The misguided belief that contractors are tax dodgers

The complexities of the tax system – and political narratives – have long contributed to the myth

Over the years, a misconception has turned from rumour into received wisdom. There’s a widespread belief that contractors aren’t grafters, but rather they’re grifters.

Far too often contractors are considered tax dodgers, or a group who, at best, don’t pay their fair share. This results from years of political narrative.

But this doesn’t reflect reality – certainly not for the vast majority of contractors who operate in absolute compliance with the rules and regulations.

To understand where the misconception has come from and to see whether the perception has had an impact on the industry, we’re taking a dive into the facts with our CEO, Seb Maley.

Weighing up the tax burden

One element that feeds this misconception is the differences between how individuals and companies pay taxes. Limited companies, which contractors tend to operate through, are subject to Corporation Tax on their profits.

Companies earning profits under £50,000 pay Corporation Tax at 19%, while businesses with profits over £250,000 pay at a rate of 25%. Those in the middle (earning between £50,000 and £250,000) pay at the main rate – that is, 25% – and can claim marginal relief. Emphasis on marginal here.

Both rates are within a few percentage points of the basic rate of income tax. Yet on top of this, limited company contractors also pay income tax on money they withdraw from their company personally. But numerous changes to the tax-free dividend allowance in recent years mean that contractors can withdraw less cash, tax-free, from their business.

Taken together, these factors put contractors and employees on more or less even footing, from a taxation perspective.

Fudging numbers

IR35 is also to blame for the misconception that contractors don’t pay the right amount of tax.

The way IR35 liability is sometimes reported – as a headline figure – adds to the perception of contractors as tax dodgers. Gary Lineker is one example, taken to tribunal over an estimated £4.9m tax bill. It’s an eye-catching number, but it doesn’t paint the full picture.

The Lineker case is a strange example, as HMRC incorrectly tried to apply the IR35 legislation. Lineker operated as the principal partner in his business partnership, and – crucially – held direct contracts with his clients.

As a result, the tribunal judge ruled that IR35 did not, “as a matter of law”, didn’t even come into play. HMRC disagrees and has appealed the decision – and so will continue chasing Lineker for…something well short of £4.9m.

That £4.9m liability (roughly £3.6m in Income Tax and £1.3m in National Insurance Contributions) fails to account for any tax already paid by the Match of the Day host. Lineker says he always paid the taxes he owed, including income tax and NICs on the income in question.

As we’ve seen, there’s not a huge disparity between contractors and employees from a tax perspective. And so Lineker would have already paid a good chunk of tax on his earnings. That would bring that £4.9m figure down considerably.

This detail is generally overlooked.

Damaging perceptions have consequences

The narrative element is important, and it has helped to grease the wheels of parliament when it comes to enacting tax reforms such as the off-payroll working rules.

But in service of collecting ever-greater tax revenues, the government and HMRC have damaged the reputation of thousands of contractors.

This matters. Misconceptions, mistruths, and inaccuracies don’t just play a role in how the wider public perceives contractors – they can have a damaging effect on the way that businesses and end clients perceive them.

I’ve no doubt that this misconception has played into the way that businesses reacted to the off-payroll working rules.

It’s plausible to suggest that many businesses took the view that contractors weren’t operating compliantly – deciding to insist they operate on the payroll, regardless of their true IR35 status.