Limited company contractors, and it seems business owners in general trading via limited companies, have become the target of a UK media determined to avoid the facts, in preference to chasing headlines. And they’ve entered a devil’s pact with politicians, led by David Cameron, who are equally happy to avoid the truth in favour of short-term, populist and ‘moralist’ soundbites.
The reporting by the UK’s media on tax avoidance is so skewed it makes Russia and China’s state-controlled media look positively balanced. And the lack of basic research into the facts relating to tax avoidance and the drivers of trading via a limited company is truly shocking.
The majority of contractors, and other users of personal service companies, are not employees, so their earnings and tax liabilities are not directly comparable with those of employees. That’s fact number one, which the media and politicians conveniently forget. Out of their limited company’s earnings, contractors must fund their own ‘employment rights’. At a very basic level this means making provision themselves for holiday and sick pay. If they don’t work, they don’t get paid.
Furthermore, the owners of personal service companies are responsible for a range of additional business costs that many employees are totally unaware that their employers pay. Again at a very basic level, these include accountancy and legal costs, insurances, basic business equipment and communication costs. They could also include travel, expenses and specialist equipment.
Those in business and not employed also have to make provision for the risk they take for not being employed. Bluntly put, there’s no guarantee of a salary each month – even for those that have already supplied the goods or services to their clients. Some contractors can spend months between contracts with no income, or might find that they’re not paid for a very long time – sometimes not at all. This risk is in part funded by the opportunities business owners have to mitigate their tax liabilities.
Finally, most highly skilled knowledge and creative industries workers in the UK, such as IT and engineering contractors, interim executives or entertainers, do not incorporate (become limited companies) through choice.
There are two reasons for this and neither receives much of an airing in media reports or politicians’ soundbites. Firstly, by incorporating, workers can ringfence business risk from their personal assets. So, if an IT contractor’s banking client decides to sue them because it believes the worker made a mistake, the contractor’s professional indemnity insurance (a cost employees don’t bear) kicks in and the contractor’s family won’t lose their home if the client wins.
Secondly, virtually all clients, and these may include organisations such as businesses, local authorities, government departments and the NHS, simply won’t hire sole traders. This is because clients don’t want the risk that the worker might wish to claim employment rights. Most clients therefore require a separate legal entity, ie a limited company, to do business with, not an individual. That means if contractors don’t incorporate, they don’t get work.
In addition to the limited company direct taxation issues are the indirect tax and economic benefit contributions made by knowledge and creative industry workers. Limited companies are businesses and they all need business services, such as solicitors and accountants, stationery, insurance, equipment, etc. All of these create jobs and tax revenues.
And people who earn a great deal tend, on the whole, to spend a great deal. Jimmy Carr is alleged to have saved a large amount of income tax using a legitimate tax avoidance scheme. He was also reported to have paid £8.5m in cash for his house. The stamp duty on that transaction alone is roughly £595,000. That’s the equivalent of the income tax generated by about 70 taxpayers on average salaries of £26,000. We could speculate that he spends another £1m on UK goods and services. In VAT alone that contributes £200,000 to the Exchequer, or the contribution equivalent to a further 23 employees.
By demonising highly skilled knowledge and creative sector workers, entertainers and entrepreneurs in a trial by media and soundbite, the UK runs the risk of driving out the very wealth creators we most need to spend their money on UK goods and services, and to employ UK-based workers.
Arguably, we need our high earners to be spending and creating jobs much more than we need them to be paying income tax. It is these harsh economic realities that require reporting, not crowd-pleasing tax avoidance stories. And it is these truths that the current media reporting and politicians’ grand-standing is so assiduously avoiding.