A contractor’s tale

So. That Department of Health / contractors / limited company tax thing.

It’s pretty common. I’ve done a similar thing (and been asked to do the limited company thing) myself.

For most of the time while I contracted, I used an umbrella company. I’ve had it patiently explained to me by a couple of agencies that this means I’m classed as a limited company for payroll and tax reasons (patiently because I have no fucking clue about how it all works in terms of the maths and legalities).

When I first started working, via a recruitment agency, for one of those mammoth services companies that operate government contracts, in February 2009 it was fairly straightforward – submit timesheet to the agency, paid via PAYE. But after a couple of months the agency was very keen to get me to move to an umbrella company. They said I would earn more money that way. I didn’t really understand it but the idea of having one constant employer (the umbrella company became my legal employer) as I moved around various jobs appealed – one set of paperwork at the end of the year. Also, I’d been out of work for a while and the agency were really, really keen. They didn’t say I’d be viewed more favourably if I moved, but…

This is how the money broke down. The recuitment agency passed my gross pay onto my umbrella company. I presume this saved the agency money because they didn’t have to process payroll. The umbrella agency did some weird expenses thing and reduced my income tax butĀ I suddenly started paying two lots of National Insurance – I started paying employer’s and employee’s NI (despite, you’ll remember, the umbrella company being my employer). This saved some company somewhere some money because I was now paying their NI requirement. I also paid the umbrella company a Ā£25 per week fee for the privilege of having my own payroll processed. In what I believe to be a quirk of the amount I was earning, my take home pay was exactly the same as it would have been if I’d stuck to PAYE.

So. The recruitment agency saved money. The umbrella company made money. I stayed about the same – the whole point of reduced tax seemed to be to compensate for the extra NI. The only person who lost out in this saga was the Treasury, who missed out on some of my tax so businesses could make more cash.

I think that’s how it worked. I handed my pay slips to my Mum once – who worked as a bookkeeper for years – and she couldn’t make head nor tail of what the numbers actually meant.

I don’t think this is quite what happened at the DoH, but I tell you to show that tax avoidance is encouraged when it comes to contractors. I’m sure some contractors do make money from the system (I didn’t), but it mainly seems to be there to help companies earn a few extra bucks thanks to the Treasury.

Eventually that services company lost the government contract I’d been working on and the quango in question took it back in house. Except they took it back too quickly and totally weren’t ready to deal with it. So I, as the sole contractor left, was approached to see if I’d be willing to do some work if they needed me. I said yes. And then they said they’d only be able to employ me if I turned myself into a limited company. They weren’t prepared to deal with agencies, or my umbrella company. I don’t know why. I can only assume it saved them money (this was at the start of the government’s public spending freeze and the quango was desperately counting every penny).

I looked into it – I didn’t get as far as the tax implications and, frankly, wouldn’t have understood it if I had – and quickly realised that the fees involved were too high for work that wasn’t guaranteed. I declined their somewhat foot-shooting offer.

So there you go. An organisation funded by the taxpayer refusing to hire anyone unless they were a limited company – which is, I believe, exactly how the guys at the DoH were paid. So rather than pointing the finger at the tax-cheating contractor-scum, let’s take a look at whether the DoH encouraged the practice itself and whether it was their idea to deny their own bloody Exchequer some money.

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