IPSE, the association of Independent Professionals and the Self Employed, has today reacted to the news that the Ministry of Health and the Ministry of Defence have been fined a total of £1.5m, after the departments were found to have failed to seek adequate assurances that contractors were being used appropriately.
Andy Chamberlain, Deputy Director of Policy and External Affairs at IPSE, said:
“Aggressive and artificial tax avoidance is wrong and the Government is right to stop it, though it is far from clear whether that is what has happened in these cases. We believe the current tax rules for public sector contractors are flawed and that they could force contractors out of the public sector altogether, putting at risk projects which are vital to national security.
“The reality is that the vast majority of these professionals are meeting their tax obligations in full. Reports such as those in this morning’s Telegraph that claim that limited company contractors pay ‘corporation tax – as low as 20 per cent – rather than personal income tax at up to 45 per cent’ are wholly misleading. In fact, as well as corporation tax, contractors additionally have to pay income tax on any profits they draw down from their company."
The tax assurance rules were brought in almost three years ago following the revelation that the then Chief Executive of the Student Loans Company, Ed Lester, was engaged via his own limited company. As a knee-jerk reaction to intense media pressure, the Chief Secretary to the Treasury, Danny Alexander, hastily compiled a set of rules which forced all public sector contractors to provide assurances about their tax arrangements.
IPSE believes these rules are unnecessary, unwise, and unclear and in any case have been unevenly and unfairly implemented by Departments.
Chamberlain said,
“The public sector tax rules are a sledge hammer to crack a nut. What was designed to prevent clear tax evasion by board level staff has now destabilised the position of specialist contractors and the projects they are working on. Government has a responsibility to ensure that the specialists with the right skills, who are very often independent professionals, are not driven out of the public sector by these rules. In the case of the Ministry of Defence, this is a matter of national security.
Chamberlain believes that in many cases departments are still using the discredited Business Entity Tests (BETs) as part of the assurance process. “It has been widely accepted, even by HMRC, that the BETs are not fit for purpose and are scheduled to be scrapped from April. Despite this we understand they are still being used by some Departments as part of their assurance process. The next government should as a matter of urgency undertake a full review of the need for this unnecessary burden on independent professionals in the public sector.”