Over the past few months, following revelations that many high-ranking public sector officials have been remunerated via their own limited companies rather than the payroll, many articles in the mainstream press have unfairly portrayed small limited company owners as ‘tax dodgers’.
Public sector use of limited companies
In late January, when it was revealed that Ed Lester, head of the Student Loans Company, had been paid via a ‘personal service company’ rather than via the PAYE system, the Chief Secretary to the Treasury Danny Alexander immediately ordered an audit of the entire public sector to establish how widespread the practice is.
The Ed Lester story was first exposed by the BBC’s Newsnight Programme, and it is ironic that the broadcaster itself now appears to be one of the largest procurers of limited company talent.
According to figures obtained by David Mowat MP via a Freedom of Information request, around 3000 workers are remunerated via personal service companies (an HMRC term). 31 of these earn £100,000 or more, and 4 earn £150,000 or more, according to news site Exaro (and subsequently reported in The Telegraph).
Witchhunt a threat to professional limited companies
The trouble with this type of media portrayal of limited companies is that these newspaper revelations do not provide the full story.
The BBC estimates that it uses 12,000 freelancers a year – people on short-term contracts, who do not have the perks afforded to many permanent employees, nor the relative security of traditional employment.
If a high ranking public servant uses a limited company purely for tax purposes, and doesn’t use the company for any other purposes, then the IR35 rules are in place to ensure that ‘disguised employment’ is taxed accordingly.
However, most limited company owners are not ‘disguised employees’, and the danger is that they will all be lumped in together as ‘tax dodgers’.
Chris Bryce, Chair of PCG (the leading organisation for freelancers, contractors and consultants) said that it is “fundamentally inaccurate to brand all one-person limited companies as employees attempting to avoid tax.”
“We must ensure we do not create an orchestrated witch-hunt against the nation’s smallest businesses that will damage public and private sector growth in the UK.”
“One-person businesses are a legitimate model and the labour market flexibility they provide is vital to the economic recovery of this country.
“We should ensure those rushing to attack limited companies don’t trample the only green shoots of recovery we have seen for quite a time – freelancers.”
Misrepresentation of limited company taxation by the media
The way limited companies are taxed has also been misrepresented in the media, in articles such as this one, which suggests that limited company owners pay 20% tax on their income rather than “50%”.
Most news reports imply that the only liability limited company owners are subject to is Corporation Tax at 20%, ignoring the fact that personal tax would also payable on dividends via the self assessment process for someone in the 40%, or 50% tax brackets so often used in headlines.