“Contractors with local council contracts trading through their own limited companies appear to be the next victims of the current government and media-led witch-hunt,” says ContractorCalculator CEO Dave Chaplin. This follows a BBC Radio 4 freedom of information (FOI) request to over 400 local authorities.
Chaplin fears such hounding could lead to an escalating brain drain. “Even greater numbers of talented interim management contractors could be lost to the public sector as a result of this,” he says.
According to a report by Fran Abrams published on BBC News, “almost 100 permanent posts at local councils are being filled by people paid through limited companies”. This has prompted the House of Commons Public Accounts Committee Chair Margaret Hodge to brand trading via a limited company as “a tax avoidance scheme which is totally wrong”.
Hodge told the BBC Radio 4’s File on 4:"Where you are a public servant it's not right you should be paid in a way that avoids tax. If someone sets up a scheme to avoid paying tax, that is income foregone to the public purse.”
But widening the witch-hunt to include local authority contractors won’t benefit the taxpayer, nor will it generate additional income, argues Chaplin. “Both the media and politicians are choosing to remain wilfully ignorant of the facts about limited company contractors, because to educate themselves would deprive them of the opportunity to make crowd-pleasing headlines and sound bites.
“We’ve done the sums and proved that many limited company contractors are only marginally better off financially than employees. Our figures also show that the public sector makes huge cost savings by hiring contractors. And taxpayers benefit enormously from the skills applied for the public good that these organisations would otherwise be unable to access.”
Chaplin adds that, although the FOI request identified many limited company contractors working for local authorities, it is entirely possible that some are inside IR35 and therefore paying income tax and National Insurance Contributions (NICs) in the same way as permanent employees.
Chaplin concludes: “The limited company contractor witch-hunt is being used to demonise tax avoidance. Tax evasion is illegal and tax evaders should be prosecuted. However, tax planning and avoidance to mitigate tax liabilities are not only perfectly legal, but also part of a functioning tax system.”