IR35 Scam on Contractors
Are the big banks and finance sector companies operating an IR35 scam on contractors (legal of course)?
Starting with HSBC one after another our major banks decided to blanket ban all contractors using their personal service companies. This seemed a strange decision as all they had to do was get their contractors to sit HMRC’s IR35 test Check Employment Status for Tax (CEST).
HMRC will guarantee this test. If a contractor passes the test then HMRC will not come after companies for that contractors tax. That’s even if later the contractor is judged inside IR35.
Questions on IR35 Scam on Contractors
- Why are the big banks putting blanket bans on Personal Service Company contractors?
- What do the big banks know that we don’t on IR35?
- Which companies are in the financial sector who cannot reclaim VAT?
- What Options are Bank Contractors Being Given?
- What is the real reason for the big banks banning contractors using personal service companies?
- What happens to the VAT that the banks paid for the contractor?
- How Much Will Companies Save by Pocketing the Contractor’s VAT
- Who are the Winners and Losers?
- Who is the big loser in this IR35 scam on contractors?
- How much does HMRC lose per contractor?
- How Can we calculate the real HMRC IR35 gains or losses?
- Will HMRC Make Any Money at all Out of IR35?
- Have HMRC Factored in the lost VAT?
Why are the big banks putting blanket bans on Personal Service Company contractors
So, why did the big banks all go for the blanket ban route and risk losing some of their best talent? I speculated that they must know something that we didn’t know.
After all the Government said recently in the Queen’s Speech “We will increase fairness and and flexibility in the labour market by stopping employers and workers experiencing significantly different outcomes from flexible forms of working.”
Treasury Minister Jesse Norman said that there was only 10% compliance in this area (IR35).
What do the big banks know that we don’t on IR35
Perhaps the big banks and finances companies had been given a view of what new legislation was coming in. After all Chancellor Sajid Javid used to work in that sector as Managing Director of Deutsche Bank before entering politics.
Because it seemed a very strange decision for them all to make. Although we know how often they appear to act in tandem.
But within he last few days I realised why the banks and finance sector are doing this.
There’s been a couple of companies doing this now. It’s an IR35 scam on contractors.
Companies in the financial sector cannot reclaim the VAT that contractors pass on to them.
Which companies are in the financial sector who cannot reclaim VAT
The major categories of financial institutions include
- central banks,
- retail and commercial banks,
- internet banks,
- credit unions,
- building societies,
- investment banks,
- investment companies,
- brokerage firms,
- insurance companies, and
- mortgage companies.
So, that’s quite a lot of UK companies who are not currently able to reclaim VAT.
What Options are Bank Contractors Being Given
What happens is that the contractors are informed that the bank or finance company will no longer use contractors who operate via a Personal Service Company.
The contractors are told that they will have to pay PAYE either via their agency or via an umbrella company. They are given very little time to make up their minds whether to accept this or leave.
They are told that that a certain percentage will be taken off their daily rate because of employer expenses. A typical one was reducing this from £600 a day to £460 a day. It’s only after those deductions that PAYE and National Insurance would be deducted.
It ends up with contractor taking home less than half their previous rate.
What is the real reason for the big banks banning contractors using personal service companies
But here is why all the big banks are doing this IR35 scam on contractors.
The contractor doesn’t actually, at the moment, bill the bank or finance company for the £600 a day. He, or she, adds VAT and bills them for £720 a day.
In fact the contractor invoices the agency who adds their bit on before invoicing the company. So that would be an extra £20 or so of VAT.
That would be £140 a day in all, that the company has to pay in VAT.
Unlike most companies, companies in the finance sector cannot claim that back.
What happens to the VAT that the banks paid for the contractor
However, if they use IR35 to force contractors to take permanent jobs with their agencies or umbrella companies then what happens to that £140 a day?
As the companies were paying a certain amount for a contractor’s services per day it could be argued that all of that should be given to the contractor before any deductions.
So, the Deductions should start from a rate of £720 a day rather than from £600 a day.
However, it looks as if the companies are pocketing the VAT.
How Much Will Companies Save by Pocketing the Contractor’s VAT
If they are saving £140 a day on VAT that is £700 a week.
That is over £35,000 a year they will save for each contractor they force into going PAYE using IR35 as an excuse.
When multiplied by a few hundred that’s a hell of a lot of money.
If they had a thousand contractors (and many banks have far more than that) then the saving is £35 million every year.
That, ladies and gentlemen is why so many banks and companies in the financial sector are issuing a blanket ban on contractors using personal service companies.
The IR35 reforms are just a cover for this.
Who are the Winners and Losers
So, who wins and who loses here?
The agencies and umbrella companies who take on these contractors on a PAYE basis win big time.
