HMRC Vs Wolverine

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Ah, the year 2000 brought us many, many things, some of them our younger team members won’t even remember….

  • The Nokia 3310 was released and kept us busy playing Snakes
  • Big Brother came to our screens for the first time
  • All Saints released Pure Shores
  • Britney Spears Did It Again
  • Brad and Jen got married
  • Wolverine, Magneto and Professor X were brought to the big screen
  • The Fast and the Furious began filming
  • IR35 was introduced

As much as we would like to write an article on the X-Men, this one is about IR35 I’m afraid – the mention of which makes contractors roll their eyes, and recruiters look dazed and confused, and it isn’t getting any easier to understand.

In the words of Wikipedia: IR35 refers to the United Kingdom’s anti-avoidance tax legislation designed to tax disguised employment at a rate similar to employment. In this context, “disguised employees” means workers who receive payments from a client via an intermediary, for example, their own limited company, and whose relationship with their client is such that had they been paid directly they would be employees of the client

The idea was to ensure that it would stop workers from setting up limited companies via which they would effectively be working as employees but saving on income tax and NI contributions by paying themselves in dividends which attract less tax. Obviously the HMRC was not too happy with this as they like money, hence IR35 was introduced.

Think of it this way – The client is Xavier School for Gifted Youngsters. Charles Xavier hires Cyclops and Storm on a 12 month contract on a day rate. They report to him daily, they are provided with uniforms and equipment, and can’t take on any other work unless Prof X agrees, they drive the company vehicle, they are effectively employees and so should pay tax as such – they are “inside IR35”.

Wolverine however, he is taken on to undertake a set project to be completed his way on agreed timescales, uses his own tools, takes on all the risk himself, could provide a substitute to complete the work and doesn’t have a company email address. As such he is probably outside IR35 and can pay himself in a very tax efficient way.

 

Easy yes? Ok then…

Back in the day, it was down to the contractor to determine if he was outside or inside IR35, and so risked investigation by the HMRC on their assignments, and potentially have to pay bucket loads of cash in owed taxes if they were deemed inside IR35.

In 2017 the HMRC (who I am trying hard not to call Magneto) decided to bring in new legislation which would apply to the public sector – the off-payroll working rules.

No longer would Wolverine be responsible for determining his status if he got a job with Bucks County Council to clean up the bad streets of Aylesbury – the responsibility now lies with the client to look at working practices (using a handy on-line tool). If the off-payroll rules apply, and therefore he is inside IR35, then he has to pay income tax and NI like a permanent employee would. Not all Public Sector contracts are inside, but it is no longer down to us to decide the status. If they do not apply, it goes back to Wolverine to determine his status.

As you can imagine, this went down well with the contractor community and recruiters alike. It is about a 25% difference in take home between being inside or outside IR35, so a lot of contractors will not take public sector assignments that fall inside at all, and certainly not at the same rate they would for outside roles.  You could argue this has reduced the talent pool available to the public sector and pushed up rates.

Recruitment Agencies are not set up to pay the tax for the contractors, and so the only option is for Wolverine to work through an Umbrella company to ensure all the right tax is paid and make it all legit. We of course recommended he called Del Williams at Paystream to get this set up!! We don’t think Del is a mutant, but to be honest, the jury is out.

So here we are in 2019 and the HMRC have decided that the IR35 reform would extend to the private sector from 2020 which is when things will get even more complicated, as these reforms only apply to large companies. For small companies, they are exempt and so it is back to the contractor to determine the status. We have no idea what this will mean for the contractor market, and for recruiters. Will rates go up, will Wolverine go permanent, will Magneto (sorry, HMRC) start investigating end clients? Whatever happens, the next 12 months are key for everyone to get their head around the compliance, rules and regulations.

All we do know, is it will probably be easier to work out where Tokyo Drift really fits in to the Fast Franchise timeline than it will be to get a full understanding of the regulations!!