The row about senior government staff being paid through service companies has spread to local authorities. The ever-helpful Eric Pickles has minted a new term – “town hall tax dodgers” – and ordered councils to publicly declare any such payments.
The reporting of this story is becoming almost slanderous, with the public sector bashing right and the self-righteous left portraying these arrangements as tax dodges. As I said on Thursday, there are often good reasons for using interims rather than permanent staff. True, some of them stay in their roles for too long because lazy or under-confident managers allow them to do so, but that is not a reason to abolish their use entirely.
Let’s just get a few things straight. Civil service employees, those with employment rights, holiday pay, pensions and the rest, are not having their salaries paid to private companies. If they are employees, they get paid through the payroll. The people being paid through companies are not employees and, therefore, have no employment rights, no holiday pay, no sick pay and no membership of the pension scheme. If they mess up they can be removed without notice and if their jobs disappear, or their departments are closed down, there are no redundancy costs to pay.
It’s not true, either, that these workers don’t pay income tax. They pay corporation tax on their company profits but they still have to declare their dividends as income which, if it goes above a certain level, is taxed at a higher rate. The only tax avoided by this arrangement is National Insurance.
By all means, put all these ‘public sector tax-dodgers’ on the payroll. Pay them for their holidays and when they are sick. Give them maternity and paternity leave. Add them to the pension scheme. And, if they mess up, or the organisation is restructured, give them huge payoffs and wait for the ‘rewards for failure’ headlines in the papers. That’s assuming that you can fill the jobs at all. As the First Division Association’s Jonathan Baume points out, many of these arrangements were put in place when civil service pay failed to attract the right sort of candidates.
There are lots of people working under self-employed contracts in both public and private sectors. There are good business reasons, on both sides, for doing this. Sure, some of them have been covering senior line roles for a long time and questions need to be asked about why these jobs haven’t been filled by permanent employees. But that is a management issue, not a reason to condemn these arrangements out of hand.
Suggesting that senior interims in the public sector are engaged in an elaborate tax dodging ruse is a nasty slur. But, as is the way during witch-hunts, the voices of reason are being shouted down.
Flip Chart Fairy Tales 
“Suggesting that senior interims in the public sector are engaged in an elaborate tax dodging ruse is a nasty slur.” It’s not an elaborate tax dodging ruse, it’s a really simple one and lots of people get up to it in the private and public sectors. You say that there are, ” good business reasons, on both sides, for doing this.”..so there might be (there definitely is when you’re earning six figures), but is it legal? Probably not.
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I would question the use of the word “intern” to describe these people. Are not interns people on work experience offering their services for nothing?
The use of a company vehicle to create an indirect relationship between employer and a natural person is, as far as I understand, not valid for tax purposes. HMRC may well argue that the substance of the relationship is governed by an employment contract between an employer and a worker and may levy tax on the natural person directly and accordingly (at 50% if a high earner).
One way of making such arrangement less attractive is to bring company taxation into the income tax regime with the same personal allowances and tax bands that natural persons are subject to. It may even be able to apply PAYE to companies where it is clear that the company is acting as a buffer between the natural person and the employer. At the year end a company could reclaim overpayments of tax if they have occurred. In law, companies are persons and are covered by the Human Rights Act. It is logical therefore to tax them in the same way as natural persons.
The word is “interim” not “intern” – you have misread the post. There is a large and thriving market for interim managers, who are experienced managers who come into an organisation for a short time to run a project, to cover absence or to deal with a particular set of problems. They are usually engaged on a services contract, rather than employed, and the contract is usually time-limited and often short (a matter of months rather than years). They have no security of employment and none of the “perks” that go with employment, such as pensions and sick pay. Because of this their remuneration is normally higher than an employed person doing the same job would command. It is these people that Rick is writing about.
Regarding your notion that individual and corporate taxation should be harmonised. There are a couple of major problems with this:
1) It would be clearly ridiculous to charge a company NI, since a company by definition cannot have a pension or sick pay. And it is primarily NI that use of services companies avoids.
