Our financial services and tax specialists are pleased to be hosting an event exclusively for brokers on 13 February, in collaboration with The Broker Club.
The Broker Club is dedicated to giving capital markets brokers a supportive, informative community where none was available before. BKL’s financial services team has experience with broker-dealer, inter-dealer broker and FX brokerage entities. We’re glad to be working with The Broker Club to support people in an increasingly regulated and rapidly changing sector.
Broker compensation is under scrutiny from both HMRC and the FCA. Our roundtable discussion will cover the implications of IR35 and what firms should be doing.
IR35 and “off-payroll working” in a nutshell
Taking on employees is, in tax terms, relatively expensive. That is mainly because employers are fixed with National Insurance Contributions (effectively a tax on employing people) of up to 13.8% of payroll.
Taking on employees is also potentially expensive in other ways. Employees have significant rights: holiday and sick pay; redundancy entitlements; unfair and wrongful dismissal rights, to name but a few.
Having work done by self-employed contractors rather than employees therefore cuts costs to a business in both tax and commercial terms (as well as being more tax-efficient for the worker, who not only saves NIC but also benefits from a much more generous regime for tax-deductible expenses).
Isn’t the answer obvious? Don’t employ people: take them on as self-employed contractors instead? Sadly not: whether someone is an employee or a self-employed contractor is determined not by what label the parties choose to attach to the relationship but by its fundamental characteristics. It’s the tax equivalent of the duck test: if it looks like an employee, walks like an employee and quacks like an employee (do employees quack?) it’s an employee.
Undismayed, businesses realised that as a matter of law a company can’t be your employee. So, instead of employing Alfred Employee, make a contract with A Employee Ltd under which A Employee Ltd agrees to put the services of Alfred at your disposal just as if he were your employee. You pay A Employee Ltd (no question then of having to operate PAYE and account for NIC – you are paying a company); and A Employee Limited pays a dividend to Alfred (again, no NIC and potentially highly tax-efficient). Neat.
20 years ago, HMRC countered that ploy with the IR35 “intermediaries” legislation. Broadly, if an intermediary (usually, but not necessarily, a company) is interposed between you and someone who would otherwise look, walk and quack like an employee, the legislation kicks in: everything that the intermediary pays over to the “employee” is treated as employment income of the “employee” and tax and NIC is applied accordingly. Problem solved for HMRC: substantially the same taxes are payable regardless of whether you engage an “employee” directly or via an intermediary.
There’s a snag for HMRC. “Payable” isn’t the same as “paid”. What if the intermediary doesn’t actually apply the law? In theory, HMRC can investigate and remedy it: in practice the amounts involved for any particular one-man company mean that an enquiry is seldom cost-effective. And even if HMRC win, it doesn’t help them much if A Employee Ltd has already paid out all its profits as dividend. HMRC estimate that only 10% of the A Employee Ltds who ought to apply IR35 actually do so.
Rethink: take the onus away from A Employee Ltd and put it onto whoever pays A Employee Ltd. Require the payer (a) to decide whether Alfred looks, walks and quacks like an employee and (b) if he does, to operate PAYE and NIC on the payment to A Employee Ltd. Which is, in fact, how HMRC originally wanted the IR35 legislation to work right from the outset but on which they were frustrated by resistance from businesses engaging the Alfred Employees of this world.
HMRC got their way in 2017 as regards payments made by the public sector (such as the NHS, BBC, local authorities and so on). In the face of much resistance they have succeeded in extending it to most private sector payers from April 2020. It raises all sorts of practical issues: our roundtable discussion with The Broker Club is where to find out more about them.
- When: Thursday 13 February, 4:00-5:30pm
- Where: The Broker Club, Becket House, 36 Old Jewry, London EC2R 8DD
If you’re a broker and would like to know more about this event, please email [email protected].
