Freelance IT Contractor - A Potted History

The phrase MGB stands for Money Grabbing B*******, (do you mean bastards - literary ed). I am not sure when this phrase came to be associated with Freelancer Contractors, but my gut feel (is it apple crumble time - food ed) is that it was probably in the early to mid '80s. It was a time when men were men (apart from those preparing for the sex change op - medical ed) and boys were boys (well until they reached 16 and could be packed off into the army and be shot at by all and sundry in far flung climes - but mostly in near flung Northern Ireland - political history ed).

Early days

There was a problem rearing its ugly head at recruitment agencies. The agencies were being chased by, what were then called the Inland Revenue and now the HMRC, for unpaid tax.

Slight aside, we used to have the Inland Revenue and HM Customs and Excise. These two behemoth organisations have since amalgamated, slimmed down and become even less competent than they were, if that is possible, and as with the best type of government departments renamed themselves (to protect the innocent, or to hide their failings,  I wonder - cynical ed).

They are now known as HM Revenue and Customs or HMRC (HM for those of a foreign disposition means Her Majesty, that is until the Queen dies and the next monarch takes over, who will in all likelihood be a man and then HM will mean His Majesty - court correspondent ed). 

What is more interesting is that HM C&E had very substantial search and entry,  and confiscation powers which the Inland Revenue did not have. When they were merged what do you think happened to those powers, restricted to just the Customs & Excise areas of HMRC perhaps?

But that is a little off the point, but given my stream of unconsciousness style of writing, I am not tremendously surprised. The point is, that the agencies were getting done time and again for unpaid income tax and NI (National Insurance, that is income tax by another name, where not only the worker, but the company has to pay it to. BTW it does not go into a specific pot for health and pensions, no matter what the government might suggest - economics ed) and PAYE (Pay As You Earn, that is income tax - economics ed) contributions.

How could this be occurring?

Well, what appeared to be happening was that large numbers of English speaking computer staff were coming from certain Commonwealth countries, possibly ones such as South Africa, Australia and New Zealand (where they all apparently speak English - ed) and working on short term contracts through recruitment agencies.

What was then happening was that these feisty Southern Hemisphere blighters would then scoot of back to sunnier climes but fail to pay their outstanding taxes in the UK. This was leaving the agencies not only financially wrong footed but open to attack by the tax authorities as the staff had been working for the agencies, and so the agencies were liable for the non-payment of taxes on all the income that the contractors had been paid. What an awful bind they found themselves in.

Now, the recruitment agencies, being smarter the normal bear, thought that this was a little unfair. So after some gatherings they decided that the way ahead would be to ensure that all freelance contractors that they would do business with would have to work through an intermediary company.

What this meant was that the contractors would either have to create their own company or join an umbrella company. So, by the mid  '80s not only the commonwealth contractors, but all of their British counterparts had to work in this way, that is if they wanted to get a contract through agencies.

With this seemingly deft stroke, it meant that the intermediary company was now liable for all of the taxes. It was a on reflection a genuine masterstroke by the agencies.

It is worth noting that a company is an standalone entity and is arguably treated as a pseudo person; with certain rights and responsibilities. One that stands out, is that it should minimise its taxation and maximise its profit, that is the whole point of the company.

So, moving on, we reach the late '80s and times were particularly fecund for computer contractors. There was a severe skills shortage of programmers (why and if that was really the case is for another post - ed). Why? Well this was the era of the personal computer, PC, which had recently been legitimatised by IBM, and that, with the costs of computer hardware costs falling year on year, each and every business thought they could build bespoke software to get them ahead of the competition by computerising  their business .

