The tax changes have also made the market a bit strange where rates are still advertised at £500 a day even though, contractor takes home significantly less money. These have not gone up inline.
The way I've seen this go with companies that care about their contractor workforce is that assignments and their working practices are thoroughly checked to ensure they remain outside IR35, so the take-home is just as good as it used to be.
Some contracts I've seen involve a liability shift clause from the agency/client to the contractor's Ltd co - and the client will often insist that you have fee-payer/agency IR35 insurance in place to protect the supply chain (Kingsbridge sell this sort of product) if such a clause is in place.
You need to be in an in-demand role and present enough value to be able to demand this though and avoid blanket 'inside' determinations.
Of course, if you continue supplying small companies, it remains the contractor's liability.
Yes that's definitely happening. However this practice is on the radar of the relevant authorities and hasn't yet been tested in court/tribunal settings. It's clearly trying to circumvent the spirit of the rules by shifting responsibility that is now explicitly intended to rest with the client or intermediaries onto the contractor themselves. That may be unfair particularly if the client or intermediaries are also writing the contract and specifying the required working arrangements for an engagement as is often the case for contract work.
It seems likely that a test case will happen before long. The resulting decision may be of the form "LOL nice try Mr Agency now pay up". As with so much in this area the real problem is that no-one knows for sure. That creates a chilling effect across the whole industry and of course the larger parties with the bigger legal budgets have a natural advantage there.
The agency would have to pay up first, but then could presumably pursue the Ltd co afterwards.
Paying the personal taxes is obviously a different matter. Even then it's usually the client side who are establishing the working arrangements and responsible for making the determination so I'm still not sure about the ethics of retrospectively hitting the contractor with a huge extra tax bill later if that determination is found to be wrong.
In many cases the contractor presumably wouldn't have taken the role in the first place if the client had got their side right so I feel like it should probably be the client's responsibility to insure against any later adverse decisions if they want to in this situation. You'll certainly find that when it's the other way around with a small business client any intermediaries will be quick to include an indemnity clause in their standard contract that leaves the contractor on the hook for all costs on both sides if they make the wrong determination.
Reality is that it is always the weakest entity in the chain that pays - see Loan Charge scandal for instance, where HMRC claims advisers, accountants, promoters of schemes and scheme operators did nothing wrong and the victims are on the hook to pay.
Personal example I have is with my friend who is a freelance care worker. She got a gig from an agency under a condition that she has to sign up for an umbrella from their Preferred Supplier List, as they deem it inside IR35. She was desperate to get the gig, so she agreed. Turns out the umbrella didn't pay tax on her behalf to HMRC but simply pocketed it. She was getting payslips showing correct deductions, but HMRC never got the money. The umbrella closed before she could find out. Then HMRC sent threatening letter that she is using a tax avoidance scheme. Guess what happened? HMRC decided to recover the missing tax through the tax code, so she barely can make ends meet from her current gig. She has no money to go after that umbrella (when I looked up, the owners are living in Asia) so there is that.
If what you saying is true, then HMRC would have gone after the umbrella, but they didn't - it's easier to make the worker pay. So the Fee Payer trying to recover money would have done nothing different than HMRC is doing themselves.
I'm surprised the agency seem to be walking away untouched though if they set up the deal and actively pushed your friend towards a dodgy umbrella employer. HMRC have some pretty screwed up policies at times but surely it can't be normal for them to go after someone who honestly believed they'd been properly employed and had all of the deductions properly collected just because someone completely different has ripped off HMRC?
This isn't really a problem with IR35 in principle though. It was apparently just plain old criminal fraud and your friend was the unlucky victim of that crime.
Edit: Also I hope your friend is disputing this with HMRC and if necessary getting their MP involved. Assuming everything you've described is a fair reflection of what really happened it clearly wasn't a tax avoidance scheme. HMRC do make mistakes but do also want to get the right money from the right people so if something has gone wrong here it's worth following up.
It is, because the situation would have not happened before the changes. Basically now, thanks to the legislation, the client has the power to force a legitimate business into employment. If you are not a skilled worker you don't have any position to bargain, so it's umbrella or nothing.
