add another layer of confusion to an already uncertain tax system. Nevertheless it may have an appeal in certain quarters but not for the aspiring contractor who wants to reap the fruits of their hard labour. Contractors would still have to address the issue of employment status and presumably if their contract was deemed to be one ‘of service’, then they would be forced to take a full salary. At least with IR35, in the same scenario, a flat 5% expense is allowed as a deduction against income.

By Andy Vessey

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13 thoughts on “Goodbye to IR35 from FLC”

  1. Concerned Contractor

    The main problem that I see with FLCs is that contractors will be subtly forced into using them by the conduct of agencies. Just because the government and IPSE say it’s optional doesn’t make it so – see the opt out of the Conduct of Agency Regulations secured by the PCG for an example of how “optional” doesn’t always work out like that in reality.

    When testifying to the House of Lords, the PCG CEO said that the introduction of a “PSC” legal entity would be one that the members would absolutely not want, but a year later it is now in the manifesto, but would be “optional”.

    An FLC will remove the uncertainty of IR35 by effectively making you inside IR35, and agencies will be coerced by HMRC into only dealing with umbrella employees and FLC operators. This will be bad news for contractors.

  2. bolshiebastard

    So, after the PCG’s, scock up over the Agency Regs and being made to look mugs by the tories (hey boys, we got the tories to agree to look at IR35 if they get into power!) they now sell us out with this bastardised FLC that from a tax point of view, is just a renamed IR35.

    Well done PCG. Sorry, IPSE. Not!

  3. KD

    And then there’s the “fixed fair salary-dividend split”. Even if they manage to get an agreement with the freelancers over what “fair” is, there’s plenty of room for scope creep in future years once lots of people have switched over to FLC.

    We’d be a very easy target for greedy/lazy politicians since it wouldn’t affect the vast majority of people and so it would be a very easy way to raise tax revenue without angering the general public.

    The main line of defence we have against HMRC at the minute is that face that we operate through limited companies. This makes it very difficult for them to legislate against us without affecting every other limited company out there too (hence the vague and almost unenforceable nature of IR35). If we allow them to put us in our own “FLC box” they will have effectively separated us from all the other limited companies out there and we will be a much easier target in the future.

    Harmonisation of Income Tax and NIC is the only sensible way forward and we shouldn’t settle for anything less.

  4. Peter

    We certainly don’t need the government imposing their ideas of what is “fair” – a group completely disconnected from the world of real work and the private sector, let alone freelance work. Even without any information on what is intended, it is a disaster waiting to happen.

  5. Mark

    Seems the PCG has finally become a fully fledged member of the establishment, I cancelled my subscription years ago!

  6. SdOffPSE

    “trumpeting”

    They do a lot of that don’t they.

    Useless bunch of tax avoiding cnunts.

  7. Ex member

    This makes my blood boil.

    I suggested this a long time ago when I was daft enough to be a member of Oopsie when they were the PCG.

    They rubbished the idea in the chimps’ tea party known as their member forums, saying that it was “impossible”.

    The main problem they saw was that I suggested that such freelancer companies should be able to pay tax under Schedule D, the sole trader rates of tax and NI.

    This gets rid of the major IR35 issue, namely Employers NI. It is totally unfair that what are effectively self-employed / sole traders should pay any ER NI at all.

    Note that sole traders don’t pay ER NI, in fact the NI they pay under Class 2 & Class 4 is about 9%, slightly lower than employees and cutting off to 2% at the same level as Employees NI.

    The reason contractors have to incorporate is that agencies may be liable for the NI if the contractor were a sole trader, so they insist on the Ltd approach. IT’s not a tax dodge by the contractor, it’s forced on them and they do the best they can to avoid a massive tax hit.

    For some reason the idea of a special type of Ltd Co paying Sch D was seen as ridiculous by the PCG, although they could offer no logic whatsoever up against the idea.

    If such companies were to exist, why could they not levy Sch D? It would be vastly more sensible than any artificial idea of “fair” on a salary/dividend split, especially in view of the fact that ER NI would continue throughout any salary paid and there is no upper limit as there is with EE NI and Class 2 & 4.

    For Philip Ross to claim that this has anything to do with the Labour Party is a complete joke. He would have read my posts as far back as 2001 so any claim that this was anything to do with Labour is… well, it’s Philip Ross.

    He produced an article on Shout99 a few years ago asking what the Labour Party could do to win contractors’ votes (since contractors were hostile to Labour, who inflicted IR35 on them).

    Aside from the cries of derision, the overriding message was… it shouldn’t be about doing whatever it takes to win votes, it should be about doing the right thing. And that starts with understanding why IR35 is wrong and repealing the darned thing immediately.

    Bottom line: Philip Ross is a tribal Labour party voter who would vote for the proverbial “teddy wearing a red rosette” and will do whatever it takes to talk up that party – even inventing the source of ideas.

    And as for the PCG or Oopsie or whatever they are now… like one of the posters below, I also left that lot when they put forward the BETs to the OTS IR35 forum without so much as consulting or informing their members in advance.