So the number of freelance contractors were creating companies in their hundreds and thousands. You could buy an off the shelf company one day and be on a contract the next, this easy move could easily double your net income at a stroke. It may be the case (highly contentious that one - ed) that some people even left their salaried job with a company on the Friday and came back as a contractor to work at the same company the following Monday doing exactly the same job (more fool the management of that company, but programming skills were in short supply and you needed to keep a hold of your staff one way or another - ed)

The grass was ever so, ever so green in the bright days of the mid to late '80s. But there were dangers lurking in the grass. These new owners of what is now called a SME (Small & Medium Enterprise) were making the best use of the tax benefits of being employed by a small company, that they owned (possibly in conjunction with their wife - ed), many, but not all, were paying themselves a very small amount of salary then taking all of the rest of the companies income as dividends. So what I hear you ask?

Well, suffice to say, UK taxation is an overly complicated beast at the best of times, but by use of a company, you could make use of the different levels of taxation depending on how you took income from the company.

Paying yourself a salary meant that your company would have to pay the following taxes:

• PAYE, 
• employee's NI, 
• and then employer's NI. 

For instance a £20K salary in year  2011-12 (with tax code 747) would cost your company £21,784:

• £2504 as PAYE
• £1532 as Employee's NI
• £1784 as Employers NI
• £15,963 of net income from this notional £20K salary

However, if you paid yourself money as a company dividend, as your company was very profitable, then the company would have to pay tax on its profit (Corporation Tax at the Small Company rate - around 22%), but you would then only have to pay personal tax (via self-assessment) and not a jot, not an iota of NI, either employees or employers. This was highlighted in numerous articles in the good old Freelance Informer (long may it rest in peace - ed) and by the freelance contractors that you met in your daily work as a salaried programmer.

But wait, it gets even better. You, as an employee of your company, could even claim various expenses, that as a salaried employee of the end client company could not, like travel! There's more, rather than paying for all that computer kit, the software, the printer, office expenses etc out of your net income, your company could pay for it all. But as good as it gets, you would still have to earn the money by putting in the hours for the client. There's nowt for nowt as some might say.

Good times never last, boom becomes bust

So, the 80's became the 90's and there was a rather nasty recession (there had been a rip snorter in the late 70's and early 80's - historical accuracy ed), where contract rates fell and work dried up, and many once-were contractors moved back to the permanent world of work. What do I mean rates fell? I mean that the next contract would be for fewer pounds per hour than the previous one, something that many permanent staff fail to get their heads around.

However, the tight times of the early 90's turned into the fairly middling 90's and then the end of the Millennium and dot.com hyped boom. Rates became engorged and contractors were making money hand over fist as programming skills were scarce, so as demand rose and the supply failed to expand so contract rates rose (allegedly - ed).

What another recession but we'd barely got out of the last one

Now as you can imagine, the Y2K and dot com boom raised contract rates to unheard of heights, but we should all have been a bit more aware, as with every boom there is and will always going to be a bust and there was a very very hard one in the contract IT industry.

For most, if not all contractors, rates took a massive tumble post boom, with the end clients taking every opportunity to drive down costs (as they should - ed). So not only did the number of potential contracts plunge from 2001 onwards so did contract rates. Some clients even took to offering contractors permanent roles in their organisations (to reduce the cost even more - ed)

So not only do rates can go up and down, the number of available contracts goes up and down.


Gordon Brown Rears His Ugly Head

Now initially, the Chancellor came up with a few good wheezes that helped small companies, but they were not to last. Freeing the Bank of England from political control was undoubtedly a brilliant move, and bringing in legislation to try and help small companies get paid more quickly was undeniably beneficial, however, when he stood up in the House of Commons in 1999 he managed in one fail swoop to do what had been considered impossible, cause the herding of cats,  that is, the creation of The PCG (now known as IPSE)

Now, the inconspicuous phrase that Uncle Gordon (Gordon is a moron, anyone - music ed) used was, " Details of this, of minor duty changes and of measures to combat tax avoidance are published this afternoon.". 

Now the measures to combat tax avoidance, became what is known as, "IR35" .

