Contractors’ use of personal service companies “staggeringly inappropriate”, says MP

Contractors using personal service companies for public sector assignments are displaying “staggeringly inappropriate” behaviour. This is according to MP Margaret Hodge, Chair of the Committee of Public Accounts, commenting on a new report published by the committee about Off-payroll arrangements in the public sector. She also branded limited company contracting as “a practice which generates suspicions of complicity in tax avoidance”.

Singling out the BBC for its use of off-payroll arrangements for 25,000 contracts, Hodge told BBC News that off-payroll arrangements were “an issue that somehow people got away with in better times.” It has since emerged that those 25,000 contracts relate to only 1500 individuals.

Hodge also criticised HMRC for failing to implement IR35 effectively, highlighting that only 23 IR35 reviews were conducted in 2010-2011, down from over 1,000 in 2003-2004.

Contractors “framed” by the media

In response, PCG managing director John Brazier told Radio Five Live’s Wake Up to Money programme that contractors have been “framed”, highlighting that contractors are “paying corporation tax and a number of other taxes as well that never get talked about in the press.”

Genuine contractors also received support from Tax Director of the Office of Tax Simplification (OTS) and Chartered Institute of Taxation (CIOT) director of tax policy John Whiting. He told Radio 4’s Today Programme that the Public Accounts Committee Report was targeting disguised employees, not freelancers.

He said: “If you are just an ordinary freelancer, which is very prevalent these days – anyone from a plumber to journalist – working here and there, working through a company is a perfectly sensible way of organising your affairs, enabling contractors to “separate private affairs from corporate and business affairs.”

Contractors don’t pay less tax

An analysis of a contractor earning £200,000 a year by Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants (ACCA) shows that channelling income into a limited company can cost more in tax than Pay As You Earn (PAYE).

“Someone being taxed at source as a conventional employee under the PAYE system would pay income tax at 20%, 40%, and 50%, amounting to £70,074,” Roy-Chowdhury told the BBC.

His analysis showed that putting these earnings through a personal service company and applying corporation tax and income tax “would leave them with income of £101,981, which is, in fact, less than the person on PAYE.”

Off-payroll hiring “not a tax issue”

According to Brazier, there are broader issues at play: “This is not really a tax issue. It is the way that people are working in this society. Increasing numbers of people in the UK and Europe are selling their services on a project basis to companies that need them.

“[If you] look at the freelance contractor workforce overall, there are clearly distinct roles where the need for flexibility by employers, whether they be in the private sector or public sector, is prevalent.”

Brazier voiced his frustration that contracting and freelancing rarely enter the policy debate, saying: “Unfortunately government and other commentators only talk about employment.”

Branding IR35 as an “unworkable piece of legislation”, he said that contractors need a supportive tax regime, and that PCG would welcome the opportunity to work with government to create one: “The other important thing…is to try and bring about a better system of taxation that helps this type of work to flourish,” thus “creating growth and providing opportunities for companies to do new and better things.

“Freelancers, along with other organisations and companies, are paying their fair share,” adds Brazier.

MPs are “out of touch”

ContractorCalculator CEO Dave Chaplin shares Brazier’s frustration at the unjust portrayal of contractors as tax dodgers, and considers MPs as too divorced from the realities of the country they are running.

“MPs are out of touch and have plain got their facts wrong,” says Chaplin. “Much is made of the tax efficiencies associated with limited companies, which have been shown to be not always positive.

Hodge is out of order to suggest that public sector contractors are not paying their fair share of tax and that trading via a limited company should automatically be considered to be some kind of tax dodge

Dave Chaplin, ContractorCalculator

“Little is made of the fact that the vast majority of contractors are highly skilled knowledge workers who have actively chosen contracting as a career and lifestyle choice. No one mentions that contractors don’t enjoy the protection of employment law, receive no perks and are responsible for their own holiday pay, sick pay, pension and equipment to do their job.

“Hodge is out of order to suggest that public sector contractors are not paying their fair share of tax and that trading via a limited company should automatically be considered to be some kind of tax dodge.”

Employment contracts not appropriate

He highlights that issuing employment contracts is not only inappropriate for the business-to-business customer-supplier relationship genuine contractors have with their clients, but also a logistical nightmare. “Should Graham Norton be re-hired every Friday night under a fresh employment contract?” he adds.

“Unfortunately,” concludes Chaplin, “despite the unjustness of Hodge’s accusations, the future for contractors with public sector assignments looks bleak, and the government’s attack on them is set to take down legitimate contractors alongside disguised employees.”

Published: Tuesday, October 9, 2012

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