Biggest heist in UK history - codename IR35

I started writing this article in mid-October after reading one of the IR35 article comments. While reading arguments between permanent employees, contractors, and HMRC bot-contractors faking "yes we are guilty, please punish us", I could not help myself think:

Rich people paying rich people to tell middle-class people to blame poor people

We could read a lot lately how IR35 legislation is all about fairness and protection of employees, but this legislation does not have anything to do with fairness. In fact, it is a quite the opposite, and it is even less about employee protection. (*)

The new IR35 legislation is one of the biggest heists in UK history. With one swift move, the government will push the plethora of small limited companies, a seed of growth, an actual middle class into the lower class, or rather wage slavery - old fashion feudalist/communist style. Question is why, for whom, and what for?

Government Needs

Let’s start with the premise that the government needs more money, erm ... because, you know, the government always needs more money.
So, the government goes and talks to HMRC to invent new ways to squeeze more money out of people.
HMRC looks in the data, and they say:

Look at these small companies, there is a lot of them, and they do not have any expert legal teams, unlike Facebook, Gooogle, Amazon ... we can take a lot from them...
But how can we do it?
It is costly to go against every and each of them, so, hm, we have that IR35 legislation which forces directors of limited companies to pay all their profits as salaries. Well, we will shift the responsibility of deciding whether small limited companies are inside or outside IR35 to their clients, that way, making clients liable.
To be on the safe side, employers will, by default, assess all contractors as inside of IR35. Basically, forcing small limited companies to pay significantly more taxes.
More than anyone else. Additionally, small limited companies a.k.a. "contractors” will need to work through umbrella companies, an "approved" way of working (read controlled by aristocratic elite personally).
Most importantly while doing all this, we will ignore the fact that "contractors" are, in fact, directors and owners of business entities.

What is IR35?

According to HMRC, IR35 refers to the United Kingdom's anti-avoidance tax legislation, which has the rules make sure that workers, who would have been an employee if they were providing their services directly to the client, pay broadly the same tax and National Insurance contributions as employees.

What is the most significant change of IR35 2020?

From April 2020 government will impose new IR35 rule into private sector. A big new change is shifting the liability to decide about IR35 status from the limited companies that are carrying out the work (service providers) to the employers (service receivers).

If HMRC decides to audit small contractor and checks it's working practices, and then court makes a ruling that a service provider operates inside of IR35 legislation, as liability is on employer, automatically employer will need to pay all taxes but also all penalties and taxes for any other service providers that are working under similar contracts and conditions.

To reduce risk and especially expenses (*) employers will use a blanket approach and default everyone to be inside IR35 to avoid possible massive legal issues. And we could already see this on the example of all major banks as Barclays, HSBC, Lloyds, RBS, Morgan Stanley and many others corporations. As risk is proportional to the number of service providers employer is engaging, the bigger the employer is, the higher is the risk.

Just to give a more vivid picture of how this works, imagine a shop with 100 customers. One of those customers may be a shoplifter. Police goes to talk to the shop-owner and says "Look, we are shifting liability to decide who of those people is a thief on you, but that is not all, if you make a mistake and you say they are innocent, and we find they are not, instead of them you will go to jail for a year, ahem, multiplied by number of people in the shop". Now, for a shop owner, the best decision he can make is to say that all customers are thieves, without putting too much thought into it. Risk of something going wrong even when you do everything correct is outweighing possible gains.


fairness /ˈfɛːnəs/
impartial and just treatment or behaviour without favouritism or discrimination.

A fair law is one that works equally for everyone, regardless of wealth, race, age, sex...
Does the UK have fair laws?
No. Laws in the UK are quite like that sentence from George Orwell's Animal Farm "All animals are equal, but some animals are more equal than others." benefit aristocracy above all. So, in some sense, UK tax law is a plutocracy wet dream, and IR35 is its extension.

Regardless of many politicians claims that IR35 legislation is designed to tackle tax evasion, the real largest tax evasion and corruption will continue business as usual, as tax-wise, they are entirely different universes, and you will find why that is shortly just bear with me.

Dissecting IR35 rule

"The rules make sure that workers, who would have been an employee if they were providing their services directly to the client, pay broadly the same tax and National Insurance contributions as employees." []

    Let's breakdown the above statement to two critical sections:
  • 1. Employees and Services
  • 2. Broadly the same tax.

1. Employees and Services

Services can be provided by legal entities and people, and generally, they could be carried out by people or automated systems. So, let's focus on people only, although automated systems are disrupting economy far more than we anticipated.

People's work is always a service, even when making products. But there is a big difference between providing services through permanent employment and through legal entities.

Let's first explore a company as a legal entity formed to provide/sell product/s or service/s, taking a limited company as a prime example, as in the case of IR35, this entity is the primary tax target.

Limited Company

"In a limited company, the liability of members or subscribers of the company is limited to what they have invested or guaranteed to the company." *wiki/ltd

In order to correctly assess mentioned IR35 rule, above means that a company is providing services, not a person!
Although an owner could be the same person who is physically carrying out the work, a company is the one providing services. The owner of such a company has limited liability.