Now if you read what IR35 says, and it is worth it, as it is very short (So off you go - ed). IR35 sets out to be targeting itself at employees who leave a company on the Friday, and start work again on the Monday working through their own company. Seems so straightforward (cans of worms lurk around every corner - ed)

What this short pamphlet does bring into our business lexicon are some new business concepts, namely: "personal service provision", "disguised employee" and  "fair share"

You might be wondering how this is advantageous for the ex-employee, the now disguised employee? Simply this, they get to decide how they extract income from their company. But as far as the Chancellor and the Inland Revenue (now HMRC - ed) are concerned the proposal is thus:

The aim of the proposed changes is to ensure that people working in what is, in effect, disguised employment will, in practice, pay the same tax and national insurance as someone employed directly.

Most remarkably and something which does not seem to be highlighted at all in most discussions on IR35, is this Monday to Friday move is clearly highly advantageous to the previous employer and now the current disguised employer (one and the same - ed) as this now disguised employee loses all employment rights, the previous employer then has no longer to pay for sick pay, holidays, pension contributions, maternity leave and training etc. In fact, IR35 tells us this about the disguised employee quite clearly:

But those who do participate (in this avoidance - ed) often have to pay a price in terms of loss of protection under employment law. They may find their terms and conditions altered - perhaps losing entitlement to sick pay or maternity leave. They may even lose their jobs without entitlement to notice or redundancy pay. They will usually have no right to any claim for unfair dismissal and may lose their entitlement to social security benefits through a failure to make adequate contributions.

So, why on earth would an employee do this then? Simply the employee wouldn't unless forced to by the employer.

For what it is worth, the Inland Revenue and the Labour Government have never come up with any facts to prove

• that this was occurring at all and if so, in what numbers, 
• the amount of taxes lost due to this kind of avoidance or even 
• what cost benefit analysis was

The real fly in the ointment, was the part of the pamphlet that said:

The proposed changes are aimed only at engagements with essential characteristics of employment. They should affect only those cases where these characteristics are disguised through use of an intermediary - such as a service company or partnership. There is no intention to redefine the existing boundary between employment and self-employment.

What was and still is to my mind wonderful fuzziness about these few sentences, and as the ensuing hundreds of IR35 cases that the PCG have fought and mostly won 1498 and lost only 10 cases against HMRC (2011 figures from PCG)

If the Friday to Monday scenario was simply the cause of the issue, then surely the simplest solution would for the HMRC to check whether the disguised employee had been working at the company at some time in the near past. Hey ho - but what do I know.

Escaping the Reaper

I really don't want to get into the hoops that freelance contractors have to jump through to ensure as best as they can that their contracts are outside of IR35. There is no such thing as IR35 proof, by the way!

But, one of the unintended consequences of the legislation is to take us into the realms of MOO (Mutuality of Obligation), Substitution, Direction and Control and what's worse, the whole grey area that is employment and self-employment.

Legislation Fails to Hit the Mark in terms of Tax Take

What is worse than the above, was that after a, "consultation period", the Inland Revenue brought out another document, that clarified IR35, bringing into our business lexicon another new term, "personal service company", which has no legal standing, and is only something dreamed up by the Inland Revenue. Try looking at the Articles of Association for your business, and see if you can find this terminology! There is also the quite unbelievable, "hypothetical contract", idea, another roister doister from the IR, as shown below:

It is therefore necessary under the legislation to construct a hypothetical contract between the worker and the client based on all the circumstances including the terms and conditions of relevant contracts and the actual substance of the arrangements between the parties. Subject to meeting the other conditions, if that hypothetical contract would be one of service then the engagement is within the legislation.

So, what they are effectively saying is , they are making a non-existent contract up, which can then be used  to catch you with the legislation. No wonder they have lost so many cases when being taken to court, they must be having a laugh.

Now, it is interesting to return to the amount of money the Government thought that it would  (to contradict yourself from above - ed) raise with the legislation.

