“The government looks set to sleepwalk the public sector into a financial and skills crisis that could rip through the Chancellor’s forthcoming Budget predictions and wreak havoc on the professionalism of the civil service.” That’s the stark warning from ContractorCalculator CEO Dave Chaplin, a masters-level mathematician who has ‘run the numbers’ to reveal the true cost of what he calls the government’s witch-hunt of limited company contractors.
He has calculated that the added cost of forcing such contractors to work as public sector employees would be between 13 and 20%. “But the financial costs would be outweighed by the more likely results that limited company contractors would simply remove their skills from the public arena, and instead only supply their services to the private sector,” says Chaplin.
“A brain drain is the grim prospect facing the public sector as the government witch-hunt for limited company contractors continues. With cabinet members and the Treasury vowing to end the perfectly legitimate and mutually beneficial right of contractors to work for the public sector, the true victim is likely to be taxpayers,” he adds.
Highly skilled and mobile limited company contractors who are forced to transition into public sector employment, and therefore see their take-home pay reduce, will either need to be paid more by the public sector or will switch to the private sector. Chaplin puts it more succinctly: “They’re just going to walk!”
Claimed tax savings are simply incorrect – limited company contractors are “a bargain for the taxpayer”
Yet according to Chaplin, the whole basis of the government’s argument, backed up by media reports that don’t tell the full story, is wrong. “Hiring the senior interims who are currently fulfilling highly specialist roles within the civil service as new employees will incur significantly greater financial costs – up to 20% more,” he says. “That will place unbearable strain on already stretched public sector budgets.”
The government looks set to sleepwalk the public sector into a financial and skills crisis that could rip through the Chancellor's forthcoming Budget predictions and wreak havoc on the professionalism of the civil service
Dave Chaplin, ContractorCalculator
Chaplin bases his argument on real-life scenarios he has calculated. A good example is his analysis of the case of interim management contractor Paul Brown. A report by Rajeev Syal in the Guardian revealed that Brown was recently terminated from his assignment with the Office for Nuclear Regulation (ONR) at the Health and Safety Executive (HSE).
“We can only assume that Brown is a classic example of the witch-hunt’s results,” continues Chaplin. “His skills and experience are so specialised that it is unlikely a candidate with the same calibre will be found to replace him. And it is likely that Brown was terminated purely for political reasons, because of how he has chosen to trade, quite legitimately, rather than as a result of any lack of performance on his part.”
The table below analyses three scenarios of Brown’s hypothetical financial profile, based on the information in the Guardian article and documents publicly available about his company, Operations Improvements Limited:
- Brown’s financial profile delivering his services on the HSE assignment via a limited company trading model – an £8,000 salary and £3,000 expenses per year is a reasonable assumption for a contractor limited company of this type
- Brown’s financial profile if his professional fees were annualised into a £145,000 salary paid as if Brown were an employee paying income tax under Pay As You Earn (PAYE)
- Brown’s financial profile if his client, HSE, were to pay a gross salary that would result in the same take-home pay as trading via a limited company
- Brown’s financial profile if HSE only paid £145,000 and the payroll tax, employer’s National Insurance Contributions (NICs) were deducted from Brown’s remuneration.
| 1. Limited company £145,000 | 2. PAYE £145,000 | 3. PAYE £154,296 | 4. PAYE £128,284 | |
| Income/salary/expenses | £145,000 gross fee income £8,000 salary £3,000 expenses |
£145,000 gross salary (employment income) | £154,296 gross salary (employment income) | £128,284 gross salary (employment income) |
| Corporation tax | £26,760 | |||
| Income tax (PAYE) | £1,600 | £50,999 | £55,148 | £44,313 |
| Employee National Insurance Contributions (NICs) | £92 | £6,281 | £6,466 | £5,946 |
| Employer National Insurance Contributions (NICs) | £128 | £19,034 | £20,316 | £16,727 |
| Income tax (dividend) | £20,685 | |||
| Cost of tax to individual | £49,137 33% of £145,000 |
£57,280 39% of £145,000 |
£61,614 39% of £154,296 |
£50,259 39% of £128,284 |
| Income after taxes | £92,662 [salary plus dividend] |
£87,720 | £92,682 | £78,024 |
| Cost to government | £145,000 | £164,034 | £174,613 | £145,011 |
| Total tax to HMRC | £49,127 | £76,314 | £81,930 | £66,966 |
“What is startling is that, despite repeated media claims, presumably fed by Government sources, Brown does not save tens of thousands of pounds because he trades via a limited company,” says Chaplin. “If you consider that limited company contractors receive no paid holidays, pension, death-in-service benefits, perks and the employment rights most workers take for granted, the approximate £5,000 advantage Brown receives over an employee being paid a gross salary the equivalent to his professional fees seems like a bargain for the taxpayer.”
PAYE costs the government more, but for no benefit to taxpayers
If Brown were employed by HSE and paid a salary such as in scenario 2 above, rather than charging fees for providing his services via a limited company, then his earnings would fall by around £500 a month and his expenses would substantially increase, because they would be paid personally and not by his limited company.
Conversely, if HSE agreed to match his take-home pay with a commensurately higher salary, as in scenario 3, then the cost to the public purse would be just short of £30,000 a year higher.
Another option would be for HSE to maintain its £145,000 budget and insist that Brown’s employer’s National Insurance Contributions (NICs) are included in that figure. This scenario is shown in column 4, and Brown would take a pay cut of over £1,100 a month.
Abolishing limited companies in the public sector gains nothing
According to Chaplin, abolishing the limited company model is a ‘lose-lose’ for the government: “The government appears to be presenting limited company contractors with two options: termination or moving onto a fixed-term employment contract.
“Termination deprives taxpayers of benefiting from exceptional talent, delivering public services under incredibly tough conditions. Moving contractors onto fixed-term employment contracts simply increases the cost to the taxpayer but with zero benefit. Should all taxpayers be expected to pay the price for the opportunity for ministers to benefit from political sound bites, whilst cynically diverting the public’s attention away from more controversial issues, like the NHS reorganisation?”
If the use of limited company contractors were to be abolished in the public sector, not only would the costs increase in cash terms, but the loss of talent via a brain drain back to the private sector would be incalculable. It seems unlikely the public sector would be able to maintain its agility and service standards without the skills limited company contractors bring.
Moving an experienced interim executive like Brown onto the payroll increases the cost to the public purse of accessing his talent of between 13% and 20% for zero benefit. But the cost of losing such talent to the private sector is incalculable.