Historically, people were liable for everything in the company, if the company bankrupts, they were losing their own wealth and often ending in prison. This created a situation where no one wanted to take on any risk anymore, as losing money would mean losing everything you have. To encourage people to take a risk and at the same time, shield them from possible failures - limited companies are created as the answer.
Shifting liability from owners to the legal entities has shown very fruitful. Allowing owners to take a risk, try out new things, and make mistakes - created a vast number of new ideas and businesses that would not exist otherwise. By and large, for the progress of technology and state civilization we enjoy nowadays, we can credit to the invention of this concept.

When we talk about contracting, for those contractors who have created their own limited companies, business relations are strictly between legal entities, not persons!

Please remember that it is essential. Although people are involved in the process, the emphasis is on the companies regardless of their size, number of employees, or annual revenue.

For the broad public, these concepts look similar because of the misleading language deliberately used by proponents of IR35. While trying to convey information faster, a meaningful context is lost:
Therefore, it is wrong to use the words "contractor provides the work" while actually, it is "company (X) is providing services for the company (Y) on hourly bases for the limited amount of time." As you can notice, there is no room for any permanent type of work in the second statement, and the company (X) is not enjoying any permanent-employment benefits from the company (Y).

When we talk about limited companies regardless of being an entity of 30000 employees or just one person, rules should be the same.

There is a clear distinction between the obligations of limited companies and employees. Although plumber, an owner of "Plumbers Ltd.," can go to your home or corporation and stay there for few hours or few days, still plumber is not that corporation's employee or your personal employee.

Plumber's obligation is to his own company "Plumbers Ltd.," contractual obligations are between two legal entities (two companies), not a plumber as a person. Even if he creates a damage plumber personally is not responsible; instead, the "Plumbers Ltd." and that entity's director (which is accidentally the same person) has the responsibility. This concept can be challenging to grasp and can look equally mind banding as trying solving time travel paradox, but it is essential to understand as it is a crucial pillar of free-market economy and capitalism in its pure form.

Effectively, this means that whatever was the contract terms between two companies are the main rules of the business regardless of how good or bad. In this sense, each company owner should be aware of the terms they are accepting - by verifying the contract with their signature. This means that each company should invest some money, proofing it with a legal team to avoid future issues. To simplify things contracts, as in the case of our "Plumber ltd." company, can be created as a template for future reuse.

That being said, if we go and revisit sentence "workers, who would have been an employee if they were providing their services directly to the client" or often asked as "Are contractors really contractors, or workers in disguise?" is equally invalid question as "if apples were pears how much juicy would they be?" or asking "If I say that I am lying, am I lying?"

An impossible question always gives a conundrum, of an infinite number of wrong answers.
Workers could not 'have been employees' of those companies simply as they are not. They have their own companies, and companies made an agreement to provide service on behalf of their own companies for the other companies that needed those services. So, "would have been" is an impossible construct.

Nevertheless, with this cunning semantic manipulation, whoever invented IR35 had its own way. Not because of fairness. Not because of care for the working force, as no one has ever forced owners to sign their company contracts, or ask them would they rather be employees of someone's else company. IR35 has been created to continue protecting super-rich aristocracy and widespread government corruption hiding behind a false narrative that says - "taxing the rich more" while in reality, they are taxing middle class more.

2. Broadly the same tax.

It is not even close to being the same. Being caught inside of IR35 is far more brutal and punishing then permanent employee tax. Depending on the point of view, by being inside of IR35 legislation, companies will pay as much as 64% to different parties, taking home only 36% of the value they provide. Detail calculations and numbers will follow.

And that's not even the worst part, IR35 legislation is destroying someone's ability to run a business in the UK as a single person, removing the ability to claim expenses, invest through that business, have the flexibility of work, and many others. Exempting the rich and pushing all small service-oriented businesses into same PAYE frame, same wage slavery.

Where is the cheese?

Did you know that each year, the UK government operates 1156 forms of tax relief, allow certain interests not to have to pay the tax that you and I pay?

"According to the Treasury, the government, the top 209 of that 1156 tax reliefs, results in `revenue foregone` revenue not collected by the government, each year of £406 billion. So, what would happen if we rolled back those regressive tax reliefs?" ( - Guy Standing, University of Cambridge (PhD) (wiki/guy)

Just as an example, Facebook’s UK operations paid £28m in tax last year, despite record £1.6bn in sales, around 1.75%.(*)

Also, did you know that between 2009 and 2012, the United Kingdom released a program called Quantities Easing, to "boost the economy and reduce poverty and unemployment"? The government gave £375 billion to super-rich people. (*) Yes, you read correctly, to rich people.

Imagine you a rich. So, you have more money than you will ever need. Then instead of paying taxes, the government gives you even more money! A nice deal isn't it?

The sinister idea was that if the government gives money to the rich, the money will trickle down to the poor and middle class. Money never trickled down; rich "invested" additional money by gambling on the stock market, inflating the economy bubble and creating even more significant distance between them and other classes.

Increasing the already high cost of living on decades salary-stagnating job market, had an additional negative effect on the wide population.

