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As many of you will have read in articles such as the one published in The Guardian last Friday, the government is examining whether to severely tighten the rules of Personal Service Companies as part of the Autumn Statement on 25th November.
The proposal is understood to oblige a consultant using a Personal Service Company to move onto the payroll of the client if the assignment lasts more than one month.
The Treasury claims that an extra £400m could be raised in tax by a “crack down on the loophole”.
A government source said: “This is about fairness in the tax system. It is just not fair to have people in the same company doing the same jobs paying different levels of tax.”
Ignoring the benefits and entitlements that an employee has over a contractor and the whole raft of additional bureaucracy that this proposal would cause, does the maths add up?
Take the example of two people working on an IT project each earning £90,000 a year where one is an employee and the other is a contractor. The contractor invoices through a Personal Service Company, pays themselves a salary of £8,000 a year, reclaims £6,000 of expenses and draws out the remainder of the available funds in Dividends.
For the current tax year, the total payments to the Treasury break down as follows:
| Employee | |
| Gross Salary | £90,000.00 |
| Income Tax | £25,403.00 |
| Employee’s NI | £5,070.80 |
| Net Salary | £59,526.20 |
| Employer’s NI | £11,307.72 |
| Total Payment to Treasury | £41,781.52 |
| Contractor | |
| Revenue | £90,000.00 |
| PAYE / NI | £0.00 |
| Income Tax – Dividend | £7,463.48 |
| Corporation Tax | £15,200.00 |
| Remuneration | £67,336.53 |
| VAT | £15,660.00 |
| Total Payment to Treasury | £38,323.48 |
Whilst it is true that the total remuneration of the contractor is more than the employee, surely that is reasonable compensation for the risk of working where the client can terminate the agreement without notice.
In addition, as the Personal Service Company revenue is over £82,000, the company is required to register for VAT. Assuming, the company adopts the Flat Rate Scheme, this brings an additional £15,660.00 to the Treasury.
As a result, in this scenario, the overall difference in revenue to the Treasury in tax year 2015-16 would be £3,458.05. There needs to be over 115,000 contractors earning £90,000 a year to raise £400m.
However, if the same model is applied to the 2016-17 tax year to take into account the changes to the taxation of Dividends that have already been announced, the result is very different:
| Employee | |
| Gross Salary | £90,000.00 |
| Income Tax | £25,200.00 |
| Employee’s NI | £4,909.60 |
| Net Salary | £59,890.40 |
| Employer’s NI | £11,307.72 |
| Total Payment to Treasury | £41,417.32 |
| Contractor | |
| Revenue | £90,000.00 |
| PAYE / NI | £0.00 |
| Income Tax – Dividend | £10,635.00 |
| Corporation Tax | £15,200.00 |
| Remuneration | £64,165.00 |
| VAT | £15,660.00 |
| Total Payment to Treasury | £41,495.00 |
As it stands, next year the overall revenue to the Treasury from the Personal Service Company would be marginally higher than that from the employee.
As has often been the case before, the facts simply do not support the headline.
The leaking of this proposal two week before the Autumn Statement smacks of the Treasury floating an idea to gauge public reaction.
As a result, it is vital to make your voice heard. You can send a message to your MP via https://www.writetothem.com/ and over the weekend we will be publishing a draft template letter that you can use to write to them.
In the meantime, if you would like any further information, please email us at welcome@cooperfaure.co.uk.
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