Civil servants avoid onerous freelance tax rules

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LaptopFor anyone who has ever worked as a freelance or a contractor will know, the tax rules can be mind-numbing and complex.

One rule that is particularly onerous is IR35, which is in place to prevent freelancers from working for just one company.
The taxman calls it 'disguised employment' and doesn't like it because the freelancer or contractor can benefit from tax advantages they wouldn't receive if they were in full-time employment.

The company employing them also enjoys tax benefits, so it's no wonder that the government likes to enforce this rule stringently.

However, it doesn't look like the government has been keeping its own house in order when enforcing the rule. A review, by the government, has found 2,000 civil servants get paid through their own companies, which allows them to sidestep tax.

Two executives at the public-funded BBC who are earning over £100,000 a year each have also been using private companies to avoid tax.

Although most of the 600,000 contractors out there have set up private companies legitimately and work for more than one business, since the 50% tax rate was introduced more wealthy people have been using this option.

The main benefit is company revenues are taxed at 20% (the rate of corporation tax) and the company can pay up to £31,000 a year to an employee. Companies also avoid paying national insurance.

Paying a 20% rate of tax on what you earn is far more appealing that the 32% tax rate a basic rate taxpayer pays (20% income tax plus 12% national insurance).

And it seems it was too appealing for some of the government's own employees, including the head of IT at HM Revenue & Customs, who was paid as a contractor through their own company.

The news about civil servants is a second blow to the IR35 rules. The government has recently made changes to the rules but groups representing small businesses and contractors have criticised HMRC for failing to listen to their advice and making the rules more complex. It also said a new business test to determine whether a person is employed or not is 'counter-productive' and would stop high-risk cases being identified.

As usual the government has failed to spot what's under its nose and complicated the rules to benefit those who are wealthy.

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