Freelancers – have I got news for you (and it’s not good)

17 Jul

It feels like tax, and specifically tax avoidance, has been making the headlines almost daily over the past few months, and it has offered a rare opportunity for MPs to agree with each other. They were queuing up to voice their disgust after the Ed Lester case, and did so again, with varying degrees of success (I’m looking at you David Cameron) after the Jimmy Carr scandal. Now, following various stories regarding the pay and tax arrangements of some of its presenters, the BBC has found itself to be the latest focus of the collective ministerial ire.

Andrew Chamberlain, PCG’s Senior Public Affairs Advisor

Here was an opportunity to score some easy points, a rare open goal of public opinion that few managed to resist. However, while watching them stand one after the other in Parliament and voice their outrage, it occurred to me that they might do well to remember that hitting the bullseye doesn’t get you any points when you are aiming at the wrong target altogether.

The truth is, most freelancers that use a limited company do so because it represents best value to their engager. The BBC admitted via a recent article in the Guardian that they stipulate “all freelancers earning over £10,000 must operate as a limited company” and they are far from alone. It is common practice for agencies and engagers in both the public and private sector to insist freelancers and contractors are paid through limited companies for various reasons.

To be fair to Danny Alexander, Margaret Hodge and the rest, the taxation system for freelancers and independent professionals is almost as difficult to understand as it is to work with. It isn’t surprising that they make inaccurate statements such as “these people are operating off-payroll when they should be employees”. The BBC has not helped the situation if reports of a whistle blower claiming he or she was presented with the choice between receiving payment via a limited company or taking a substantial pay cut are true.

If accurate, this sounds like a straightforward attempt by the BBC to reduce its tax bills and perhaps its obligations as an employer too. Where an engagement has been artificially constructed solely to reduce tax bills the Government are right to investigate that arrangement and where appropriate put a stop to it. However the exposure of what appears to be an (albeit ill advised) attempt by the BBC to save money does not alter the fact that the model itself is undeniably the most appropriate for broadcasting.  In a world where frequently changing personnel is key to maintaining a fresh output and appeal, the use of freelancers is absolutely the right approach. In terms of quality of output and value to the licence fee payer, the BBC has got it right.

The Government must also be mindful that in certain industries using freelancers is quite simply the most appropriate method of finding the talented personnel needed for individual projects.  It is no surprise therefore that the biggest broadcaster in the UK makes use of the UK’s world-leading flexible labour market. Our message to the Government is therefore simple. We hate to see tax avoidance just as much as you do, but don’t punish legitimate freelancers and their engagers in your haste to stamp it out. The BBC, and the UK, needs them.

By Andrew Chamberlain, PCG’s Senior Public Affairs Adviser

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8 Responses to “Freelancers – have I got news for you (and it’s not good)”

  1. Fraser Mackie July 19, 2012 at 6:17 pm #

    Most people use Ltd companies not out of choice but requirement from client or agent.

    Here in Germany at least there is no such requirement. As sole trader working with a good accountant is easy compared to the Ltd route. Earning is mot limited, the tax rules simple enough profit / loss account is all you require, not to mention less in general.

    Even still this is not something you can change overnight by updating the law. The culture and way of working as a freelancer in the UK is deeply embedded and resistive to change, it’ll take many years IMO for this to change. A real shame.

  2. Peter G July 20, 2012 at 9:05 am #

    Every one of my clients, including the NHS, has insisted on me operating as a limited company; as a Project Manager it is relevant to have short term contracts not employment contracts. Most Projects have a short lifecycle (many TV & Radio shows and IT projects are one-offs) so it makes NO SENSE for clients to hire me as a permanent employee.

    My limited company is legal, I pay MORE tax than employees (confirmed yesterday by accountants at 50% of my day rate) whereas the maximum an employee pays is 45% and pay promptly by every deadline the government states, so why are the government hounding me ????? THEIR OUTRAGE IS BASED ON INCORRECT INFORMATION.

    Why are they not focusing on the people and companies who are avoiding payment of £millions in taxes???

    • James July 21, 2012 at 8:25 am #

      If you are paying 50% tax get a new accountant!

  3. Barry Man July 20, 2012 at 9:19 am #

    One needs to go back to the history of why limited companies were used by one-man bands in the first place.

    30 or 40 years ago it was common for freelancers to be self-employed / sole traders. But due to a number of these avoiding payment of tax, the Inland Revenue started to pursue the companies that the freelancers had worked for (or agencies that the freelancers had worked through), for income tax on the freelancers’ earnings. This was done on the basis that the fees to the freelancers were really employee earnings paid net of tax and so a grossed-up figure was arrived at on which the companies / agencies were then made to hand over PAYE.

    As a consequence the one man limited company became a requirement by virtually all companies / agencies in order to create an arms length situation precluding the possibility of the Inland Revenue pursuing the companies / agencies for PAYE.

    My reading of the BBC stance is that it is probably a hangover from the lessons learnt in those days.

  4. Dr Morsom July 20, 2012 at 10:07 pm #

    Don’t quite see how BBC could save money by paying to a Ltd instead of paying via PAYE. Unless, of course, we are talking about the lower end of the contract market (i.e. no VAT). A person on, say, 100K per year contract rate will cost 20% extra in VAT and a person on 100K perm salary will only attract extra 11% or so in employer’s insurance contributions. The question is where is the saving for the employer?

    • Jimmy August 23, 2012 at 10:34 am #

      VAT is not an issue for business2business transactions, since the Input tax is netted off against the Output tax. The savings achieved by a company that engages freelancers through Ltd companies over those employing people is therefore the 11% Employers NICs that you identified.

    • Barry Scarr October 26, 2012 at 11:23 am #

      The BBC, like most public bodies, reclaims its VAT input tax. The saving comes from employers NI, and employers contribution to a final salry pension scheme, whcih can be as high as 30%. There are also no deferred costs associated with pension liability.

  5. Barnaby KissAccounts August 10, 2012 at 9:22 am #

    Freelancing and Contracting is a win situation for both employer and worker and I view Freelancer and Contractor legislation as a work in progress, that will lead (ever so slowly) to the emancipation of many a worker.
    I set up as a freelancer to give me the freedom to balance my work with family life and many of my friends are still working 10 hours a day because of job insecurity.
    In my business (contractor accounting) there is lots of work around so I don’t have to be unduly worried. Perhaps if the sickness benefits for people who strive to work self-employed were anywhere near as generous as those that allow people to sit on their behinds for year after year, then many more people would bite the bullet and go freelance.

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