Friday, 9 March 2012

Is that whip tax-deductible?

The news that Ken Livingstone has been using a personal services company for his media earnings, thereby avoiding some tax, has led to charges of hypocrisy, both from those on the left who consider it an own-goal and those on the right who usually champion tax 'optimisation'.

The blather-storm is purely political. Ken's "dodge" would not have occasioned much interest were it not for the upcoming mayoral elections. What has largely gone unremarked is the fact that PSCs are now seen as "normal", an incidental opinion ascribed to an ally of Ken in the New Statesman's piece. The ally is not wrong.

Last month's revelations that senior civil servants are using PSCs focused on the top end of the work pyramid. Jonathan Baume, of the First Division Association (the union for top rank civil servants), even claimed that these arrangements were necessary to attract talent from the private sector.

His conclusion was that transparency demanded higher salaries, which is just him doing his job. In fact, it's likely that these individuals would have used PSCs when working in the private sector as well. Baume was guilty of allowing the issue to be framed as a matter concerning a few score fattish cats in the public sector, which was music to the ears of anti-state ideologues.

PSCs allow tax to be reduced by disguising income as corporate profit and by reducing gross profit through offsetting expenses. Umbrella companies for contractors can also reduce tax, albeit by a smaller amount. Income "laundering" like this has a long history in the UK, though it was traditionally limited to partnerships in sectors such as banking, law and accountancy. Independent contractors have also been a long-standing feature, most famously GPs who wanted to stay at arms-length from the NHS.

From the 1980s onwards, the use of limited companies by contractors grew considerably. During the course of the 70s, just over half a million companies were formed (this includes "real" companies as well as PSCs). In the 80s, over a million were formed (see page 11 of this Tax Research UK report). Even allowing for the increased churn of the 80s recession, a large part of this doubling must be attributed to PSCs. There were four major reasons for this growth.
  1. The government's favouring of lower corporation and dividend tax rates made PSCs increasingly attractive because of the increased tax margin.
  2. The ideological encouragement of entrepreneurialism (including making company formation easier) led many to experiment with self-employment (when jobs decrease the self-employed tend to increase).
  3. The greater use of outsourcing, in both private and public sectors, diluted employee loyalty and made variable employment arrangements in the same workplace less unusual and less contentious.
  4. Advances in technology increased the premium for specialist staff, notably in areas such as IT, engineering, design, health and pharma, and oil and gas.
This final point will probably prove to be the most significant in the long run. "Skilled trades" have increasingly migrated to the middle class, swapping blue for white (and then open) collars along the way. The decimation of the "aristocracy of labour" was not just about the managed decline of coal and steel, it was about the co-option of technical roles into the ranks of the non-unionised. Whereas this was once largely limited to the "drawing office" in manufacturing and heavy industry, it has spread as most companies have grown their IT, finance and HR functions. Notions of solidarity have evaporated along the way. In the 1990s, 1.5 million companies were formed. In the last decade, 3.5 million were formed (op cit, pgs 15-19).

The spread of contracting is often presented as a positive lifestyle choice at the top end of the income scale, in contrast to the casualisation and precariousness at the bottom end. In effect, the tax dodge is the quid pro quo for middle class professionals accepting less secure terms of employment. In practice, many of them are no less secure than they ever were. The "Friday to Monday" conversion of permanent employees to contractors has been no less pernicious than the revolving door between civil service and government suppliers, or between the police and media organisations.

When considered alongside the trend of companies to divest themselves of pension schemes, the continuing primacy of shareholder value, and the toleration of rent-seeking by executives, the growth of PSCs is a key part of the wider transition to an economy in which companies have no social obligations.

There are about 29 million working people in the UK, of whom 12.4 million are in management, professional or technical roles. It is estimated that there are 1.9 million active companies. That's one company for every 15 workers. It is further estimated that businesses without employees (i.e. the workers are directors) account for 75% of the total. This implies that there may be around 1.5 million PSCs, which will overwhelmingly represent people in the higher skill group. In other words, about 12% of that group may be working through PSCs and thus enjoying a tax break.

As a member of the metropolitan middle class, with top notes of media, Ken really is quite typical of his ilk, as is his opponent, Boris Johnson. To that extent the charges of hypocrisy are unfair. As the New Statesmen's "source close to" implies, Ken didn't seem to clock that he was doing anything wrong. An unconscious hypocrite is an oxymoron.

The real scandal is not that Livingstone was engaged in a scam to minimise his tax, but that a significant proportion of the middle class is doing exactly the same. It has become normal, and therefore almost acceptable. Some of the very same people who do this will be among those up in arms about losing their child benefit. Now that would be hypocrisy.

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