Distrust of limited company contractors intensifies

Making out every one-person limited company is an employee trying to avoid tax is “fundamentally inaccurate” and puts the economic value such personal service companies create at risk, says PCG.

Launching this defence of freelance working yesterday, the Professional Contractors Group said now was the time for ministers, civil servants and the media to “limit the hysteria about limited companies.”

To policy-makers, PCG made clear it supported scrutiny of public servants’ remuneration, and agreed “disguised employment” should be “stopped and fully investigated” by the taxman.

But turning to the mainstream media, where coverage of these complex issues is growing yet varying in its balance and understanding, PCG’s Chris Bryce warned against populist attacks. 

For the good of the UK’s private and public sector growth, he asked media outlets “not to create an orchestrated witch-hunt” against the nation’s micro businesses” - specifically limited company contractors.

The freelance group chair’s pushback to the press can be sourced to Student Loans boss Ed Lester, ‘exposed’ across the broadsheets for a limited company set-up that saw his income tax bill fall by £40,000.

PCG’s other motivation came yesterday, when a national newspaper splashed that 25 long-serving health officials could similarly minimise their tax liabilities as they also receive their pay not as individuals, but via their own private companies.  

In the press items about Mr Lester, much of the outcry was rooted in his role as a public servant at a time when the coalition government had promised to clampdown on tax avoidance.

In the case of the health officials, the same charge applies. Worse though is that, when asked in December, the Department of Health denied any workers were paid in a way likely to reduce their tax bills. It then reportedly turned to covering up the practice, applied in relation to payments to the mandarins of £4m.  

In fact faced with a parliamentary question on whether DoH staff received pay as limited companies, civil servants discussed the possibility of getting round it by replying that the cost of answering would be prohibitive, The Guardian reported.

Obtained by the paper, emails by the civil servants cautioned whoever does respond that, “The department would probably want to avoid anything that implies its NPW [non-pay-rolled workers] are disguised employees”.

This is the nub of the issue: while personal service companies such as those used by Mr Lester and his DoH counterparts can offer an effective way to lower income tax and NI payments, with interest and penalties, the reduction is more than cancelled out where IR35 applies.

John Whiting, chairman of the Chartered Institute of Taxation, summed it up last night. Speaking to Channel 4 news, he explained that limited companies, and the preferential tax treatment they afford, still represented a “perfectly sensible way of operating”.

However the single caveat he presented was a major one – namely that in the case of the DoH staff, -and indeed most other one-person limited companies, there is a “good question” whether the IR35 legislation does, in fact, apply.

Almost regardless of the public servants’ true employment status, the two payment exposes have reportedly prompted the Revenue to increase its deployment of IR35 officers and will be subject to a special review by the Treasury.