2) PAYE as operated for employees is inappropriate for a business because income is not constant and is frequently only known retrospectively. That applies to interim managers working on short-term contracts just as much as a manufacturing company subject to seasonal downturns. Once a contract ends it may be some months before another opportunity presents itself, and some contracts are part-time or ad-hoc. Over a year, therefore, there may be wild swings in income from very high to almost nothing. Administering a PAYE system that could accommodate such swings would be a nightmare.
Yes, you are right, I did misread the posting as regards interns v interims (my eyesight is not as good as I would like it to be).
1) Nowhere did I suggest that companies should pay National Insurance. I reproduce what I wrote here,
“One way of making such arrangement less attractive is to bring company taxation into the income tax regime with the same personal allowances and tax bands that natural persons are subject to”. Note the explicit use of the phrase “income tax”.
Income tax is not the same as National Insurance. You are thus trying to put words into my mouth by introducing National Insurance into your critique of my observations.
2) Variations in income is not a valid reason for rejecting PAYE as a means of collecting tax. Many, many employees have variable earnings but are still subject to PAYE. In any case, I did not say ALL companies should pay tax via PAYE. Again I reproduce what I actually wrote here,
” It may even be able to apply PAYE to companies where it is clear that the company is acting as a buffer between the natural person and the employer. At the year end a company could reclaim overpayments of tax if they have occurred”.
For your information. income tax collected under PAYE is essentially a withholding tax. The earnings of self-employed construction workers frequently vary significantly from month to month. A withholding tax regime, known as the CIS, operates for them with adjustments made at the year end when the self-assessment return is submitted to HMRC. This demonstrates how a withholding tax regime could be applied to relevant companies occupying interim positions in employing organisation. My point is that it would make administrative sense for employing organisations, since they already operate a withholding tax system, known as PAYE, to apply the same system for companies brought in to perform an interim role. I do not accept that such a system would be a nightmare.
As for special pleadings, many many employees do not have job security, are on short term contracts, and do not enjoy employment protection rights. Agency workers are just one example. These workers have income tax deducted at source (PAYE) and HMRC are legally empowered to insist on it (The Agency Regulations).
I am all for flexible working. Indeed I am in favour of ridding ourselves of the concept and legalities of employment and encouraging everyone to go self-employed. Markets, not hierarchies, in short. So I am not anti the arrangements that Rick talks about. I just want to see a level playing field, that term so beloved of the CBI and other business lobbying groups when they don’t get their own way. And clearly, the word interim implies a temporary arrangement. It is quite clear that the arrangement that Rick writes about are being used by permanent workers such as CEOs of large organisations. This must be wrong given the justification you put forward.
Stephen
The main tax avoided by these arrangements is NI, not income tax. Hence my comments.
It is by no means clear, as you assert, when services companies are simply a vehicle for avoiding employment. Nor is it correct to suggest that one-person companies necessarily break the law. The majority do not. If they did, and it was clear that they did, then HMRC would not lose the majority of cases brought under IR35 rules, would they?
You assume that interim managers and other freelance workers only do one contract at a time. This is not the case. If there are multiple contracts with different companies then for all those companies to administer what amounts to PAYE for that individual makes their tax affairs very complicated. It would also be unwarranted discrimination against a particular type of small business legitimately supplying services.
I’m well aware that agency workers have PAYE deducted, but that is because they are deemed to be employed by their agency. This is a completely different arrangement.
I am self-employed, and my income is subject to the sort of swings I describe. HMRC already operates a “withholding tax” regime for self-employed people, namely the payments on account which assume that income in one year is the same as income in the previous year. This frankly is an iniquitous system that means that people can be legally liable for paying tax they do not actually owe, and are then not compensated by HMRC for providing them with what amounts to a loan. I would like to see that system abolished and all self-employed people pay tax retrospectively on the basis of completed accounts. I certainly don’t want to see estimated taxation systems extended to small companies as well.
I am not defending abuse of the system. If, as you say, people remain in those roles for years, their contractual position should be changed.