Even child could have told you how stupid that idea was, it is like saying "to eradicated starvation we will give food to gluttonous obese people and then falling crumbs will feed all hungry people", and government got away with it, erm because you know government can get away with anything, like with any other stupid idea over the years, because we the people, are, so it seems, powerless.

In 2016 article IPSE in overly positive tone stated that there are roughly a 2 million self-employed professionals who are working in the UK. Out of which, approximately 1.77 million working as full-time contractors, and about 234,000 working on a self-employed basis, as their second job. Contributing £109 billion to the UK economy. (*)

So, the government is letting go of those who have £406 billion annual subsidies but squeezing as much as possible from smaller slice made of a skinny layer of the middle class!?

The government is estimating additional gain of only 1.3bn (*1) to £5.4bn (*2) (*3) per year.

According to an April 2019 report by S&P Global Ratings, Brexit had cost the British economy £66bn in just under three years - equivalent £22bn a year. The government is estimating a yearly tax gain that is four times smaller than what the UK is losing as a result of the Brexit!

Although IR35 is destructive to small businesses and damaging to those company owners and the middle middle-class, although gains will be minuscule in comparison to £406 bn subsidies given to the rich, the government will continue rolling out these changes regardless of what party is in the power Tories or Labour.

As mentioned, this is part of politicians’ manipulative narrative, saying one thing but doing another, stating they will tax rich, while actually, they are taxing the middle class and small businesses.

Why HMRC does not go after big guys?

Big corporations’ shareholders are already controlling the government in one form or another. Even in unlikely case government goes after big corporations, they have very skilful, highly paid legal and accountancy teams at their disposal. Crème de la crème, capable of hiding hundreds of millions of pounds. For corporations to pay £250K to £500K per such a very skilful legal resource is peanut money in comparison to savings (read tax evasion) they can make.

You probably remember the case of "Panama Papers" *wiki/panama 11.5 million documents and US$2 trillion passed, uncovering many UK rich people and politicians, including David Cameron former UK PM. Out of many wealthy tax evaders, no one was ever prosecuted.

Now, the question is: when you are an owner of a small company, often being call contractor, can you pay a big legal team to do the same for you?

For the government to run multiple of these long-lasting cases is a quite pricy endeavour, and usually, the government's legal teams, paid with public salaries, are not proportional match. Especially when taking into consideration how frequently the government loses legal cases. Often as they do, they have to pay all legal costs - but they do not care as long as they are spending, of course, our tax money isn't it?
When they run out of money, they will, of course, simply increase taxes.

Second, the more important reason is that rich may hold country as a hostage; if the government goes after them, unlike ordinary people going to streets and not achieving anything, the rich have more persuasive tools at their disposal. They simply discharge a few thousand people creating turmoil and unrest in society. Also, they can quickly move their wealth around the world, famously Gerard Depardieu left France because of high taxes. (*)

Again, unlike ordinary people, rich people have that ability, but do you?

Government is using a clever trick showing that people on earnings of let say over £100K belong to 5% of wealthiest in the country, hiding the fact that just 1% of wealthiest has 24% of all UK wealth. We are missing to understand different metrics to measure wealth, but also how difficult is to tax it especially as rich have a better ability to "hide" money.
When I say "hide," I do not mean illegal Panama papers style, but by merely operating in constraints of laws designed for rich.
To give you a simple example, we can agree that with a modest way of life a person would survive with £2000 income, and this is the same for rich and poor. People who have salaries, they must pay around 40% all they earn.

On the other hand, rich can manage millions in their companies without ever paying any tax. Just by balancing corporate income and expenses, they can avoid taxes and constantly grow. In the end, if they sell a business for millions, they will pay only 10% tax on the total amount. The thing to remember is that the rich do not pay PAYE - taxes designed for them are a completely different dimension.

So, when you hear all those talks about taxing rich, it is just a manipulative narrative for broad masses, all the while government, in fact, is taxing the middle class more, without any effect of spending tax money on the poor. Just a small portion of tax money will go to increase public salaries like government office and NHS just to calm down people's rage. The rest will be spent on wast number of corrupted projects giving additional subsidies to the rich.

Permanent employee vs "contractor"

To answer, "Why contactor who sits next to me and does the same job earns more money?" dilemma let me ask following:
What is better for the government to have someone who is contributing £55K or £29K a year in the mutual pot?

Permanent Employees

The top permanent senior IT salary is approximately £70K (*) (**) but an average UK salary is £36,611 (!), and following are some of the pros and cons of the permanent employment both for employer and employee:

  • Paid national insurance and pension
  • Paid sick leave
  • Paid maternity/paternity leave
  • Paid vacation often 6 weeks
  • Severance pay for previous years in case of redundancy
  • Very difficult to ask for salary increase
  • Appraisals are usually just a formality not providing enough incentive for improvements
  • Vertical growth is limited to a few people, and horizontal not rewarding enough
  • People with different skill levels, often have very similar salaries
  • Performers and slackers are often treated equally
  • It is not easy to discharge permanent staff, it can be a long and costly process
  • Unions protect workers which can result in a long process of allegation bringing employer to the tribunal
  • There are multiple ways of avoiding delivery without being fired
  • Work-wise employees are almost encouraged to abuse system; unfortunately many of them do
  • From intellectual property rights, perspective contracts are more restrictive giving total rights to employers

On £70K salary permanent employee will pay around £21K or ~30% of taxes while additional of £8.5K NI has been paid by employer (will explain a bit later) taking home £49K (*)

Limited Company with one employee

The average UK contractor rate is £500 per day; on top of that, Net rate client will pay an additional 20% of VAT = £600 a day and between 10-25% for recruitment agency fees on top of all that.