Now the Regulatory Impact Assessment (this is the assessment the Government was honour bound to do, to see what the impact a new piece of regulation would have on the economy - ed), estimated that the tax revenue would be £220m a year in National Insurance Contributions and an additional £80m in income tax! Wow, £300m quite a bit of money.

The strange thing is, that the Labour Government when asked in the House of Commons over a number of years were unable to specify how much additional NI & tax had been raised! What? Yup, they had no idea or in one case the minister standing in for the Chancellor said,

"The intermediaries legislation, commonly known as "IR35", was introduced with effect from 6 April 2000 to counter the avoidance of employed levels of tax and national insurance by individuals providing their services through intermediaries. Disclosure of HM Revenue and Customs' compliance data relating to the legislation would result in a risk of non- compliance with the legislation. Accordingly I am not able to provide the data requested."

So I can't tell you, as that would risk non-compliance, what a load of drivel!

What has been subsequently been found out with a Freedom of Information (FOI) request in 2009, the following:

"The FOI reply revealed that in the tax years 2002/03 to 2007/08, IR35 directly raised just £9.2 million. This equates to an average of around only £1.5 million per tax year, less than 1% of the expected amount. It is not clear whether this includes the NI contribution, or is just income tax."

Lying Politicians (no oxymoron there, I can assure you)

So given the above record, of

• losing cases 
• raising little money 
• decrease in number of new cases (from 158 in 2007, down to 12 in 2009 and 23 in 2010 and the change of Government

why, now nearly 3 years ago, is the legislation still on the books? Why hasn't it been revoked?

Well, there is another story to be told here, the Tories and their friends the Lib Dems, had both suggested in opposition that IR35 would be looked into (removed) when/if they got into government as they had been swayed by the number of respectable professional organisation that were saying that it was not only not worth the paper it was written on, but that it had been shown to be incredibly hard to implement and was still a very grey area for all concerned.

So what happened after the election, the Coalition kicked off a review of Small Business Taxation, by the beautifully named Office of Tax Simplification (OTS) that would take into account IR35.

This review came to the following conclusions:

• Suspend IR35, with the view to abolishing it permanently
• Retain IR35 in its existing form but with explicit commitments from HMRC to make specified changes to the enforcement of the legislation
• Introduction of a "genuine business test" to give business a good steer as to whether they are caught or clear of the legislation

What the Government appear to be going to do is retain IR35 and introduce a "genuine business test".

So, we get to keep all the uncertainties of the old regime and have more hoops introduced for contractors to jump through to prove that they are genuine businesses and not simply Money Grabbing B******* who don't pair their fair share of tax.

So where are we know

Well the PCG is no longer a single issue organisation, it undoubtedly failed totally in its original goal of removing IR35 from the statute books. However, to give it its due, it has help large numbers of contractors fight IR35 cases against the HMRC and win the vast majority of them.

Afterthought

My history has lost its way, the rant is all but spent, and now I need to put this post to bed.

Night night.

Long Time Afterward

Given that this was written over 3 (three - not related to the mobile phone company - ed) there have  been proposed changes to IR35 that are worth examining (in some detail - ed) - read IR35 Mark 2 (or is it 3,4 or 5?) for the latest proposal.

I will be creating an new blog post about "off-payroll", with thoughts on this over the coming weeks (this is me writing this in November 2016) once we have had the clarification from HMRC sometime before 5th December 2016.

In rare moments of clarity - it is clear to me that the Government really hasn't got a clue about much about anything.

Yes Minister the IR35 Off Payroll Version - a spoof.

Damn that television

Well, a short post, to let you all know that I almost had a 1,000 hits in March alone, missed it by just 18, darn it!

You all must do better this month, forward links to interesting posts (if there are any - sigh ed) to your friends (you never know they might like some of the wiffle - ed).

