09 October 2012
A lot of commentators say that these should all be paid with tax deducted at source and suggest that the BBC is somehow avoiding tax or encouraging tax avoidance. These include not only the press, but also legislators, who maybe ought to be better briefed.
Let's look at some simple numbers:
If the rate for the job for a salaried employee is a salary £50,000 plus employer's pension contribution of say 10%, the cost to the employer including employer's National Insurance is £50,000 + roughly £5,900 NI + say £5,000 pension.
This excludes all other benefits and costs of employment; some of these will exist for on-site contract workers anyway (such as the cost of office space), and some won't, such as health care, certification, training, and some equipment and services. That's a total outlay of £60,900.
To be able to pay the same salary, employer's NI and employer's pension contribution, a contractor will need to receive the same amount. However, employers have long been recommended to insist that contractors work for a personal service company (PSC) or umbrella company to ensure that liability for unpaid Income Tax and NI doesn't fall back on the employer in case that a contractor goes missing.
So the contractor also has costs of establishment, insurance and administration for a PSC, including employer's and public indemnity insurance, accounting and filing, payroll, and bank charges. This may amount to a few percent of the total turnover, say £2,000 per annum.
So to have the same net income and pension contribution, a contractor needs to bill say £62,900, possibly with VAT to be added depending on registration limits. In that case, the outlay to the employer is another £12,580, although some of this may be offset against VATable supplies.
And having received £62,900 plus VAT, it's then the PSC's responsibility to pay salary, Income Tax and employer's and employee's income tax - exactly the same amounts to Her Majesty's Revenue and Customs that the employer would gave paid. The VAT, if charged, also has to be paid - that's additional revenue for the taxman.
The problem in this picture is the contractor that finds a way to evade making the tax and NI payments that would be due. If there is evidence of this abuse, HMRC already has powers to clamp down and should just do it.
No-one's suggesting that all contract staff are tax evaders. It's not necessary to take away the flexibility both for employers and for staff that prefer to work on contract by insisting that everyone must become a PAYE employee.