Saturday, 5 May 2012

Contractor Hysteria

I thought that the Telegraph had turned into the fucking Guardian the other day when I read the following story and reader comments:

Two thousand senior civil servants could be minimising their tax by being paid off the Government payroll, it has emerged.
Danny Alexander, Chief Secretary to the Treasury, said the officials would have to prove they are paying their fair share of tax or lose their jobs.

If these people are receiving all the benefits of working in the civil service like the pensions and paid holidays and at the same time being paid off payroll through a company then HMRC is rightly going to kick their arses using IR35 as the boot. Of course this is likely to turn out to be bollocks with inflammatory news articles about "tax dodgers" proving unhelpful, leading to knee-jerk reactions from ignorant politicians, extra work for an already overstretched HMRC, and stress for those under investigation. The truth isn't particularly exciting and doesn't make for good headlines, but read on if you want an explanation...

A contractor will charge the government (or indeed any company) an hourly or daily rate, or fixed cost for work that they want done, usually plus VAT and through a limited company. The government pays this and perhaps reimburses exceptional expenses, nothing more. Because the contractor is not an employee, there are significant advantages for the government in that there are no pensions, holidays, sick pay, and other perks to pay for, and employment rights don't apply so the contractor can be got rid of a short or no notice with no fuss - no redundancy, no tribunals. The whole point of this arrangement is to cover short term skills gaps, be it bringing in a project manager to implement specialist software or an interim director to manage a major reorganisation. The work is usually critical, specialist, and time-bound, therefore this needs someone with a proven track record of delivery but who is expendable when they have finished. It is poor management to bring in a contractor for long term business as usual work.
So what are the advantages for the contractor? Well, there is plenty of variety in taking lots of short term assignments as well as building up contacts, and opportunities to work outside of your usual industry. Then there is of course what everyone is interested in - the money. Yes, there is potential to earn a lot although the reality is not as simple as pocketing your day rate and paying little or no tax, as the papers would have you believe...

To clear up the tax misnomer, contractors certainly can mitigate their tax bill completely legally but there is still plenty of tax to pay.  Consider this - as a contractor, unless you can draw down on savings you will have to pay yourself a salary to cover your regular outgoings. You will pay income tax and employees national insurance on this (at the appropriate rates) and your company will have to pay employers national insurance (13.8%). If the company makes a profit then HMRC will have 20% of that as corporation tax. The remainder you can pay out as dividends, although if you've had a good year and end up paying tax at the higher rate, then there is a further tax charge of 25%. If you've had a great year and pay the additional rate, then it's 36.1%.
The contractor can also claim expenses through their company before tax is paid. Contrary to popular belief, you can't claim your mortgage payments*, utility bills*, holidays, shopping, electrical goods, and clothes**. Some of these expenses are beneficial over regular employment - if you work from home then you can claim costs from your company when you travel to client sites, but others like training, research materials, and specialist tools which would normally be paid for by an employer now come out of your pocket. You also need to cover your pension provision, employers and public liability insurance, professional indemnity insurance, accountancy fees, and filing fees at Companies House.

So there you go - contracting through a limited company is not the tax-dodging scam that it has been unfairly made out to be. Don't forget to set aside money to cover holidays, sickness, and void periods also. On a final note:

Under the new crackdown Mr Alexander will force any official who is not on the pay roll, has been employed for more than six months and is paid over £220 a day – the equivalent of a senior civil servant’s salary - to prove that they are paying their fair share of tax.

If cannot prove they are paying the same income tax and National Insurance Contributions as an employee, they will have their contracts terminated.

If the government forces contractors to pay themselves everything that they’ve billed through PAYE but without all the advantages of being an employee, then nobody will want to take the work on, at least not anyone who is any good. Good luck with that Danny.

* OK, if you have part of your house set up as a permanent office exclusively for business use then you can claim a proportional amount of mortgage interest and bills as a company expense. The reality is that is a massive hassle with tax implications and it is easier just to claim the £3 a week that HMRC allow for this.

** Overalls and protective gear - yes. Suit, shirt, and tie - no.

No comments:

Post a Comment