> it can't be normal for them to go after someone who honestly believed they'd been properly employed and had all of the deductions properly collected just because someone completely different has ripped off HMRC?
It is their default behaviour unfortunately. It is cheaper to go after the worker, as ultimately it is their personal tax and they have no money to defend themselves in court. "You should have chosen the umbrella more wisely or you should have taken the work elsewhere". This is even on their official guidance pages, that the worker is responsible for their tax even if someone up the chain pulls a scam.
> I'm surprised the agency seem to be walking away untouched though if they set up the deal and actively pushed your friend towards a dodgy umbrella employer.
You would have to prove that they knew the umbrella is going to pull the scam and that they acted in bad faith, which is probably not possible. Having a PSL is also legal and the worker could always have walked away. They could also ask if she has logged in to the HMRC portal to see if her tax was being paid etc. and that is her fault for not taking due dilligence.
> HMRC do make mistakes but do also want to get the right money from the right people so if something has gone wrong here it's worth following up.
That's not true. For instance, read about the Loan Charge scandal.
HMRC is pretending they are doing anything about it - https://www.gov.uk/guidance/mini-umbrella-company-fraud - they post some examples there.
> HMRC has deregistered tens of thousands of mini umbrella companies who they believed were involved in one or both of the following: >exploiting the VAT Flat Rate scheme >exploiting Employment Allowance
That's just two things out of many they should be focusing on and imagine they have already "deregistered" _tens_of_thousands_ of mini umbrellas.
Add to that the government is not interested in any regulation of umbrellas and any concerns about IR35 are dismissed by both government and HMRC.
But clients always had the option to do that. They could just decide not to work with contractors and only hire permanent staff instead. In fact that is the alternative that many of the biggest companies apparently decided to choose after the IR35 changes came into effect instead of adopting some kind of blanket umbrella policy. At least those ones were honest about their new strategy!
That's not true.
I've been harmed by HMRC mistakes and dodgy policies several times both personally and professionally. It's difficult when you're the one being messed around but you have to remember it's probably not personal. HMRC is a vast organisation implementing an insanely complicated set of rules that even its own staff don't always understand. It has nothing like the amount of resources it would need to credibly pursue a lot of the people who really are trying to rip off the tax man and by extension the public. It is sometimes like a wild animal - just acting on instinct - or in this case on standard procedures that lack the nuance they really need because there's nobody and no budget to do better.
Even so my personal experience has been that almost everyone I've actually spoken to who works at HMRC is at least reasonably neutral and professional. Some of them really will go out of their way to try and get a fair resolution if something has gone wrong and they become aware of it. In the situations I've been involved with personally we have always so far ended up with the right money in the right places and no lasting harm done even though sometimes it took far longer than it should have to reach that point.
And again if the policies HMRC is enforcing really are broken and someone who should be treated as a victim really is being seen as a tax dodger they really should contact their MP. Maybe the current rules actually are bad in this scenario and in that case until someone draws attention to the problem no-one is going to try to fix it.
Actually the parliamentary group that also deals with Loan Charge scandal is aware of the problem of umbrella companies pulling fraud with impunity. They called for a reform, highlighted the issues to no avail. HMRC is dead set on this to continue. There is nothing one can do. After all who cares about some care worker getting screwed, she should have known better...
It's a bit more complicated than that. The tax rules themselves haven't actually changed. What did change was who was responsible for deciding whether an engagement was caught by IR35 or not and was also liable to pay for the big tax shortfall if they were later found to have made the wrong decision.
It used to be the contractor themselves who determined the status. Now it depends on the situation but in many cases it will be the client. That has swung the needle from determinations often being too optimistic (some contractors claimed to be outside when they really weren't and hoped to get away with paying less tax than they should) to too pessimistic (risk-averse big clients aren't always assessing engagements properly and instead set blanket policies that put everyone inside even when they shouldn't be).
Neither situation is good for the contracting market and neither is what the tax rules say should happen. Both are the fault of successive governments for using such ambiguous rules about such an important tax question and making such poor provision for honest participants who want to get on with the job to know they're safe and doing the right thing as far as their tax obligations are concerned.