At this point, many will exclaim, "Wow, that is a lot of money; I would like to do the same," and soon after envy creeps in. But things are not that simple, that money is not personal, it is not employee's (a person known as the contractor) earnings, it is a company's income, and often many confuse the difference. Although it looks the same, the difference is huge.
A limited company that contractor runs needs to pay different types of dues:

  • Insurances (employer liability, public liability, professional indemnity... )
  • In case of sickness, days contractor is not working his company/him is losing money
  • If contactor cannot work for more 5 days and send a replacement, he can lose a contact
  • There is no contract security - the contractor can be literally told on Friday, not to come back on Monday.
  • There is no paid vacation - if you don't work you lose money (vacation looks like this: 10 days of vacation (10 * £500 daily rate) + £1000 for vacation = totalling £6000)
  • Each time a contractor goes to an interview he is competing against others, it is not just his skills and that part many consider terrifying
  • At interviews people realize how much they do not know, forcing them to constantly learn new skills (constant education costs money and time)
  • Failing to make delivery within the predefined time constraints can cause penalties or losing the contract
  • Faults and mistakes are often mended in their own time and at their own expense
  • Each previous work creates a good or bad reputation that will have an impact on finding the next client
  • If contractors are lucky s/he will work 240 days a year * (£500 a day) = £144K a year including VAT
  • When the job market is low, there can be gaps between finding a new contract that can last a few months significantly decreasing total annual income
  • Needs to pay an accountant and often pay for legal consultancy
  • In parallel, contractors in their own time need to do their own accountancy, fill different assessment, keep books and expenses in order... all this is time consuming

£120K gross profit = £500 * 240 days
£144K including 20% VAT
£173K including 20% agency fee
£10K expenses (base salary £8K, accountancy, insurance, advertising, company management, education, seminars, travel ...)
£110K out of that
£24K VAT
£25K Corporation Tax (in UK for IT consultancies corporation tax is 22.5%)
NET profit (still not money you take home) => 85K left
£60K = personal = 50K dividends + 10K directory salary (depends how much you take from company)
additional personal tax paid on above is ~6.1K
22K left in company for days of volatile market when it is hard to find contract and fill the gaps

With existing way of business on maximum 240 days engagement £120K gross income, contractor will pay ~55K or 38% (55K(24+25+6.1)/144K) taxes.(*)
Have in mind that tax on agency fee has not been calculated in. Agencies will also pay different taxes on their 20% or 29K on top of 144K "contractor" is generating. They will also pay corporate tax, employees, then those employees will pay taxes, etc. let say that roughly 30% or £10K of that money will end up as tax. Meaning that currently "contractors" earning £500 a day while being outside of IR35, will hand over £65K to HMRC each year through taxes, taking home max £76.5K (85+8-16.5) which is a 44.2% of total value, and this all is under existing rules.

It is worth mentioning that the "contractor" needs to consider paying into a private pension fund, as usually, that part has not been covered. Hence, a contractor is already paying significantly more taxes than a permanent employee in fact 2 times more taxes, although we were comparing top permanent salary with an average contract rate, without considering that s/he needs to invest significantly more time just trying to stay in the game.
And how is that rewarded?
It is rewarded by destroying the entire industry, just so the government can hide their corrupt ways and support false narrative of taxing rich.

Why do contractors do it then?

Contracting allows meeting new people and learn new skills rather than being stuck in the same place with the same mindset. It allows knowledge cross-pollination - benefiting to all clients.
As the next job depends on reputation, contractors learn how to do a job as better and as professionally as they can.

Next is the flexibility of work. Limited companies can accumulate money, allowing contractors to choose when to work and how. Some of them describe working 9-5 until the retirement - as brain-numbing and life wasting experience. Instead, they can choose to work for 6 days a week the entire year and then take a few months to explore different ideas. Such a concept best described in Stefan Sagmeister's TED talk, "The power of time off" has a good impact on mental health, reducing overall NHS expenses.

Contracting is about leveraging the risk. Entrepreneurs and contractors are very similar in that regards; they are risking things as pension, savings, health... they play a game with their own life; they are working riskier for a bit higher gains, with the hope that they will have the opportunity to profit allowing them to manage their life better in future.
Higher gains, coupled with the risk, is not a formula or promise of success, it is a just ability. Freeing time can lead to new ideas and also lead to the creation of new businesses. Collecting enough funds within a company, over time, allows investing in new business, reinvest profits and employ more people. This is especially important for those people who do not know how to find investors willing to invest money in their ideas.

