Perm to consultant...
Discussion
ysnnim said:
If an individual, was moving from a perm role to a consultative role in the same company - and the perm role paid £70k per annum, how much would you expect to pay the person as a self employed consultant? £250, £300, £350 per day? More?
Appreciate views..
D
Assuming you would fall foul of IR35 and have to pay employer's NI, and assuming you want the equivalent of 35 days a year holiday (statutory and normal), and assuming you will be ill 7 days a year, you would need to charge somwhere around £375 a day to have the same take-home money.
See www.ir35calc.co.uk for various calculators that answer this exact question.
Eg:
Note that to convert an hourly rate to a day rate you generally multiply by 8, so the above become £320 and £416 respectively.
>> Edited by JonRB on Sunday 20th February 15:26
Eg:
ir35calc said:
* On a salary of £70,000 net income per month is £3,870
* To earn the same contracting, outside of IR35, you would need a rate of £40 .
* To earn the same contracting, inside of IR35, you would need a rate of £52.
Note that to convert an hourly rate to a day rate you generally multiply by 8, so the above become £320 and £416 respectively.
>> Edited by JonRB on Sunday 20th February 15:26
IR35 only applies if you run your consultancy work through your own limited company.
If you do not do it this way, then you ignore the IR35 provisions.
However, if you are being paid personally as a Self Employed consultant, there is the danger that the Inland Revenue might force your "employer" to put you back "on the books" as a normal employee.
If you do not do it this way, then you ignore the IR35 provisions.
However, if you are being paid personally as a Self Employed consultant, there is the danger that the Inland Revenue might force your "employer" to put you back "on the books" as a normal employee.
JonRB said:
Eric - this has been nagging at the back of my mind for a while now. Surely there is a reason that PSCs run the gauntlet of IR35 by being incorporated rather than Sole Traders?
I thought there were still tax benefits to being a PSC outside of IR35 which is why we still do it?
When I started out I was told the Agencies had decided to only work with PSCs because in times gone by some contractors didn't pay their Tax & NI. The Contractors then claimed they thought the Agency had paid them Net of Tax and the Agencies got stung by the IR.
Don't know if this is an Urban Myth though....
Sorry Eric Mc, but you are not quite correct. A common misconception of IR35 (see also IR591!) is that I'm not a such-and-such or I don't do this or that.. IR35 has a number of indicators and as such you only need to have one or more of those indicators and IR35 will be deemed to apply.. Please see below for a really broad definition from the IRs own documentation (IR56). Note that it does not mention a Ltd. Company anywhere...
Broadly, you are
• self-employed if you are in business on your own account and
bear the responsibility for the success or failure of that
business, and
• employed if you personally work under the control of someone
and do not run the risks of having a business yourself.
I would suggest that those who are more interested in this contact an account or similar, or look to :
www.inlandrevenue.gov.uk/pdfs/ir56.pdf
For the IRs own view on all of this...
hth
Broadly, you are
• self-employed if you are in business on your own account and
bear the responsibility for the success or failure of that
business, and
• employed if you personally work under the control of someone
and do not run the risks of having a business yourself.
I would suggest that those who are more interested in this contact an account or similar, or look to :
www.inlandrevenue.gov.uk/pdfs/ir56.pdf
For the IRs own view on all of this...
hth
The term the Inland Revenue use is "Intermediary". The whole push behind the implementation of IR35 was to stop individuals hiding behind an "intermediary" entity in order to relieve the "employer" from having to hire them as either permanent or temporary employees.
In the vast majority of cases the "intermediary" device used was a limited company although less frequently a "partnership" might have been used.
The reason why "intermediaries" were/are popular in the context of these arrangements was because businesses were/are far more exposed to having a "self-employed" individual forcibly recategorised by the Inland Revenue as a normal employee within the organisation. Once that happened, the "employer" would be obliged to deduct PAYE and levy NIC (employee's and employer's) on the payments made to the individual. Even worse, the Inland Revenue could force the "employer" to calculate the backlog of unpaid PAYE and NI on past payments to the "employee". Having the individual operate through their own Ltd Co (or partnership) removed this risk. The added bonus for the individual was that, if operating through a Ltd Co, they could pay themselves using Dividends rather than salary, thereby avoiding the need to make NIC payments from their own company. In other words, the Inland Revenue did rather badly out of the arrangement.