For genuine contractors who are working with decent clients and obviously aren't disguised employees the rules haven't changed and neither have the tax obligations.
But yes there are some clients who just throw everything inside IR35 as policy and also want to keep the same headline rates as before. Contractors working with those clients will have taken quite a hit. The solution is not to work with bad clients who try to dump their obligations on you!
The problem is that whether someone is genuine or not is no longer relevant, because you may be genuine, but risk averse client says you are not and there is nothing you can do about it. Every single genuine contractor I know now works in-scope of IR35. They pay their business costs out of their deemed salary, which is insane.
> The solution is not to work with bad clients who try to dump their obligations on you!
That's not a solution if the pool of "good" clients is getting smaller and smaller. If you now have much longer downtime because it is much more difficult to find a "good" client - say when it used to take a couple of weeks or even days, now it takes months - it makes the business no longer viable.
That is a silly situation I agree. But it's a situation that perpetuates in part because too many contractors tolerate it.
If you read the stats published by some of the more open agencies the majority of contractors are still strongly preferring outside IR35 contracts and the clients who still have blanket umbrella policies are finding it harder to hire. Some of the big names who pay high enough rates will get away with it because of those rates of course but further down the list things aren't looking so great apparently.
If that pressure keeps up then eventually the ones who determine status properly (and increase rates accordingly for inside IR35 work via umbrellas) will be the ones that attract the good people.
A sizeable proportion of contractors I used to work with simply removed themselves from the market when the changes were introduced. Many of them retired early, and one retrained as a plasterer.
I only tolerate it because I have a mortgage to pay. I'm not willing to take a 50% pay cut to go perm, or a ~20% pay cut for the few contracts outside IR35 that I'm offered. The rates on those used to be significantly higher than before the changes.
Speaking to a lot of recruiters over the last few years, we have noticed wage compression in the market. The bottom end has been brought up quite substantially, the top end has dropped.
for the rest of us, it was a non-event.
The difference between a small business and agency is that agency can actually afford to properly avoid paying tax.
The taxes have been changed anyway, so the mythical small salary + dividend, does not offer meaningful advantage any more when it comes to tax.
The real problem is that IR35 removes profit from the company and the company has no way of offsetting legitimate business costs against tax (like your office, accountant, insurance, tools, software etc.) and you also can't retain part of the invoice and taking lower salary and dividend to have a cushion for the times out of clients or when you want to build capital for a start up idea.
It has completely killed entrepreneurship. It means less competition, less jobs and smaller growth of the economy. Not sure how is that a good idea.
It has just become more expensive to hire skilled workers that were freelancing. This means the budget for permanent employees had to be culled. So while you laugh out of envy, you will notice that your raise or bonus will not go ahead.
Companies also learn that the changed IR35 lets them decouple themselves from the responsibilities of an employer and they can no longer worry about unions if they move all their employees (except the core ones) to Umbrellas.
The fire and re-hire schemes are getting more common. My friend was terminated this year and was given an opportunity to come back through an agency and an umbrella. Of course a slight pay cut and no more career path within the company he worked at.
In the UK, you could hire a decent senior for 80K in London, now it would cost 100-120K. I know a few decent devs whose base salary rose to ~200K, that was extremely rare in the UK and even in London.
Also in Germany and Austria I see salaries rising.
On UK contractors, the government closed a tax loophole, or rather made it harder to exploit it, so the person sitting next to you and earning 700-800£ per day, now doesn’t pay less taxes than the junior making 60K per annum.
After putting some contributions away for retirement that "decent senior" on £80K might just about be able to buy a 1-2 bed flat in a soulless development in an "OK" part of London, but definitely not a family home.
A graduate? Min 10% in to a pension (if aged 20), student loan, and they're only taking home £3.8K/mo. £2K/mo for rent is easily spent on a 1 bed furnished flat now, plus cost of living... might be OK, but hardly living like Gordon Gekko.
And I’m not sure it’s worth moving to London with a 200K salary if you don’t have 200K in your bank to pay for a deposit on a flat. I wouldn’t wish renting in the UK on my worst enemy.