What’s £75 million between friends!
Back in November of last year, the House of Lords Select Committee on Personal Service Companies took evidence from HMRC. Rowena Fletcher, Deputy Director with special responsibility for the Employment Status Team, said that the Exchequer risk when IR35 was first introduced was £475 million and that has remained unaltered.
In a note to supplement HMRC’s oral evidence, issued to the Lords recently, the Revenue now say that the true figure is closer to £550 million, a difference of £75 million! Yet still the department defended their position by stating, “This current estimate [£550 million] is in line with the estimates [£475 million] we provided to the committee during their evidence session on 25 November.”
How is the Exchequer risk calculated?
The Exchequer risk is comprised of the Exchequer yield from those who are inside of IR35 plus the deterrent effect. HMRC’s note explains how it has now arrived at the revised figure of £550 million:
- £115million is the total revenue that contractors, owning their own limited companies would remunerate themselves by way of higher dividends and lower salaries and thereby starve the Treasury, if IR35 did not exist.
- £405 million as a result of contractors being employed by the likes of umbrella companies because IR35 discourages them from using their own PSC.
- £30 million is the tax and NIC yield from those contractors caught by IR35 and making deemed payments.
HMRC also pointed out that it collects “additional compliance yield as a result of uncovering non-compliance with IR35” and that as a result of their enquiry work the department reaped an additional £1.1 million in the last tax year (2012/13).
It seems unlikely that in the course of a number of weeks HMRC unearthed new data that caused them to revise their figures. More plausible is that Ms Fletcher dropped a bit of a clanger my Lords!
If they don’t want me to contract via a PSC, I could get a permanent role and be a proper employee, I will then earn as a salary perhaps 60% of what I earn as a contractor, HMRC get their way as they get all the tax and NIC’s on my now reduced incme, I’m worse off and so are they as their tax take will drop in line with the reduced salary…. why is this never pointed out to them ? They get more because as contractors we can earn more
This is unbelievable!
If this were a legal case for say a speeding fine and the police got their facts wrong, the defence would have the whole case thrown out.
How can it be that LAW can be passed when the idiots that make it cannot even obtain accurate figures/evidence?
Well said TomL, I can’t help but think we are scapegoats to help plug the budget deficit. We all lose this way – beggar’s belief that HMRC actually want less tax on a reduced permanent salary, rather than take VAT, Corporation Tax and Self Assessed Tax in abundance.
Tom, I heard that IR35 was heavily influenced by Patricia Hewitt (alegedly) as she came from Andersens (I think) and they did not want competition from SMEs and so the lobbyists deliberately made us look as though we were all cheats etc. and persuaded the legislators to make life as hard for contractors as possible.
If you also look at Labour’s DNA they hate anything non-union etc, and have always tried to make everyone a wage slave.
TomL has it exactly right. I earn 60% more as a contractor and so the HMRC make much more from me than if I went permanent. HMRC assume that if I went permanent then I would be paid exactly the same as I am as a contractor which is complete nonsense. Add to that the fact that an extra 20% ON TOP of my day rate is paid to HMRC in the form of VAT and they are quite clearly quids in due to my freelance status.
One thing I have wondered is if a successful case against could be brought against IR35 in the European Court of Human Rights. After all this is clearly a discriminatory piece of legislation that targets people like IT contractors whilst others who sell their expertise (e.g. electricians, builders, plumbers, etc) are completely left alone. This hypocrisy is one of the reasons IR35 is so difficult to enforce as it’s pretty much impossible to frame a law to target one group without dragging in a load of unintended targets and/or committing obvious discrimination.
Tom, I mentioned that to the PCG a couple of years ago because comrade Primarolo hid behind parliamentary privilege when she openly accuse the self-employed of being liars and cheats etc.
It still seems amazing to me that you cannot say something about a person because of the colour e.g. “all back people..” but we are fair game?
Yes… Hewitt was very much involved and we were very much portrayed as cheats at the time!! Thats why the PCG formed so quickly and we all paid in to get the judicial review….It was sickening and infuriating not to be able to get your voice heard, as it is now… this review is talking to loads of experts, but are they talking to any contractors ??
When I went contracting I knew nothing of Ltd companies, tax, nic’s etc… I just wanted to work and earn more. Back then you couldn’t get engaged directly by an employer as they feared paying your tax if you didn’t pay it, so they went through agencies and the agency took on that risk, the agency got rid of that risk by only offering work to people with a Ltd company… so if you wanted to contract you had to have a company.
Can we get the names of the committee members and perhaps mail them directly ?
Aaaarrrgghhh Dawn Primarolo !!!!!! She was another one !. No experience, failry young and was appointed Paymaster General by Blair.
Excellent suggestion Matt, I have been saying this for years IR35 is purely aimed at IT contractors but never any other industry where Ltd Companies are used. Total discrimination! Maybe an email to the PCG could look into this?
No need to tell me the numbers aren’t accurate, they’re simplified to illustrate a point, the net benefit to HMRC by someone contracting at an annual rate of £100k versus an annual salary of £50k.
I think it’s a valid point as post IR35 between 2001 and 2005 I know of contractors caught by IR35 or simple frightened into paying it that decided to just have an easy life and take a permie role….
£100k gross earnings (+£20k VAT)
Assume
8,000 personal allowance
18,000 annual salary
6,000 pension payments
4,000 allowable expenses (i.e. accountancy fees etc)
Approx £5,000 via PAYE for Tax, EE and ER NIC’s
Approx £7,000 retained in company
£60,000 paid as a dividend
CT and higher rate tax to pay on company profits & Dividend – approx £27,000
Paid to HMRC
£ 5,000 via PAYE
£20,000 via VAT
£27,000 via CT and Higher rate tax
Total £52,000
As an employee on £50,000
10,800 Tax
4,200 Employees NIC
5,000 Employers NIC
Total £20,000
Over £30,000 positive net effect to HMRC
Tom,
Not true, we all live on £52.50 a week and take the rest in dividends! 🙂
If we paid every single penny as a dividend and paid no NIC’s at all HMRC would still be better off by us contracting rather than being employed.
I dont think the VAT argument is a good one. If i work as a contractor, i charge VAT to the client but they deduct that from their own VAT. If i worked as a permie, then HMRC would still get that VAT because the client would pay it as they dont have my invoice to offset it against.
But certainly agree that the reduction in salary from a contractor paying tax on dividends plus corporation tax to a permie paying income Tax and NI on a salary of at least half that of a contractor would ultimately reduce the revenue the government earns.
I would take my skills and leave the country if I had to work for someone else. Plenty of roles where the taxes are lower and the weather better… my knowledge, investment, spending power would go with it.
So a bunch of self-interested, self-serving bints who are good at little else other than political “entrepreneurship” are to blame for this? A bit like “Dr” Thom.
“It still seems amazing to me that you cannot say something about a person because of the colour e.g. “all back people..” but we are fair game?
“
Agreed. Contractors – banking, IT, oil/gas, whatever – are not even 1% of the population. HMRC can’t even get its figures right and most of it is from alleged estimations showing how good IR35 is for another waste of space – umbrella companies. No wonder Giant thinks we pay too “little” tax. Leeching scum that feed off a vibrant sector of the economy, that is one of the few ways for Britain’s heavily over-taxed middle class population to make a living for itself. People don’t come here for the weather…