Will Phillip Hammond come after contractors in the upcoming budget?

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The first major leak ahead of the budget has arrived. And if the rumour is to be believed, it is bad news for contractors.

Yesterday, the economics editor for the BBC, Kamal Ahmed, broke a story outlining the Treasury’s plans to overhaul tax rules, by targeting the ‘synthetic self-employed’ that avoid paying national insurance contributions.   

The law change is designed to extract a bigger National Insurance contribution from contractors who set themselves up as a limited company to receive payment from their employer. The Treasury believes that without reform, non-compliance could cost HMRC £1.2bn a year by 2023.
 

Contractor at work


 

If a contractor has a long-term job at a company, say 12 months, and pays a lower rate of national insurance than the full-timers they sit next to because they receive payment through a limited company, then that seems unfair.

But that is not the case.

There have been many ill-informed comments on the rumoured reform since the story was published yesterday.

The amount of tax that contractors contribute has been overlooked in favour of slandering the job they do at the perceived tax relief.

The reality is that contractors are in a more competitive industry, with increased risk and most definitely pay their fair share of tax.

 

Permanent v Contractor

Contracting is hard work. And when comparing the two roles side by side, it is apparent that the role of a contractor is not as easy as the ill-informed wish to portray it.

Full-time contracted employees enjoy workers’ rights such as: paid holidays, sick pay entitlement and maternity leave. They also have good job security and their position is subject to pay-rises, promotions, appraisals and career progression.

Contractors on the other hand, do not receive the benefits PAYE employees do, and don’t enjoy any rights to: paid holidays, sick pay or maternity leave. They can also get sacked at one weeks notice if they don’t produce constant high-quality work and will not be invited to a discussion around career progression or pay rises.

If the contributions to national insurance made by contractors will be closer aligned to those of full-time employees, will they receive similar workers’ rights? With the proposed reform, contractors would be financially worse off without receiving any improvements to working conditions.

 

Would it be the right move by HMRC?

There has been a lot of feedback on the story since it was published. People from both sides have been giving their opinion on the reform.

The perception that contractors don’t pay tax is founded upon a fallacy. Contractors that run a limited company pay corporation tax at 20%, any money taken out of the company as a salary is at the same tax level as anyone else and any dividend is subject to 33% tax.

The rumoured reform would be targeting the contractor workforce and understandably has them upset. Dave Chaplin, CEO of Contractor Calculator, who advise self-employed workers said, "the Treasury's claim that it is losing money is based on an ideological flaw and fails to acknowledge the 'freelance premium' that individuals charge for their services, compared to what they earn when they are in full-time employment."

Contractors must fund their own equipment, training and cater for the lack of worker’s rights we have already mentioned, and so, they charge a higher day-rate for their services than a permanent employee.

Mr. Chaplin followed up by questioning the basis of the reform, “HMRC's own calculations demonstrate that 84% of the perceived tax loss where an individual is engaged via a personal service company results from the hiring organisation not having to pay employer's national insurance.”

What Mr. Chaplin is talking about is that when employing a contractor, a business avoids incurring a 13.8% National Insurance contribution. Since the last recession, the number of contractors has increased due to the benefits that they themselves and their employers received. However, this has led to some workers being forcefully encouraged to become a contractor so the company can avoid this National Insurance contribution.

 

Cadbury v Contractors

The workers at the lower end of the spectrum, who work hard in their skilled roles, are coming in for harsh treatment in the week that saw Cadbury’s parent company, Mondelez, pay zero corporation tax in a year they reported over £185m in profits.

The documents filed by Mondelez at Companies House reported that the business paid no tax last year while paying a dividend of £247m to its immediate owner, Kraft Foods Schweiz Holdings which is incorporated in Switzerland.

The Mirror reported that the 48 subsidiaries of Modelez paid a total of £5.9m in corporation tax on profits of £1.3bn.

Stories like that of Cadbury’s, whose Quaker heritage has been quickly forgotten, further disenfranchise the PAYE workforce. Contractors and permanent employees will stand together in agreement that they pay their share of tax, so why can’t HMRC hold multi-national corporations accountable for the profits made in this country?

For the tax system to be sustainable, it must be fair. And consistently having multi-national corporations avoiding tax through intra-group dividends and very skilled accountants is certainly not fair.

 

What would the reform mean for accountants?

The rumoured reform will have implications for our industry.

Partners in accountancy practices are self-employed and often directors of limited companies.

And on the client side, the reform could see a reduction in the number of contractors working in the UK. As the benefits of contracting reduce, without an improvement in conditions, the number of contractors relying on accountants to keep them compliant would likely reduce.

While a reduced client pool would worry some, there are agents that wouldn’t miss the work contractors cause.

There is also the strong possibility that the rumoured reform might not happen at all. It is not uncommon for a rumour like this to be released in the run up to a budget, only for the budget to announce a less impactful change.

Until the budget is announced at the end of the month we won’t be able to say for certain, but even if there are no changes to contractor NI contribution, interest remains high around the budget and the amount of corporation tax paid by multinational companies in the UK.  

 

 

 

https://www.independent.co.uk/news/business/news/cadbury-chocolate-mondelez-no-corporation-tax-paid-uk-profit-a8578951.html
https://www.mirror.co.uk/news/uk-news/cadburys-owners-paid-no-corporation-13396542
https://www.bbc.co.uk/news/business-45822650