Companies pay a much lower marginal rate of tax on their profits than do high earning individuals. A high earning worker employed directly by an organisation will pay a marginal income tax rate of 40% or 50%. A company receiving the same net income will pay either 20% or 25%. There is a significant and substantial difference, therefore, between the tax levied on the incomes between companies and individuals with the same net incomes. It is not true to say that incorporation facilitates the reduction of National Insurance only, and not tax levied on income. Incorporating produces substantial savings in income tax for those whose marginal tax rate would otherwise be 40% or 50%.
If a company has a single shareholder and a single director and they are the same person then that is good evidence that the natural person is trading through a company to reduce their income tax liability. Incidentally, I have not suggested that a natural person is breaking the law by trading through a company.
Agency workers may be deemed self employed by the agency. An employment tribunal may well uphold this designation after inspecting the contract for services subsisting between them. An agency work may well have no employment protection in an employment tribunal as a consequence. Despite this, the agency, whatever relationship subsists in contract, is obliged under HMRC rules to deduct income tax at source from the worker.
I would agree with you that if a company has multiple, simultaneous contracts then incorporation is likely to have been chosen entirely for sound business reasons. No problem there. However, the issue of natural persons trading through companies has become topical because it is clear from recent examples that such arrangements have been been made with no reason other than to avoid higher rate income tax (and yes National Insurance).
I wouldn’t describe the self assessment system per se as operating a withholding tax system. Yes, one is obliged to pay tax in he current year before one’s liability has been ascertained and yes this is based on one’s previous tax liability. However, for taxable incomes below £1k payments on account are not required. Also, if the current year’s income is likely to be substantially lower than the previous year’s income then concessions are available. I don’t think the system is particularly unfair.
Withholding tax, in contrast, requires income tax to be deducted from disbursements by the paying party and for those deductions to be remitted to HMRC soon after disbursement. There is no waiting for the year end to remit the tax deductions as with the self-assessment system – the deductions are remitted throughout the year in a manner similar to PAYE. Self employed construction workers are subject to such a withholding tax regime but may be due tax rebates at year end following submission of their tax return.
To summarise my position, I don’t see why incorporation should enable higher rate tax payers to avoid income tax in cases where they would otherwise and logically be employed directly. Aligning corporation tax rates with income tax rates, bands, and allowances could discourage this practice and make taxes on earnings fairer (a level playing field, even).
Case Law has developed tests, known as the Badges of Trade, which distinguish between someone who is self-employed and someone who is employed. I suggest these tests are applied to companies operated by sole directors so that phoney incorporation can be ascertained. Genuine incorporations would escape the specific provisions applied to “companies of convenience”. Such a provision might be being subjected to a withholding tax regime. Self-employed agency workers and self-employed construction workers are, so why not those who use companies as tax shields?
You know it makes sense.
I will need to set up a spreadsheet to examine the effects in detail. But in the meantime I believe that retaining some of the profits, as distinct from declaring a dividend, will lower the income tax bill as against being a direct employee. Alternatively, as you suggest, the profit subject to corp tax can be reduced via expenditure on business assets.
I think we are getting off the point. The media storm is about individuals who are using incorporation purely to avoid tax, rather than wishing to enjoy the benefits of ltd liability etc. I am not advocating anyone be disadvantaged from trading as a ltd company provided the decision is not a tax avoidance scam. A notable case in point was John Birt, the head of the BBC, who traded through a ltd company in preference to being a direct employee of that organisation.
Err, no, Stephen, incorporation can’t be used to enable people to avoid higher-rate income tax. Yes, they receive a tax credit offsetting the corporation tax paid, but any income tax owing above that amount has to be settled in the normal way on submission of their tax return.
And no, single-shareholding can’t be used as evidence that someone is deliberately trying to avoid tax. Some people using services companies have family members as shareholders, which can enable them to avoid higher-rate tax on dividends. This would certainly be a deliberate tax-avoiding strategy.
As I’ve said already, I don’t defend abuse of the system. But I defend to the hilt the right of people to run their businesses as they see fit and take advantage of whatever tax laws are in place that benefit them.
