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IR35, tax avoidance and Ed Lester: a potent mix threatening contractors’ livelihoods

Contractors should be concerned about Ed Lester’s trial by media. The interim chief executive of the Student Loans Company is unfairly coming under increasing criticism for running a contracting business.

So why be worried? Well, for a multitude of reasons, not least of which is the shocking media misrepresentation of limited company contracting. This may well come back to bite genuine limited company contractors in the bum – in the form of rushed, poorly considered and unjustified anti-avoidance legislation. And that wouldn’t just be bad for contractors, it would ultimately further damage the UK economy just when it most needs it highly skilled flexible workforce.

For those of you wondering who Ed Lester might be and why he is being tried by the media, the facts of the story so far are these. A successful and experienced interim management contractor trading through his own limited company, Ed Lester has a good track record for turnaround projects. He was contracted on an interim basis via a well regarded interim agency, to turn around the failing Student Loans Company. Following the success of his initial appointment, Lester went on to renegotiate a contract renewal lasting two years.

Would you agree that, so far, this scenario is commonplace to the readers of ContractorCalculator? And that Lester has, so far as anyone can tell, not apparently broken any laws? Aside from the fact that he is at the top end of the earnings scale at £900 per day, there is absolutely nothing at all unusual in what Lester has done; an estimated 350,000 limited company contractors are doing exactly the same.

But the story broke on Thursday 2nd February that a senior civil servant was exploiting a tax loophole to avoid tax. The story escalated the next day, following which Lester has clearly been forced to go down the PAYE route by his client, the Department for Business, Innovation and Skills. And the media is in a positive frenzy:

  • According to the Mail Online, trading via a limited company is a tax avoidance loophole, which the government says sets “a bad example”
  • The Belfast Telegraph implied that Lester was not ‘abiding by the tax law’ and suggested that Lester’s arrangement ‘looks just like’ he is inside IR35
  • BBC News claimed that Lester’s pay was “channelled into a private company” that was “tax avoidant”
  • The Guardian says that Lester’s deal “to avoid paying tens of thousands of pounds in tax” was “torn up” by Danny Alexander.

This story, and its media treatment, highlight a number of very serious issues for contractors:

  • None of the media outlets above have acknowledged that senior interims are routinely hired on this basis, nor that contracts of this kind are a commonplace commercial arrangement between a client and service provider. They are not some kind of tax dodge. There are approximately 1.1m small businesses trading as limited companies – does their very trading vehicle make them all guilty of tax avoidance?
  • Lester’s IR35 status has been called into question based on zero evidence. If it is a matter for HMRC, then whether Lester is a disguised employee should be established via the existing procedures; by applying the tests of employment in a context in which the full acts are known and given due consideration. His case should certainly not be judged based on third-hand media reports by ill-informed journalists.
  • Subsequent to his successful initial appointment, Lester clearly negotiated a fresh deal between his limited company and his interim agency, or direct with Student Loans Company, which a government minister has simply cancelled. Does this call into question the validity of any contract between a contractor and a government department? Surely there are contractual issues here that should not go unchallenged?

A witch-hunt has begun to track down all senior interim management contractors who are currently providing their services to government departments. So, in addition to the implications for those interims’ businesses, this could have far reaching and negative implications for the effective running of the public sector as a whole.

Lester’s services, and the skills, capabilities and experience that come with them, were procured for the Student Loans Company because there was no one else suitably qualified, and available, to do the job. That he has stayed in post despite what appears to be a shocking breach of contract forced upon his company is a credit to his professionalism as an interim management contractor.

It seems likely that a significant number of interims are likely to be put under similar pressure to terminate legal contracts between their businesses and the government. Many will simply choose to find alternative clients. That will be a huge loss of management talent and expertise to the public sector, and all because an ill-informed media and a government without the courage of its convictions are reacting to what they think the public perception is.

Some dangerous precedents may already have been set, and incorrect assumptions made, about contractors and contracting.

Published: 03 February 2012

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