When we talk about higher earnings, we have to consider that there is a huge difference between cashing-in on years of personal hard work and making money off someone else work. Difference between a contractor and passive shareholders. Difference between a sole contractor and employer who profits on each of his employees. Difference between an effort and greed, between worker and slave-driver. Difference between a small limited company and corporate giant.

Contracting creates fairer wealth distribution

Big corporations usually look how to decrease the number of employees as they represent an expense for the company. Optimization of working practices, automation, AI bots, and many other techniques are used to reduce expenses and maximize profit. From corporation top-management perspective, employees are just another expense, nothing more than a burden, if shareholders could replace working force with something cheaper, they will do it without thinking about employees’ personal circumstances. A simple proof of this is the outsourcing of the workforce to cheaper countries like India and China.

That being said, from a social point of view, "contracting" is a better way of distributing wealth. During the last 20 years, salaries in the UK have not seen a significant increase, while contractors’ rates, on the other hand, are on constantly increasing trajectory. (**)

If you consider the steep rise of the capital gains of top richest 1%, the only force that is confronting total oligarchy of rich in terms of earnings and inflation-adjusted values are - contractors and small limited companies.

Reason for this is the higher frequency of daily-rate negotiation. Rates are updated on more regular bases avoiding the trap of permanent salary stagnation, crating fairer economy.

Even if 2 million contractors were to dodge 100% of taxes, which is very unlikely, the country and the economy would be better off than having 5 billionaires with an equal amount of money. If we take 2 million small limited companies with an average gross income of £120K, they will generate a £240bn after VAT. Unavoidably, the government would collect £48bn from VAT only.
Now, if we consider 5 billionaires with £40bn each having equal daily needs as ordinary people, their purchasing power is not even close to 2 million people. Those 2 million tax dodgers still need to eat and drink every day, they need toiletries, they need to pay transport, they need clothes, and they need to pay electricity, internet, and phone bills. They need to feed their families as well, so we need to multiply all numbers by at least 3. Each pound contractors spend will go to different shops and services, so, the money will truly trickle down from those 2 million to the rest of society.
On the other hand, those 5 billionaires more or less have the same expenses as any 5 people of those 2 million. Combine 5 billionaires would buy maybe 50 pairs of jeans, but definitely, they will not buy 6 million pairs. Most certainly, they will not buy 4 million pieces of bread each day each 365 days of year!

At this point, envious people have to understand that taxing small limited companies will not make them better off, it will just equalize everyone old fashion communist way - bringing middle-class down to the same poverty level and cutting off a climbing rope of ability for everyone, to even attempt to do the same.

Stealth personal taxes

Although IR35 taxes are significantly higher issues not stopping there. For those on PAYE if on a sizeable income, such as £100,000, every pay rise you get until you earn more than £125,000 will be taxed at 60%. (*)

In the case of permanent employment, employer pay an additional 13.8% of employer's Employee National Insurance. (*) With new IR35 2020 limited Companies deemed to be inside of IR35 would need to pay a full income as PAYE. As employers will most likely refuse to pay additional money on top of the current contractors' rates, it means that 13.8% will be deducted from the base rate. Which is roughly an additional £16.5K of taxes on £120K.

When everything adds up it seems for contractors would be better off to switch to a permanent job salary of approximately £92K (paying ~£30K tax + employer would pay ~£13K) and enjoy all the employee benefits. It would also be better off for an employer as they would pay £105K for a permanent employee, in comparison to £144K they would pay to a contractor, subsequently reducing recruitment agencies fees per each contractor and the middle-men (head-hunter and different payment processing agencies). The article "Why tax rules mean the economy is suffering as 'entrepreneurs' abandon self employment" explains it nicely.

In the case that everyone goes permanent, treasury will be left short of at least ~£12K per each person, (a £55K currently vs £43K for permanent salary employee taxes + employer tax) if all 2 million contractors turn to parament in a similar way, that would mean £24 billion less in the treasury per annum.

What will happen then?

"First, they came for the socialists, and I did not speak out—because I was not a socialist.
Then they came for the trade unionists, and I did not speak out— because I was not a trade unionist.
Then they came for the Jews, and I did not speak out—because I was not a Jew.
Then they came for me—and there was no one left to speak for me."
-- Martin Niemöller"

At that point, we can assume, as there will be even less money in the treasury, again the government will not go for a big corporation; instead they will go after everyone's permanent salaries - already diminished by inflation, increasing the burden of taxes on everyone, except of course the slave drivers.

Don't forget all these penalizing feudalistic changes are happening under Tories party. While I was slowly writing this article, the above quote lines manifested in front of my eyes in the title General election 2019: Does £80,000 put you in the top 5% of earners?
What Labour party is proposing is an additional tax bracket of 45% after £80K, meaning first they will force contractors into PAYE diminishing daily rates, and then on what is left, they slice with additional income tax.
When Labour proposing free services, it is not for free, it means that contractors will pay for everyone.

At this point, we came to the conclusion that all politicians are in the same bandwagon as mentioned (*). People who think that taxing more those who earn less 150K per annum will help them personally, are probably suffering syndrome of grandiose delusions.
The issue is: these new changes will not lift everyone less fortunate UP, they will actually just put DOWN what was left of the middle-class.