So stay with me folks, the long awaited post on Freelance Contracting is wending its way to publication, there is still Oxford's Underground Cathedral in the wings, followed by the following posts: Politicians Uh (What Are They Good For), Emotions, Angels on my Shoulders, Stream of Unconsciousness, Mission Control, Romance of the FA Cup,  Logging and the Truth, It's One O'Clock, Your Lying Eyes, He's Lost Control, Black Dog and Government Spending (that is long long overdue - ed)

Naturally, this doesn't exclude me from writing other stuff that in the news that makes me irate (which is pretty much everything at the moment - ed)

Toodle pip.

Afterthought
Upon further investigation, the statistics (what lies, damn lies and ,,, - ed) for the last month, are in fact for the rolling last month (that is last 30 days I think - ed), so not a real month at all, which explains why the last months hit keeps varying when I looked at them on April 1st.

As April 1st was moing towards its end (well late evening - ed) I was coming up with explanations of people further to the West i.e. in the USA and Hawaii were reading the blog and so altering the hit statistics

So much for my intellect then, I had put my spin on what the statistics meant, rather than what they actually mean.

Even so, adds up to 30 or so hits a day, which ain't bad given the restricted number of people who follow it from friends and family on Facebook, and Twitter.

A Ship of the Line

Well, we celebrated my Dad's Birthday yesterdays at Heather and Paul's house in Didcot (place of the mightly cooling towers if you manage to look out to the East whilst on the A34 South of Oxford).

The hush hush painting was unveiled as my present to my Dad. He also received a hamper full of goodies from my Sister none which would be recommended by a Dr, luckily there wasn't one about and a bottle of something alcoholic from Brother Paul.

So, A Ship of the Line, what is that all about? This is the Ship of The Line that my Dad had mentioned back at Xmas that he would like to have me paint. I postponed and postponed it for weeks, but eventually I had to have a go at starting it (strangely the more it was postponed, the closer it came to the Birthday that it had to be done for - time management ed).

The hardest part was doing the initial sketch. Did some research on the web and found a number of photos and paintings of the HMS Victory. Used them as a basis for my creation and used a second hand artistic licence I picked up on the cheap from EBay.

Took quite some time before I got the prow right, if you look at pictures of the actual ship, it has a really odd look about the front which I struggled to capture. The sails were a breeze (ho ho - ed). 

I noticed that I got caught (again - art ed) with having to do detail around the edges of the ship which was much  harder than I expected (or wanted - ed), and that was all very fiddly. Howerver, all a good learning experience, will read up on a couple of things to see if I can find ways of making my life a little easier on this front, presumably I am missing some easy technique (or at least he is hoping that is the case, maybe it is simply hard - ed)

So where am I now on my adventure in oil painting land. I have painted a ship, various flowers, a cat, a dog, a lion, a b&w person, various sunrises and sunsets, seas and skies, one landscape and trees, so what next?

On my own personal list (of paintings to be done - ed), I have a painting to do of Bridget ('er indoors - ed), and that is an interesting one, have a good range of photos, just need to pick the right one and see how it turns out. Also, quite fancy doing a tiger, full facial, because that will have some lovely colours.

Also, speaking to Esmerelda of Oz this morning (she really is a real person, though the name may have been changed to protect some innocent person or other - ed), and talked about the painting of Tanhouse Lane that she wanted, and it seems that what is needed is an essence of Tanhouse lane, i.e. not realistic, but an almalgam of the bits that she likes. Fancy trying that in a Impressionist vein, will keep you posted on that.

Anyhow, here you go, a subset of the photos I took whilst doing the painting, which in elapsed days and actual time spent was the longest that I have had to do.

First sketch attempt (actually nth, lots of expostulations and use of eraser)

Last alterations to sketch before painting started

See the sea

Sea and sky (errmm)

Sea, sky and sails

Now for the ship itself

Hmm, time for some black it seems

Friggin' with the riggin'

Liven up the sea and sky. Cannon added

More detailing, frizzin rattin rigging Dick Dastardly

More bow and wake, more clouds

More rigging etc must stop with the fiddling! Finished article