    Was that the biggest own-goal in history? Or perhaps you choose to wonder if they realised how far their membership numbers would fall if there were no more IR35. To my mind they’re simply part of the vested interests group that were invited onto the IR35 group of “experts”.

    For them to be championing what they derided a few years ago and still getting it wrong with this nonsense about “fair split”… sigh. I despair, contractors really need a new organisation to champion their rights.

  8. Ex member

    Oh and of course I should add that my previous post is my opinion and only my opinion.

    Usual caveats, mutter, mutter.

  9. Soon to be ex member

    OMG. Really. Damn. My subscription just renewed. 1st the BET test from teh IR35 forum and now this. Nope these guys do not represent me. More like a bunch of wanne be union guys who think all high paid contractors should be paying NI, and realised that there’s more lower paid subs to be had from the newly recruited self empoloyed bunch – aka 0 hours contracts lot. Sorry to say I shall be leaving. Best bet it to fund Tax Payers alliance and get rid of NI/Stamp duty/Captial gains and bring in a flat rate tax on all earning instead – regardless of how you earned it.

  10. Ex member

    I’m disappointed to see Mr Vessey once again on the bandwagon of merging “income tax and NI”.

    Presumably you mean employees NI? Since it would make no sense to merge Employers NI into income tax, since income tax is a tax on earnings (levied on the worker personally) and employers NI is a tax on jobs (levied on the employing business).

    The issue with IR35 is employers NI. Those caught have to pay that throughout their income [b]in addition[/b] to employees NI in the usual bands.

    So merging employees NI into income tax would make no difference to those inside IR35 – those paying dividends may need to pay more but IR35 would still be applied and additionally demand the ER NI that would be due on any deemed salary payment.

    We’ve had this discussion before, Mr Vessey, so I’m surprised to see you still posting as if you don’t understand these basics.

  11. Andy Vessey

    Ex member, I think you maybe in a minority as back in 2011 the OTS said that a commitment from the Government to the integration of income tax and NICs, would lead to a reduction
    in the tax motivation for incorporation. The IPSE seem to think similarly. Is there something we are all missing?

  12. CharlieBean

    FFS PCG / IPSE

    LEAVE IT ALONE !!!

    Every time you attempt to lobby you make things so much worse.

    Do us all a favour and crawl back under your rocks and leave us the hell alone.

    You DO NOT speak for me !

  13. Ex member

    #11 Andy Vessey

    What you are missing is exactly what I mentioned in my post – the same as the last time I had to have this discussion with you:

    Merging tax and “NI” vaguely ignores the fact that there are two forms of NI, employers and employees. One form of NI (employees) is a tax on the individual and as such can be merged into income tax.

    The other (employers) is a tax on BUSINESS and as such certainly cannot be merged into income tax. I can imagine the rioting and disorder now… by everyone in this country who would just have been dealt a 14% tax rise [b]throughout their income[/b] (no upper limit on employers NI).

    It should be noted that there are some issues with merging employees NI and income tax – governments in this country have always kept them separate because dividend income also includes those who invest in stocks & shares, so to increase the tax to, say, 30% would deter investors in the UK stock exchange.

    That aside, the question is then… which form of NI is of most concern in IR35?

    The answer, without doubt, and by a very large margin… is Employers NI. This applies throughout the salary range.

    Employers NI was designed (badly) to be paid by businesses, but by putting contractors in the position of having a Ltd Co all but forced upon them, they are artificially made into both employer and employee when paying tax.

    A simple comparison between the take-home pay of a self-employed/sole trader person under Schedule D and that of those inside IR35 via a Ltd Co will show this very clearly.

    Things will be the same for tax purposes. Then you compare personal NI and you find that the Ltd Co person pays 11% employees NI while the Sch D person pays around 9% – and up to the same upper limit level.

    Then… the SchD people don’t pay any employers NI, but the Ltd Co does. There’s a 5% “allowance” in an IR35 case but that simply reduces 14% to 9% (I think it’s now closer to 15% and 10%). That’s a massive difference.

    IR35 is all about Employers NI, the personal NI that can be merged into income tax is largely a matter of supreme irrelevance.

    I hope you’re not going to waste more of our time by claiming that the company is a separate entity or any of the other nonsense I’ve had to deal with on the PCG forums in the past.

    And I also hope that this will finally be understood so that your future articles can be better focused on helping contractors, who need all the help they can get. With help like the PCG, who needs enemies, as they say?

    The effect of merging tax and employees NI would be that those using dividends would pay more than they do now, but would still be in the cross-hairs of IR35 when HMRC want to come after the Employers NI on any deemed salary. Another own-goal.

    The proposed FLC would effectively herd contractors into a milking stall (more of an abattoir?) and leave those outside as a more easily identified target. Yet another own-goal.

    What they COULD do, as a simple fix, is to increase the (relatively-new) Employers NI threshold from £2,000 to around £21,000 thereby removing it from small business calculations up to about £150k turnover/salary. Now IR35 would be similar to its Australian equivalent – which is only about whether or not people can claim/deduct expenses.

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