The curious case of the Civil Servant contractor and his tax bill

The current UK Government is rapidly building up a reputation for mixed messages and a ‘do as I say not as I do’ attitude, but last week’s reports focussing on the tax affairs of Ed Lester, CEO of the Student Loans Company, and the subsequent reaction from Chief Secretary to the Treasury, Danny Alexander, have hit close to home for many contractors and small business owners. The trick now is to manage the fall out without the usual law of Unintended Consequences kicking in at a cost to the UK’s skilled flexible workforce.

In a nutshell, Mr Lester, was reported to have had his £180,000 plus salary paid through his own personal service company (PSC) as part of a move to minimise his tax and national insurance payments, much to the displeasure of some MPs from both sides of the house. The Government, through Chief Secretary of the Treasury, Danny Alexander, tried to quell the upset by announcing in Parliament that this had now stopped with an immediate effect and that there would be an urgent review into this and any similar arrangements within the Civil Service.

The practice of using a PSC in this way will be familiar to hundreds of thousands of contractors, freelancers and professional interims in the UK as it is a perfectly legitimate way to manage your business compliantly provided that the way it is structured works within the strictly drafted tax legislation, in particular the Income Tax Earnings and Pensions Act 2003.

While the case in question might be deeply embarrassing to a Coalition Government that has been very vocal in its commitment to tackling tax avoidance, the fact remains that tax avoidance isn’t illegal.

This payment structure might not be appropriate for high-level government appointees and civil servants but it is the bedrock of the UK’s highly skilled, professional flexible workforce, a sector of the UK economy that is doing more than most to help drive the recovery in the UK. They deserve the reward and recognition that should come with the risk of going it alone and building up a business.

But there is one aspect of this case that is still rankling with me, why hasn’t anyone looked at Mr Lester’s IR35 status? Where do the substitution, mutuality of obligation and control tests come in for a CEO of a quasi-Government organisation funded by the taxpayer?

We recently successfully defended a client against HMRC action as a result of IR35, and all we are asking for is a bit of common sense and a level playing field. Yes this company structure might not be appropriate for a high-level civil servant but that doesn’t mean it’s not appropriate for the rest of us when managed compliantly. It’s about time politicians of all parties recognised this to stop knee jerk reactions to a particular issue from having a snowball effect (IR35 or AWR anyone?). It’s also about time that HMRC start to treat all businesses the same when applying the rules. We are all in this together after all!