Re self-employment. Are you self-employed, or have you ever been? Do you know how difficult it is to struggle to meet payments because you are being expected to overpay your tax and HMRC will not accept your claim for reduction? Do you know how GALLING it is then to be proved right and provided with a large tax rebate at the end of an extremely difficult year – which would have been much easier if HMRC hadn’t ripped you off? Get
real. The self-employed tax system is WRONG. End of.
No it doesn’t. Corporate tax and individual tax are completely separate. A shareholder only becomes liable to income tax on receipt of a dividend. The amount of dividend in the context we are talking is set by…er… the shareholder (because they are also the sole director). So the company pays 20% corporation tax, pays the sole employee the tax free allowance (£7,450) which off course has already reduced the corp tax by £1,490, and then a judicious dividend is declared. Provided the dividend declared does not represent a complete distribution of remaining profits (after claiming business expenses) then a significant chunk of income tax is avoided. These options, including the business expense claims, are not available to direct employees. I am not saying it is illegal. On the contrary, it is perfectly sensible. What is undeniable is that high earners have set up these so called service companies purely to obtain the tax manipulation advantages outlined above. No one wants to persecute genuine incorporated business owners and that is not what the media story is about. It is about ppl who work for one organisation but do it through a company and are permitted to do it by the authorities and others.
I have to say, I have had no such difficulties with HMRC.
Stephen, with respect that is nonsense. In order for the contractor to avoid higher-rate tax the company would have to distribute an amount in dividends which was below the higher-rate tax threshold. No contractor earning a decent rate is going to want to live on that.
Also, no contractor would leave idle money lying around in the company. They would use that money for something – fixed assets purchase, for example. At the very least they would make contributions to a corporate pension scheme (which carries tax relief, of course).
Its a perfectly legal method. Been using it for 6 years. And many of us earn not that well.
Not sure anyone used the word intern……that’s something else as you say.
HMRC may argue that , and they will probably lose….as the article says , fine , employ me on a perm contract then , sick pay , annual leave , employers NI , pension scheme , employment rights….bring it on ! (and stop whingeing about what you pay interims)
It’s not a “perfectly legal” method..that’s the whole point. HMRC have come down hard on this in other industries, and they should do the same here. Whether or not the system should be changed is another matter-I’d argue strongly that it should. I think the issue here, and what sticks in a lot peoples throats is the level of pay the interims in question are being awarded. If you’re earning six figures freelance, not having access to the range of benefits full employment brings is somewhat less of an issue…plus, the savings you make on your tax liability (I’d imagine they’ve got good accountants) will more than make up for this.
hmmm … it is perfectly legal. HMRC review contracts for these roles and, if they don’t think it’s appropriate, they route you through IR35 (which is a more stringent regime that allows fewer deductions). If you are effectively an employee, you should end up on IR35. If you are a freelancer working for multiple companies or you have the right to substitute others for the work you are doing, you don’t usually fall under IR35.
When you have a company and you are the sole worker, you typically pay Corporation Tax, PAYE, personal tax through Self Assessment, VAT and National Insurance. On the upside, if you buy yourself a computer, you can deduct VAT.
The actual amount of tax that you don’t pay is pretty small – and it is not strictly tax but National Insurance. You don’t pay that on dividends – but you do pay Corporation Tax and Personal Tax (either via PAYE or Self Assessment or both).
This is not some huge scam and it’s good to see this blog putting some facts up – none of the news stories have managed to so far.
Er, I think you are slightly missing the point.
1) In the vast majority of cases it is completely legal. Employment is often inappropriate for professional interim managers – they are small businesses providing short-term or project-based services to companies. There are undoubtedly some that are abusing the system, but that’s not a reason for attacking legitimate businesses. HMRC has tried in the past to crack down on this (IR35 rules) and failed, not least because it is so hard to prove.
2) The main beneficiary is the “employer” not the contractor. The only benefit to the contractor is the avoidance of NI. No other tax is avoided. What IS being avoided are the costs and responsibilities of employment.