As stated earlier, they will not go after "Panama Papers" (*) guys or big corporations - they are going after you (*) and your earnings. They are using numbers of how many people are in the poor class and how little they earn to justify middle-class tax raises.

And as expected someone on Twitter commented:

I already mentioned (*).
Here, the question is not what kind of job can give you £80K salary, as we can quickly list plenty of jobs 90% of people in the UK do not have, and will never have the necessary qualifications to do.
Instead, the question is; in what kind of sad state this country is when people think that £80K represents a lot of money, especially when 50% is taken by taxes what left divide by 12 months? (Hint: take home a month would be £3.3K)

So, let's discuss a few numbers and definitions for the 21st century UK.

Poverty, wage slavery, freedom vs survival

poverty /ˈpɒvəti/
not having enough material possessions or income for a person's needs.
the state of one who lacks a usual or socially acceptable amount of money or material possessions [Merriam-Webster]

When personal profit (earnings vs expenses) does not give enough freedom and person is always one salary away from a total disaster, finding difficult to save any money, without ability to change job - is an indication that person, trapped by the circumstances, is a quite possibly a victim of wage slavery.(*)

In 2016, Shelter's research found that 37% of working families in England could not cover housing costs, being one paycheck from losing their home. (*)

Often poor choices can lead to unfortunate personal economic circumstances, for instance, if a person buys a house they cannot afford. The usual response is that it is their own fault, as they had a choice of purchasing a smaller property, which they could have afforded. But what if the market is such that you do not have any other option? You either rent giving most of your hard-earned money to someone else, or you buy a property that is "affordable," hoping to keep the same level of income for the specified number of years.

From the above perspective, a person living in London with a gross salary of £60K or less is not a member of the middle class, but most probably the upper-poor class, especially if they recently purchased a property and they are paying a mortgage.

Walking along the river Thames, it is easy to find a lot of vacant new residential buildings. The only issue is, those properties are not built for London working force. How else can we explain a tiny 1-bedroom flat with a starting price of £600K? We are not talking about some luxury 5-bedroom house, just a small 1-bedroom flat, maybe it is newly built, but it is just as same as any other 45 square meter space in an overcrowded city.

Now, person with the salary of £60K per annum, takes home around £3.6K a month.
25 years mortgage =
instalment £2.5K a month
+ insurance (£100)
+ electricity (£50)
+ internet/phone (£50)
+ food (£400)
+ transport (£130)
+ water/garbage (£30)
= £760 and £340 left. So far so good, but we forgot:
+ Council Tax ~ £200,
+ Ground Rent £50 and
+ Service charge £250, which can for new buildings skyrocket easily to £800 per month.
Suddenly without enjoying any special luxury person are spending more than they earn.

Taking such a mortgage is equal to 25+ years of constant fear and struggle. That is not a life; it a 25-year prison sentence. All this so someone can enjoy his new private jet and play war games sending UK kids to desert countries?

What about the government's so-called "Help to Buy"?
Those should be rather called 'scams' than schemes, and I will write about those in a separate article.

With new IR35 changes, the government may push the rest of the middle class into a similar condition. Maybe for Londoner's solution is to buy a property in Zone 4, 5, 6, or even further?
Each travel zone adds up to the transport costs, but also o time spent commuting to work and that time is - life lost forever.

What will happen to those who already went to a property ladder, finding out that their property is suddenly unaffordable because tax has jumped from 30% to 50%?
Why did they buy those properties?

Because banks allowed them, calculating risk beside contractors’ rates, not considering tax change that will turn everything upside-down.
And what with those who are sole providers for their entire family, how will this change affect them?


Last year March study revealed that in a quarter of British adults have no savings. (*) For those with good saving habits, an article has a "positive" remark: "If they don't spend their money in the shops, Brits try and put away on average £171 a month into savings. But the ones, who are able to put money away more regularly, have an average savings balance of £4,212.40." neglecting to put in perspective how little money that is.

Imagine finding a property that requires 10% of deposit and costs £200K. After saving, as suggested in above article, each year brit will save around £2k (£171*12), meaning they will need a 10 years just to save for deposit, renouncing everything you possibly can, with minuscule bank savings interests rates of 0.25%, they will literally look how inflation is eating away their savings, again not have enough for a deposit as in 10 years property prices will double.
Stuck in the rat race, delaying gratification, renouncing basic needs and every day simple pleasures, they will watch how everything is taken away because of the "state of the economy." All the while, the rich will increase their wealth by multi-folds.

Welcome to the feudal 21st century!

It does not come as a surprise (*) that UK's National savings 2015 are lower than any OECD country. It is wrong to look for justification of this by blaming national habits as simply put, one cannot save where there is nothing to save!
Plutocracy, corrupt government and crony capitalism made it that way.

Deceptiveness of GDP index

The media love to use GDP as a measure of growth, but that measure is quite deceptive; although it gives how well a country does as a whole, it sends the wrong picture where the concentration of the wealth is.