The biggest winners are the big banks and finance companies who will save £35,000 VAT on each contractor.
The contractors lose big time as they will keep less than half of what they earn.
Who is the big loser in this IR35 scam on contractors
Is there any other loser here?
Step forward HMRC.
They used to get all that VAT, i.e. £35,000 per contractor.
They still get something i.e. the PAYE and NI that the permified contractor now has to pay.
But they lose the tax that the PSC contractor used to pay.
The difference between what the contractor will pay now in tax and what he or she used to pay in tax is usually put at £15,000 to £20,000.
Let’s call it £17,500.
How much does HMRC lose per contractor
That means that HMRC gain £17,500 per contractor via IR35 – and lose £35,000 per contractor from the financial sector companies not having to pay the VAT for those contractors.
So, HMRC will lose £17,500 for each contractor who works for a financial institution. The banks and financial sector companies are among the very heaviest users of contractors.
There is an expression that “our computer systems ARE our business”. There is nowhere where that is more true than the banking and finance sector.
I don’t know what percentage of contractors are operating in the finance sector. However, this sector is a massive generator of revenues for the UK.
How Can we calculate the real HMRC IR35 gains or losses
Let’s say (and I don’t know this) that half of the contractors in the UK are in the Finance sector. Let’s say that all companies in that sector have a blanket ban on contractors.
That would mean that HMRC would be losing £17,500 for each contractor in that sector, i.e. the amount of PAYE minus what the contractor used to pay in tax less the missing VAT.
Now let’s say that the other half of contractors are in all other UK companies. Also, let’s say that all of them test contractors for IR35 rather than issue a blanket ban.
Now let’s say that half of their contractors pass the test and are outside IR35 and the others are inside IR35.
HMRC would receive no more tax from those outside IR35 than they currently get (a quarter of all contractors).
However, they would get an extra £17,500 a year from each contractor who is shown to be inside IR35.
Will HMRC Make Any Money at all Out of IR35
That would mean that::-
- HMRC get the same tax from a quarter of contractors as they did before
- They get £17,500 a year more from a quarter of contractors
- They get £17,500 less a year from a half of contractors
Now I have made quite a few assumptions Some may be wrong.
However, it does show that there is a possibility that HMRC may lose money from bringing in the IR35 reforms.
Did HMRC take into account that the big banks and financial sector companies might make their contractors pay PAYE and then pocket the VAT?
Have HMRC Factored in the lost VAT
When HMRC and he Government said this would bring them in £3 billion over 4 years did they subtract the amount they would lose in VAT?
They probably did not as the banks and finance companies have only revealed their blanket banning of PSC contractors recently.
This was not a problem in he public sector.
They almost certainly have not factored this in.
To give a true picture of the amount of tax they will get in they would have to subtract what they are going to lose on VAT from the big banks and financial sector companies.
We can now see the amount of disturbance to the flexible worker market and the plans of all of our big companies.
And this while perhaps losing money from implementing the IR35 reforms.
It’s time these IR35 reforms in April 2020 are stopped till HMRC and the Government can assess this new development.
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This is nonsense. The umbrella company still charges the end client VAT. It just goes from end client –> umbrella –> HMRC, rather than end client –> LtdCo –> HMRC.
Companies in the financial sector like banks cannot claim the VAT back from the Government / HMRC like other companies can
Amanensia is correct. It is irrelevant whether the finance companies can claim back the VAT. Whatever VAT the agency charges, they have to pay it to HMRC – they don’t get to keep any of it. This is a total non-story.
Show me where I said that the agency gets to keep the VAT? You’ve misunderstood the article.
With most companies the contractor charges the agency VAT, the agency charges the client VAT. The contractor pays HMRC the VAT. Presumably the agency pays HMRC their bit of he VAT. The client claims it back from HMRC.
with a financial institution the contractor charges the agency VAT, the agency passes that on to the client company but f it is a bank, for instance, the bank is not able to claim it back form HMRC.
So, he bank is stuck for it. However, by putting their contractors on their agency’s PAYE the bank no longer has to pay HMRC and VAT as the contractor and agency have not claimed it from them.
The Agency and / or umbrella still claim the VAT from the bank. The don’t suddenly stop charging the bank VAT because the contractor isn’t via a PSC. The total charge to the bank will still include VAT. Therefore the bank still pays it.
All umbrella companies charge the banks VAT on their invoices, so the VAT is still paid by the banks but the contractor is no longer involved. The banks will still pay the same amount of VAT .. if not more, as not all contractors were previously VAT registered. The Tax take from VAT is likely to be larger for HMRC through Umbrella companies… and the Banks will pay out more VAT as VAT will be charged for contractors who prevoously earned under the VAT threshold as their invoices will now be aggregated by the VAT registered umbrella company.