3) The main reason for the high remuneration is BECAUSE these people are not employed. These people can be dismissed without reason – no job tribunals for them. They have to make their own pension arrangements – no company pensions. They don’t get sick pay or holiday pay. They have no guarantee that their time-limited contracts will be renewed. Yes, they earn a lot. They need it to compensate them for loss of job security and benefits.
@Frances Coppola
1) In the situation you describe, yes, it’s perfectly legal. It’s really easy to judge whether it’s legal or not, HMRC have a very handy set of yes/no questions to figure this out. My understanding the of the cases highlighted is that they weren’t legal, these were long term positions not short term or project based roles.
2) “No other tax is avoided”. I see. Are you self-employed, or ever have been? If those people in question here (i.e. those people/roles that have sparked these stories and this blog post) are not writing anything off against their tax bill as expenses, then no, no other tax is being avoided.
3) The MAIN reason for high remuneration is their instability? Partly I’m sure. Again, I argue strongly that those earning six figures in a freelance capacity are not terribly concerned about job security.
To finish, I think there is a really, very big difference between those working freelance on £30k p/a (I’ve done this in this in past) and those earning £100k+. This story seems to be about the latter group, and I would argue strongly, that different rules begin to apply when you Eastern this kind of cash…being able to afford a really good accountant to reduce your tax bill for one.
@thomtownsend
1) As I pointed about in my comment above, it is NOT perfectly clear. HMRC may have a handy set of questions, but in the end the courts decide whether their view is correct and historically the courts have generally found against HMRC.
2) I am currently self-employed, and have been for over ten years. Prior to that I ran my own business through a services company. So I think I know what I am talking about.
The argument is whether someone is deliberately using a services company to avoid tax or is simply running a small business. As I said in 1) above, the distinction is actually not clear, however much HMRC might say it is. If an expense incurred in the course of business can be legally declared against tax, it is not “avoiding” tax. Small businesses can declare all sorts of things as expenses. Interim managers running their own businesses should be able to benefit from those rules just the same as any other sort of small business.
3) Why do you think that people’s lifestyles don’t expand to reflect their earning capacity? If I were on £100K, I would probably have a mortgage of at least £300K….believe me, job security would matter to me.
I don’t earn anything like that amount, but I have an accountant to make sure I claim all the expenses and reliefs I am entitled to, so I don’t pay more (or less) tax than I should. This is simply prudent tax management and all small businesses should use accountants for this reason. It has nothing to do with my remuneration level and everything to do with the fact that I am not a tax expert and have better things to do with my time than research it.
It’s not Public Sector Interims that are the issue here.
It is Financial Sector and Government incompetence. FSA / Bank of England / Treasury regulation failed , the Financial sector nearly collapses the economy. A vindictive and ideological Tory government slashes and burns Public Services , Benefits and Local Government.
Result is my firm loses 80,000gbp (no that doesn’t all go to me) and is destroyed. I am unemployed for 18 months. I now receive nothing from Jobcentre Minus.
How about compensation ? benefits I could survive on ? a job even ???
Frances is absolutely right to highlight the fact nothing illegal is being done by the individuals concerned and her point about HMRC seeking to apply the rules inappropriately is certainly right. I run a small consulting business though have generally avoided interim assignments (nothing to do with tax) and I think her points on expenses and tax-management are well made.
People somehow forget the value of paid holiday, sickness and other time off, plus the employers contributions to pension … all added tithe “reward value” for an employee. The point is self-employed and employed people receive different types of benefits. Calling a small-business owner a “tax-dodger” for claiming business expenses and taling dividends is like calling a nurse a “pension scrounge” for collecting a subsidised pension.
Turning to the organisations, there are many good reasons why an organisation might decide to use an interim for a particular position or project for a period of time. I can understand however, the concern from taxpayers generally and “governance-minded” individuals when they see people making appointment decisions which appear to avoid the rules (both tax and an organisation’s reward policy) which apply to most people working in that environment.
It’s a shame these cases ar yet more examples of decision driven by media pressure rather than careful decision-making … but that’s the price you pay for suggesting “transpancy” is the only way to resolve poor decision-making.