To give an example, if we take an imaginary country of 66.7 million people with £42.5K of GDP per capita, we could conclude that this is a good country to live in.
But soon as we show a breakdown of GDP per number of people versus the amount of their income:
Top 100 has an average income of 10 billion.
Next 10,000 has, on average, 100 million.
Next 100,000 has, on average, 5 million.

We conclude that the average GDP per capita for the rest of 66.5 million people (in this imaginary country) is £5000 per annum, coupled with the cost of living, means that majority are struggling to survive.

Such a 'ranked GDP' should be a real measure of wellbeing in one country as it gives a picture of how well the majority is doing versus minority. Especially when minority creates laws that work only for them, not giving chance others to lift themselves out of the poverty, regardless of their level of education.

How many people do you know with a degree who work on low paying jobs that can be done without any degree?

Full comparison calculation: Permanent / Outside IR35 / umbrella / Inside IR35

Permanent salary

"Take Home vs Value" represents how much employee is taking home from the perspective of total expense for the employer, or the value s/he is providing.
Below double lines are numbers we could characterise as far fetch, although they are easily achievable from the perspective of contract rates, from the standpoint of permanent salary those rates are not very likely.

Limited Company - Outside IR35

Daily rate: £500.00
Engagement 240 working days (48 weeks)
Free time (for rest and looking for the new contracts) 4 weeks
(1) Annual Income (Days * Daily Rate) £120,000.00
(2) With VAT 20% £144,000.00
(3) With Agency Fee 20% £172,800.00
(4) VAT only £24,000.00
(5) Agency Fee only £28,800.00
(6) Base Salary £8,000.00
(7) Expenses (Accountancy, insurance, trainings...) £4,000.00
(8) Profit after expense £108,000.00
(9) Corporation Tax £20,520.00
(10) Dividend Tax £18,905.00
(11) Total Tax ((4) + (9) + (10)) £63,425.00
(12) Total Tax + Agency Tax (~30%) ((11) + (5)) £72,065.00
(13) Dividends £68,575.00
(14) Take Home ((13)+(6)) £76,575.00
(15) Take Home vs Gross income ( (14)/(2) ) 53%
(16) Take Home vs Gross Income with Agency Fee ( (14)/(3) ) 44%

Now, notice bold red line (11) even without including agency tax, contractors are paying £1000 more to HMRC than they would if they had a gross salary equal to daily rate (£120K) - £63,425.00 vs £62,424.00. So, even with giving the same permanent salary rates HMRC would start losing money. What will happen when people massively switch to lower salaries to avoid the hassle. How much money will HMRC lose?
But that is not the only thing HMRC will lose, read more in the following chapter.

Limited Company - Inside IR35

Daily rate: 500
Engagement 240 working days (48 weeks)
Free time (for rest and looking for the new contracts) 4 weeks
(1) Annual Income (Days * Daily Rate) £120,000.00
(2) With VAT 20% £144,000.00
(3) With Agency Fee 20% £172,800.00
(4) VAT only £24,000.00
(5) Agency Fee only £28,800.00
(6) Base Salary £0.00
(7) Expenses (Accountancy, insurance, trainings...) £6,000.00
(8) Profit after expense £114,000.00
(9) Employers NI £13,824.00
(10) Deemed payment / Taxable income £100,175.00
(11) Employees NI £5,970.00
(12) PAYE £27,606.00
(13) "Salary Tax" ( (9) + (11) + (12) ) £47,400.00
(14) "Salary Tax" + VAT ( (13) + (2) ) £71,400.00
(15) Total Tax + Agency Tax 30% ((14) + ((5)*0.3)) £80,040.00
(16) Take Home ((13)+(6)) £66,599.00
(17) Take Home vs Gross income ( (14)/(2) ) 46%
(18) Take Home vs Gross Income with Agency Fee ( (14)/(3) ) 38%
For the calculation go to (**);

As being caught inside IR35 means that Limited Company must treat full turnover as salary - a contractor will end up paying ~£8,000.00 more of taxes (£71,400-£63,425).
For what? White kind of value and protection will the government provide for 4 million contractors for that additional tax?
As in good old feudalism, the answer is - none!

Recently, one of the most prominent UK recruitment companies Lorien sent emails to their contractors with a calculation showing that taxes for those being caught inside of the IR35 will go all the way to 54% taking home only 46% (similar outcome to one I showed above).
From the perspective of gross value including agency taking home is only 38% of all the value of the service company is providing!

Now, you have to ask: Why are one-person Limited companies taxed with 54%, while "broadly the same tax" permanent employees paying 30% and Facebook is paying 1.75% tax on its profit?

Reasoning along the same lines, why not scrap all limited company and corporations, and force all shareholders to be inside IR35?
That is just a crazy idea, isn't it, as it would kill all businesses you say?
Yes, it is crazy, equally crazy and unfair for any size of the company, crazy as the entire IR35 legislation to begin with. The difference is that small one-person companies on their own cannot lobby or by any other way meaningfully influence politicians. Contractors on their own simply do not have a voice or representation. Employees have unions, but small limited company owners do not have anything similar to protect them from the government's crazy ideas.


No one really thinks about the domino effect, until the shit hits the fan.

