Limited company contractors want more tax flexibility

The main problem faced by many contractors, and particularly those in the IT and engineering sector, is that a high percentage of their work is sourced through recruitment agencies.

Sections 44-47 of the Income Tax (Earnings and Pensions) Act 2003, effectively says that if a recruiter places a contractor on assignment, and that person does not subsequently pay their taxes, the recruiter could be held liable for any outstanding tax debt to HMRC. This does not apply to limited company contractors, only self employed (Schedule D) individuals.

Since the addition of S44-47, many recruiters have been forced to respond by refusing to engage self employed contractors because of the financial exposure and risk it entails. Instead, contractors are now given just three options; PAYE at the agency, umbrella company or their own limited company.

The PCG study found that, of the 900 IT contractors that took part, a massive 95 per cent work through their own limited company. The remainder are either self employed (2 per cent) or work through an umbrella company (3 per cent). A spokesperson from the PCG commented:

"Freelancers in the IT industry most generally work through recruitment agencies. According to the S134 rules, the agency could be held responsible for unpaid taxes of a Schedule D worker. The risk-averse nature of agency businesses resulted in nearly all of them refusing to accept 'workers' who were Schedule D. This forced freelancers who use agencies to incorporate."

The PCG concluded: "PCG wants to see the repeal of sections 44-47 of the Income Tax (Earnings and Pensions) Act 2003 - which effectively force a nano-business to operate on a corporate basis, denying freelancers the opportunity to be truly self-employed."

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