I have said for some time the skills required to run large complex organisations through successful strategic change are not easy to find and the public sector is in competition with private sector businesses for those skills. While it might be unrealistic politically (in a time of austerity) to increase pay levels for top public sector jobs … without doing so, it will be necessary to bring those skills in through other means.
You should read your own commenters before getting on your high horse:
“but at £500/day I pay about 20% tax because my salary is paid to a company incorporated in Jersey…This practice is a lot more commonplace than you’d think.”
Sounds like tax dodging to me, it may be legal, but that’s not really the issue is it?
The issue is whether paying an interim manager through a services company is legal. That’s what the argument has been about. Offshoring is a completely different matter.
There may indeed be contractors who use offshoring to avoid UK tax. But that doesn’t mean everyone does. I worked through a services company for years and never offshored anything.
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@Thomtownsend @Stephen I’m impressed by your, and Richard Murphy’s, certainty that many of these arrangements are illegal. Government departments and local authorities have large and very risk-averse legal departments. Agencies like Penna tend to be well versed in the law too. If there really is a case against service companies being used in this way, surely HMRC would have made it by now, or public sector legal departments would have run scared and stopped the practice for fear of losing court cases.
We shall see what happens when (and, more likely, if) any of these cases are challenged but I’d be careful about accusing others of breaking the law.
@Rick If you take the trouble to read my posts you will see that I state quite clearly that I do not believe it to be illegal (or unlawful). Please do not put words into my mouth.
1. The following table compares two individuals, one directly employed, the other employed indirectly through a service company, and both being paid £35k per annum before tax:
Company Employee
Gross earnings £ 35,000 35,000
Corporation tax (20%) 5,505
Income tax (20%) 5,505
Take home pay 29.495 29,495
NB The 2011-2012 personal allowance of £7,475 has been assumed. The company’ provides a take home pay consists of a wage of £7,475 and cash dividends of £22,020. One can see at this level of income there is no difference between the income tax positions.
2. The following table compares two individuals, one directly employed, the other employed indirectly through a service company, and both being paid £150k per annum before tax:
Company Employee
Gross earnings £ 150,000 150,000
Corporation tax (20%) 30,000
Income tax 17,700 53,000
Take home pay 102,300 97,000
NB No personal allowance has been assumed because the income limit has been exceeded. The company’s take home pay consists entirely of cash dividends. The income tax liability falls on the individuals and arises on the dividends in the case of the company and on the salary in the case of the employee.
3. Conclusion
One can see that at higher levels of income the income tax advantage of incorporating becomes significant (£5,300 in this case). Couple this income tax advantage with the avoidance of National Insurance payments and it becomes easier to see why those on high pay might seek to incorporate solely for tax avoidance reasons. It also becomes easier to see why there is a public appetite to close down this tax scam. Although it is not illegal, the rich and powerful will defend this scam because, of course, they are the major beneficiaries. It is the public that bears the cost of this scam in the lost revenue required to pay for public services. As the first table shows, there is no need for this arrangement to be barred at levels of income of around £40K or less pa. This is because, apart from the NI savings, there are no (or very small) income tax savings to be had from incorporating. Although NI savings deprive the public of valuable revenue, the non-payment of NI also releases the State from many of its monetary obligations that it would otherwise have to the non-payer (Pension. Benefits. etc). Thus not paying NI may turn out to be a false economy for non-payers. Caveat Emptor.
I have just attempted to post a case study that clearly shows that incorporating produces significant income tax advantage at higher levels of income (£50k +). For some reason, the post has not been published.
Rather than being the nutter referred to by Frances on her TwitterFeed, my detailed analysis that I am indeed correct when I say that the income tax advantage of incorporation is significant when compared to a directly employed worker on an identical income.
It is usually better to play the ball, not the man, because as in this case, someone you dismiss as a nutter may actually be correct. Or was the man played for fear of losing the argument? I suspect the latter.
