I am surprised the UK revenue still accepts that scam, no doubt there will be some investigations. Of course any legal costs defending a case as a taxpayer against the UK revenue are not tax deductible even if you win in court, of course 20% VAT is payable on those fees which probably won't be deductible either.
I know someone who has paid £20-30k a year for over 10 years in legal costs in a dispute with the revenue, to date the revenue have not demanded any further tax to be paid.

Starting a company & running a company in CH is rather more expensive than the UK, the rules are different.

I can only hope they'll clamp down on it as it's immensely unfair to everyone else. That said, they probably won't as they're one of those organisations that seems to exist only to piss everyone off to the maximum extent.

After a number of years as a permanent employee seeing my coworkers (in software, doing the same thing as I) putting away just 5% to the revenue through various malicious schemes is one of the reasons I'm out of the country. Not once did I hear of anyone being audited - it was mostly just boasting and what-not.

A scam? A contractor in the UK has little choice but to use a Ltd company as there are few other options. If the contract falls inside IR35, which most do, then the contractor will pay far more tax and NI than a permanent employee on the same income. They are classed as employees but with no rights or benefits whatsoever like am employee. Hardly fair on who?

The system in Switzerland for contractors seems much fairer.

That sounds fabulous in principle, but in practice? My point is that I've never heard of any contractor declaring, or being audited due to a breach of, IR35 rules.

Having worked in the UK as a contractor, I can fill in a few details for the woefully ignorant .

UK

It costs about £50 to set up a company in the UK. The general model is to pay yourself a low salary. That way you pay a minimal amount of national insurance (employers and employees). The rest of your income you take as dividends. Dividends are taxed out of company taxation, but are not taxed again as income (unless you're in the higher tax brackets). Dividends do not attract NI, so there is a saving of both types of NI. Still, significant amounts of tax are paid; certainly more than 5%. It's also possible to have a husband/wife split of dividends, so both tax allowances can be used to advantage. This concession was put in by Nigel Lawson, and was recently confirmed at the appeal court (search Arctic Systems), when HMRC tried to argue otherwise.

If someone works as a ltdco contractor, but a hypothetical contract can be constructed between them and the client that would be one of employment, IR35 kicks in, and all income (less 5% for company expenses) must be paid as wages, and therefore both types of NI. In such a situation, the tax paid by the individual is more than for an employee.

There have been IR35 cases which have been successfully prosecuted, however it is largely optional, since with due care and attention and properly written contracts it can be safely avoided. Many contractors, however, are so worried by the whole thing that they use umbrella companies - entirely under PAYE, and employers NI comes out of their fee. In that sense, IR35 may have worked nicely in increasing the tax take, though there are no figures available.

Now, there are some foolish people who've tried various schemes where they've ended up paying 5% or less on their income. It hasn't turned out well. If you don't know about these things, I can only assume you've not been looking.

Switzerland

Dividend income is taxed. Therefore there is no point in taking dividends from your own company - you'll be paying double tax. The most tax efficient method of getting money out is as wages. This means paying employers and employees social contributions. The only possible tax advantage is via expenses - i.e. the company paying for things. Swiss tax law is rather more flexible than UK, but it's still not a free for all. As couples are taxed together, there's isn't the same situation as in the UK were a couple both earning 30K are better off than a couple were one person earns 60k and the other nothing.

It costs several thousand francs to set up a company in Switzerland. For this reason, many contractors go straight down the umbrella/payroll company route.

__________________
Down with racism. Long live miscegenation!

"Scam" is an unwarranted word. Generally speaking IT companies in the UK don't accept contractors except in a B2B arrangement - umbrella or Ltd. That's the whole point of a contractor: to avoid getting an employee.

If the contractor can be assimilated to an employee (i.e. is part and parcel of the organisation he or she works for, which is not always the case - the HMRC has guidelines on this) then a Ltd falls under IR35 legislation, which ensures that the contractor is royally screwed for tax purposes. It's not called Her Majesty's Revenue and Customs for nothing

I've seen plenty of contractors under "IR35 safe" contracts have their equipment supplied by the company while having management authority over significantly sized teams. I'd say there's a fair bit of "ignorance" involved in assuming IR35 actually works.

Nothing is "IR35 safe" until the HMRC says it is, and they have a lot of flexibility in this regard, due to the fuzziness of the rules.