IR35 was invented to remove this "problem" for the Inland Revenue.
Whether an INDIVIDUAL should be treated as Self Employed or as an employee is nothing to do with IR35. Indeed, this issue has been the subject of many a tax case for over 100 years before IR35 was even thought of. About that far back in history, a judge in a tax case defined someone as being Self Employed (or more correctly, a Sole Trader) as someone who could exhibit "the badges of trade". In other words, there are a number of indicators which would lead one to believe that the individual was trading in their own right. If enough of these indicators were present, the individual could be deemed to be trading.
IR35 uses these well established historic indicators to determine if an "intermediary" is a genuine business or merely a substitute entity for an individual who would otherwise be treated as an employee.
In the vast majority of cases the "intermediary" device used was a limited company although less frequently a "partnership" might have been used.
The reason why "intermediaries" were/are popular in the context of these arrangements was because businesses were/are far more exposed to having a "self-employed" individual forcibly recategorised by the Inland Revenue as a normal employee within the organisation. Once that happened, the "employer" would be obliged to deduct PAYE and levy NIC (employee's and employer's) on the payments made to the individual. Even worse, the Inland Revenue could force the "employer" to calculate the backlog of unpaid PAYE and NI on past payments to the "employee". Having the individual operate through their own Ltd Co (or partnership) removed this risk. The added bonus for the individual was that, if operating through a Ltd Co, they could pay themselves using Dividends rather than salary, thereby avoiding the need to make NIC payments from their own company. In other words, the Inland Revenue did rather badly out of the arrangement.
IR35 was invented to remove this "problem" for the Inland Revenue.
Whether an INDIVIDUAL should be treated as Self Employed or as an employee is nothing to do with IR35. Indeed, this issue has been the subject of many a tax case for over 100 years before IR35 was even thought of. About that far back in history, a judge in a tax case defined someone as being Self Employed (or more correctly, a Sole Trader) as someone who could exhibit "the badges of trade". In other words, there are a number of indicators which would lead one to believe that the individual was trading in their own right. If enough of these indicators were present, the individual could be deemed to be trading.
IR35 uses these well established historic indicators to determine if an "intermediary" is a genuine business or merely a substitute entity for an individual who would otherwise be treated as an employee.
Eric Mc said:On the contrary, IR35 uses a set of wooly and vague definitions that have little or no relevance to 'knowledge workers' such as myself, which is why we operate under business uncertainty; a situation no business wants to operate under. There are well documented cases of one tax inspector ruling a contract caught by IR35 and another ruling exactly the same contract as being outside of IR35.
IR35 uses these well established historic indicators to determine if an "intermediary" is a genuine business or merely a substitute entity for an individual who would otherwise be treated as an employee.
Until adequete Case Law is established, IR35 (as applied to Knowledge Workers) is far from being the hard & fast rule with 'well established historic indicators' that you seem to think.
Did I use the term "hard and fast"?
Just because a technique is well established doesn't mean that it is precise - or likely to lead to the same conclusion on every occasion.
The "badges of trade" tests were never "hard and fast". They can be extremely subjective and can produce suprising results. We have had many occurences of the Inland Revenue and the (as it was) Contributions Agency coming to completely opposite conclusions even though they have looked at the same set of facts.
A very good example of this is the treatment of peripatetic music teachers. The Inland Revenue have usually been quite happy to allow these individuals to be paid on a Self Employed basis for tax purposes. However, these very same individuals who have been cleared as Self Employed for tax have found themselves being treated as Employees for National Insurance purposes - even though the circumstances are identical
The Inland Revenue use these same tests when determining whether a company or its individuals contracts fall under IR35. The big change introduced under IR35 was that these tests were now being applied to entities which were not people i.e limited companies and partnerships.
Just because a technique is well established doesn't mean that it is precise - or likely to lead to the same conclusion on every occasion.
