Legal Business Blogs

Firms assess options ahead of potential crackdown on contract lawyer tax loophole

A potential government crackdown on tax savings made by consultants through ‘personal service companies (PSCs)’, could have negative implications for contract lawyer services such as Addleshaw Goddard’s Integrate, Pinsent Masons Vario and Allen & Overy’s Peerpoint, as well as BLP’s Lawyers on Demand.

Any changes are likely to be announced by Chancellor George Osborne in the autumn statement next Wednesday (25 November) in a bid to raise up to £400m.

Contract lawyers often set up as PSCs, as this means limited employee obligations are placed on the contracting business and it is in the financial interests of the consultants.

As contract lawyers are not deemed as employees of a law firm, many will end up paying different levels of tax, even if they are doing the same job as a direct employee. This could allow someone using a PSC to reduce their tax payments by as much as 20%. However, should the changes come into force, it would mean any consultant using a PSC would need to move onto a firm’s payroll after a month, with all that this entails.

While many firms were reluctant to discuss the issue, according to one law firm partner, firms could find a way around this by having contract lawyers work from home or from a client’s premises in order to meet the minimum employee obligations.

Another told Legal Business their firm was actively monitoring the situation and was likely to take external advice on the matter.

A discussion document issued by HM Revenue & Customs in July aimed at starting ‘a dialogue with business on how to improve the effectiveness of the existing intermediaries’ legislation, commonly known as IR35.’

The government argues that this contributes to and reinforces the incentives for individuals to work through companies when they would otherwise be employees, and for businesses to engage individuals through companies, even if they are working in a similar way to their employees.

The paper issued by the government also includes an example of a case study specifically concerning a law firm:

‘A legal company hires two lawyers in 2015-16 who do the same job and work on the same cases. The company pays the lawyers gross payments of £70,000 per year.

‘Jo works as a direct employee. The company deducts income tax and employee national insurance contributions (NICs) from her salary and pays employer NICs on top. The total tax and NICs paid on Jo’s salary is £30,612 (£22,071 by Jo and £8,541 by the company.)

‘Ben works through a PSC and does not operate IR35. He pays himself the most tax advantageous remuneration strategy combining a low salary and dividends. His total tax and NICs liability is £16,900.’

Read the full discussion document here.

Subscribers can read more about contract lawyering in the feature ‘So demanding – are contract lawyers business delivering for clients?’