As mentioned in the article (*) government stated that the new IR35 rules will impact 170,000 consultants, 60,000 end-users and generate additional tax revenue of £3.1billion between 2020 and 2024. Most of the articles estimating a similar number, which is minuscule to the subsidies given to rich, but again highly destructive for small businesses. (*)

Can we anticipate the impact of IR35?
Has anyone done a thorough analysis of the impact?
If the global economy does well because of unrelated factors, would that be shown as a positive effect of IR35?
And who and how will measure negative effects that will ripple 20 years along the lines?

So, let's try discussing what may happen, and then in a few years the same as with my predictions about global warming, we will come back and see how well I did. With global warming at least my predictions were more than correct - and each day since I wished I was wrong.

First UK economy or GDP won't be disturbed much at first, as explained about deceptive nature of GDP, things will cancel out, rich will increase wealth and middle class will lose money, GDP wise economy will continue to be misleading, which will politician use to boos about national success while majority continues to struggle.

Instead, it is necessary to consider who will be the winners and who will be the looser as that will give a better picture of the society.

After implementing new IR35 changes, we need to consider multiple possible scenarios:
Some people will close their companies and take permanent positions or switch to Umbrella companies. As explain depending on the scale, this could have a harmful effect on HMRC, causing reduced tax collection.

Adverse effects will ripple to recruitment agencies whose services would not be required at the same extent.
Without the ability to claim expenses, people will reconsider travelling long distances, car leasing through small companies will stop.
If many switches to permanent positions, accountancies will lose clients.
To save a bit more money instead of buying food in restaurants and small shops, contractors will turn to homemade sandwiches. As statistic says that little as a 15% drop in the sale is needed to close shops, many will lose their businesses.
Additional phone numbers and internet bills will not be necessary, and communication companies will experience decreased turnover.
Banks will recalculate and adjust mortgages, reducing the purchasing ability of those on PAYE. So, both lenders and property market will suffer.

Contractors are feeding many families, not only their own. It is wishful thinking that everyone's permanent salaries will just grow to the same contractor’s rate comparable level. That will not happen, simply because, in the economy where maximizing a profit is the priority, salaries are just an expense, and companies look to decrees their expenses as much as possible.

When everyone works as permanent, there is no purpose for hire agency, as there are better more cost-effective ways to find resources. Often seen contracting chains of 2 or more companies will slowly die out. Big employers will save money and agencies will start losing money. In a few years many agencies, except those most resilient will close.

Some contractors will lose their mortgage repaying ability, they will foreclose and sell properties for half of the initial price. Rich will use this to increase their wealth even more. The property market will shift to foreign buyers, and the so-called working class won't be able to afford. For singles in London, it will become almost impossible to take a mortgage, and for those who do it, life will become one continuously dull race to the grave - constantly feeding aristocratic beast at the top.

Indirectly IR35 will hurt entrepreneurial ventures. Increasing fear of being deemed as a tax dodger. Complicating procedure to find a temporary working force will discourage people from investing their own personal money, already crippled by taxes, into new businesses.

The smartest among contractors, fed up with the entire situations, will just leave to other countries with lower taxes and proper capitalistic structure. Foreign countries as Germany, France or Switzerland, especially if we consider Brexit, may come up with opposite legislation giving tax subsidies in order to attract IT talents, going in line with the plan to transfer finance centre of Europe from London to Paris or Frankfurt, paying off enormously over the long term.
People will follow, and instead of paying on average £54K of taxes they used to, they will start paying taxes in those countries, paying zero taxes in the UK.

There is an estimated number of 2.27 million EU nationals a 61,000 fewer than for a year earlier and 1.29 million non-EU nationals 130,000 more than for a year earlier working in the UK (*) and combine them with the possible effect of Brexit and increased tax rates can cause a quite a bit turmoil for UK economy.

Office for Budget Responsibility in their Fiscal Risk Report 2019 gave the following statement:

"At Autumn Budget 2018, the Government extended ‘off-payroll’ working reforms to the private sector, which were estimated to raise £0.7 billion a year by 2023-24. This measure also received a ‘very-high’ uncertainty rating, reflecting both the quality of data and the uncertainty of the behavioural response, as well as the challenges in modelling the impact of the measure."
People often neglect how crucial some people can be for their departments and organizations until they lose them. So, from that perspective, it is interesting to consider impacts similar to the one that happens to TSB recently because of the IT glitch (*)

Smart people get easily fed up by government bullshits, so questions are what will be the impact of large-scale resignations at some point March next year. Each time an employee leaves the company, valuable knowledge is lost, so what happens when many leave at the same time?
It seems we will find an answer to that question soon. Although circumstances are becoming more like in a feudal France, historically the UK has not dealt with plutocrats as France, so if you wonder what will happen this time, my guess is probably nothing, as we live in the far more civilized world then it was back then, people will just accept to pay more as always and continue as nothing has happened, but there will be consequences.

Only left is to ask:
If you are a member of government: What is needed to recognize that IR35 is a bad idea?
If you are contractor: Are you going yield or do something about this injustice?

Next time I will write about possible tax solutions that may work for everyone, in the meantime, you can do one thing, share this post with at least one person...