No. Your figures are wrong. It isn’t possible to take all the salary as dividend, because a company must have at least one employee. In practice what happens is that the contractor takes a small salary, on which s/he pays employees’ NIC and the company pays employer’s NIC. The personal allowance DOES apply and that may mean that no PAYE tax is payable. The contractor’s salary and associated costs are legitimate business expenses, so that reduces the company’s profits for tax purposes. The company pays small business corporation tax @20% on its remaining profits and distributes what is left as dividend. The contractor receives a dividend tax credit roughly equivalent to the corporation tax paid. However, s/he then has to declare ALL of that dividend payment, and the tax credit, along with the salary and any PAYE paid, on the year end self assessment tax return. If that total income takes earnings over the higher rate (or 50%) tax rate then the contractor is liable for income tax on the top slice just as a highly-paid employee would be. There is therefore in practice very little difference between the income tax paid under either scenario. The main tax avoided is therefore NIC, as I said.
Ooh. On looking at Christie’s calculation, evidently the dividend tax credit is only half the small business corporation tax paid. That’s lower than it was when I last did this. So the contractor is arguably paying MORE tax, not less, than an employee would be.
@Stephen, I am doubtful of your figures. First off, you need to be clearer in the distinction between salary paid to an employee and the fee paid to a company and the fact that the employing organisation will look at the total cost it will incur in getting the work done either by an employee or a company. In your figures, you seem to have ignored national insurance contributions, both employer and employee. If an organisation were to have an employee with a salary of £150,000 a year, it would be paying another 13.8% on top of that as employer’s national insurance (possibly reason enough to hire a company instead of a person, assuming that the VAT charged by the company could be reclaimed, and for most businesses and public services it can. VAT usually cannot be reclaimed by charities and they would find employing a person more cost effective than employing a company.)
Secondly, in your example, if the employee employed by the company took all the money as dividend (which is unlikely because they are likely to pay themselves a basic salary if only to ensure they pay enough national insurance to be entitled to a state pension in later life because they are not paying anything into a company pension scheme!) then that would be an income of £120,000. Income tax is payable on all of that (minus the personal allowance) and your figure of £17,700 is clearly wrong because it is an average tax rate of less than 15%. I haven’t the time or inclination to work out an exact figure but it is going to be about £40,000 bring take home pay down to around £80,000. I think if you factor employee’s national insurance into the calculations for the employee on £150,000 their take home pay would fall to around £80,000 too.
The thing is, we shouldn’t be too surprised about the fact that in the end there is little difference. Tax loopholes open up all the time and HMRC civil servants figure out how to close them. At least they do for people on PAYE and small businesses. But the tax affairs of multinational companies, that’s a different story.
Hey, let me have a go at the dividend tax. I reckon it should be:
((£150,000[A] – £30,000[B]) x 100/90[C] – £35,000[D]) x 32.5%[E] – 10%[F] = £22,130.
Explanation:
A – the profit made by the company
B – tax paid by the company
C – gross up the dividend for the implicit tax credit (source: HMRC)
D – dividend income below £35,000 isn’t taxed (source: HMRC)
E – tax rate on dividends between £35,000 and £150,000 (source: HMRC)
F – the 10% tax credit on dividends (source: HMRC).
The main HMRC source here is http://www.hmrc.gov.uk/taxon/uk.htm#3.
Tax doesn’t have to be taxing. But in respect of dividends, it most certainly is…
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Not so bothered about the tax implications. But can HMG really extract £150K+ of value out of an interim? Value to whom, the relevant department and minister or the not so relevant public. Then there is the suspicion that many Civil Service jobs are there to restrict expenditure whilst not being openly seen to restrict. Contrast with the private sector where an interim gets hired to do a job, not piddle around delivering the illusion of a job. So, an interim might be worth £150K to a mandarin or a minister but to the public – probably not.
I’m a nine-year interim and consultant working mainly for public sector organisations through my own company and I certainly recognise all these arguments. One point not being made is the cost of running a company including paying those accountants, your own insurance (at the least professional indemnity, which can be very significant for an accountant, lawyer or engineer. I’m none of those and it still costs several hundred a year.) Plus costs of travel, pitching and marketing, possibly accommodation, comms and IT etc. These apply to any small business and do not apply to employees. Get them wrong and that profit margin will be badly affected.