Have you actually done this? It has been a long time since I did this, but some of the up front stuff included:

- Capital about 20k
- Social Secority Bond 50k
- VAT Bond 5K
- Lost Income Insurance to cover first two year gap 6k

They were just the big ticked items I remember, I'd say add a couple of more Ks for the rest.

And then after all that, most clients will still expect you to go via an agency and unemployment benefits are very difficult to get.

[ I spend over 20 years contracting in Switzerland ]

I'd say I'll believe it when I see it but I'm no longer obligated to subscribe any of my hard-earned to those clowns. In a large media organisation with hundreds of contractor devs and managers with company equipment there wasn't any instance of an audit.

Well like I said back of a napkin stuff, just to give the OP a feel for it.

In my case the reasons I switched after 20 years were that contracts started to get shorter, gaps between contracts started to get longer and payment went from hourly to daily...

I might add that the switch after 20 years was a struggle as employers don't want to take on ex-contractors..

If you merely have a case of contractor envy, why don't you simply give it a shot yourself?

Very good. Do you know what I'd really like? For them to enforce their own rules in a fair manner.

There is a huge amount of ignorance about IR35. I was involved in the Professional Contractors Group from its inception, so I've seen a lot in this context.
You can get IR35 insurance, where if you have your contracts checked by a legal expert, all your legal costs and (if you lose) financial costs are covered.

However, the chances of losing under such circumstances are very low. When cases have come to court, if the contracts have been correctly written, and the working practices match, HMRC have lost. The hard part can be getting contract changes agreed, but you can hire legal specialists who'll negotiate for you, for not a huge amount.

For those who bother, IR35 can be made a low risk issue. For those who can't - they can always go the umbrella route (zero risk - except a third party has control of the money you've earned).

Contracting in Switzerland is much more straightforward, but less lucrative.

__________________
Down with racism. Long live miscegenation!

The majority of contractors do not discuss finances with internals. They mostly know what kind of etiquette to follow. However, if there is an internal that moans a lot about how unfair it all seems to be, then that person will be a prime candidate for a wind up. I suspect this is the case here.

When you lose you job because it has been outsourced to India and all externals must go, one month after your child is born. When you are called up at the weekend and told sorry, we can't give you that renewal on Monday after all, please come and pick up your things and thanks for all the years you've given us. When you work for a company that has special rules for contractors and treats you like a prisoner on day release. When you can't claim unemployment benefit even although you paid more NI than a permanent employee.... then perhaps you can complain about fairness.

I'm not disputing any of this. I merely said that the "IR35 safe" appraisal is usually in the eye of the HMRC and the courts.

You can mitigate the risk (especially the financial one) and I agree there's probably a low chance of an investigation anyway, but as far as I can tell, the only way to be a contractor and reasonably "IR35 safe" is to actually behave like a business (i.e. have premises, perhaps work for several clients simultaneously, have delivery-based rather than time-based contracts, outsource part of the work etc).

As to the tax efficiency, my understanding is that UK Ltd non-IR35 > Switzerland > UK IR35.

In fairness, if you're giving them years as a contractor, why not be an employee to begin with?

Thanks for assuming I'd express my acerbity in their vicinity but I remain totally aware that I could be doing the same thing. Many of my good friends are in IT contracting and this isn't about bitterness toward avoidance as much as I'd like the system to become more like what I've learned about the way they work here.

I felt the need to clear up your misunderstanding but in order to steer away from the off-topic rant about the HMRC I'd like to suggest that we move on to more productive endeavours. Arguing against their practice is quite a futile act, especially on the Internet.

Aw, boo hoo. Because a £600 day rate with dividend rate or less tax isn't adequate enough compensation for those incredibly unlikely scenarios. Seriously, you're only looking at one side of the scale there and well-paid IT mercenaries are in no way victims of the system.

Because the company did not want an employee. They wanted someone who could be dropped the moment there was no work. They wanted someone who could be drip fed with 1-3 month contracts and sometimes told to take a month or two off, when the workload was low. They wanted someone who required no training. If they had taken on an employee, that employee would be still on the payroll, long after the project ended.

All those scenarios are 100% true and no contractors pay 5% tax. You really have taken the bate somewhere down the line.