The "badges of trade" tests were never "hard and fast". They can be extremely subjective and can produce suprising results. We have had many occurences of the Inland Revenue and the (as it was) Contributions Agency coming to completely opposite conclusions even though they have looked at the same set of facts.
A very good example of this is the treatment of peripatetic music teachers. The Inland Revenue have usually been quite happy to allow these individuals to be paid on a Self Employed basis for tax purposes. However, these very same individuals who have been cleared as Self Employed for tax have found themselves being treated as Employees for National Insurance purposes - even though the circumstances are identical
The Inland Revenue use these same tests when determining whether a company or its individuals contracts fall under IR35. The big change introduced under IR35 was that these tests were now being applied to entities which were not people i.e limited companies and partnerships.
No problem 
The point I was trying to make was that the various tests and checks that the Inland Revenue use when determining IR35 status have been around for decades - it's just that they never applied them to Ltd companies before the introduction of IR35.
>> Edited by Eric Mc on Tuesday 22 February 11:28
The point I was trying to make was that the various tests and checks that the Inland Revenue use when determining IR35 status have been around for decades - it's just that they never applied them to Ltd companies before the introduction of IR35.
>> Edited by Eric Mc on Tuesday 22 February 11:28
Eric Mc said:Indeed. However, by the nature of the fact that they have been around for decades they are poorly equipped to deal with Knowledge Workers. With, say, a carpenter, it is easy to see that he turns up with his own tools, possibly his own wood, he is not told how to build, say, a table but simply told to build one in a certain style, size, etc. He is a craftsman and is obviously not an employee.
The point I was trying to make was that the various tests and checks that the Inland Revenue use when determining IR35 status have been around for decades - it's just that they never applied them to Ltd companies before the introduction of IR35.
By contrast, my 'skills' are in my head. It is therefore far harder to apply the indicators to employment that the IR have been applying for decades because the nature and, indeed, concept of the services being supplied are so different.
I'd compare it to the situation we had before the Computer Misuse Act was enacted. Before that 'hacking' was not a crime explicitly and the best that could be brought against a hacker was 'stealing electricity'. The point being that the old laws were inadequete for dealing with the new crime.
I would submit that the current IR guidelines for employent and self employment are equally inadequete.
Doesn't a carpenter use "knowledge"? Does a plumber only use his hands and not his brain?
I actually think that the assumption that computer programmers or any other person involved in IT linked activities is somehow fundamentally different to other forms of work is fundamentally flawed itself. The Inland Revenue could not give a toss about the work actually being done. What they are interested in is the nature of the relationship between the "worker" (whatever he/she does) and the business he/she is working for.
Don't forget that the idea of "hiding" behind a personal service company was/is not unique to IT (although it did become very prevalent in that area of the economy). Actors, entertainmnet industry technicians, doctors, accountants, solicitors and even directors of large corporations have all used this ploy.
In fact, I would hazard a guess that the case that really alerted the Inland Revenue to the issue was that of Kelvin Burt. When he was Director General of the BBC, he was actually remunerated through his own personal limited company rather than as a straight employee. When this became common knowledge, the government of the day were extremely embarrased by the revelation - he was, after all, ostensibly a government employee. He was forced to resign for this and other reasons. The Treasury began making noises about ending these practices not long after this incident.
I actually think that the assumption that computer programmers or any other person involved in IT linked activities is somehow fundamentally different to other forms of work is fundamentally flawed itself. The Inland Revenue could not give a toss about the work actually being done. What they are interested in is the nature of the relationship between the "worker" (whatever he/she does) and the business he/she is working for.
Don't forget that the idea of "hiding" behind a personal service company was/is not unique to IT (although it did become very prevalent in that area of the economy). Actors, entertainmnet industry technicians, doctors, accountants, solicitors and even directors of large corporations have all used this ploy.
In fact, I would hazard a guess that the case that really alerted the Inland Revenue to the issue was that of Kelvin Burt. When he was Director General of the BBC, he was actually remunerated through his own personal limited company rather than as a straight employee. When this became common knowledge, the government of the day were extremely embarrased by the revelation - he was, after all, ostensibly a government employee. He was forced to resign for this and other reasons. The Treasury began making noises about ending these practices not long after this incident.
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