Out-Law News 2 min. read

Off-payroll arrangements "undermine public sector leadership" on tax avoidance say MPs


The public sector must avoid the use of 'off-payroll' arrangements to remunerate staff if it is to "show leadership" in the fight against tax avoidance, according to a committee of MPs.

In a report into public sector payroll arrangements, the House of Commons Public Accounts Committee (PAC) said that public officials - whose income is "derived from monies raised through taxation" - had a "particular obligation" to make sure they did not use tax avoidance schemes. Off-payroll arrangements generate "suspicions of complicity in tax avoidance", the PAC added.

Committee chair Margaret Hodge said that during its investigations the PAC had discovered that "no fewer than 2,400 central government appointees" were benefitting from off-payroll arrangements, while the BBC used about 25,000 such contracts to remunerate workers.

"[The BBC] told us that it intends to review these arrangements," she said. "We want the review to explain how the BBC will gain assurance that the staff involved are paying the correct amount of tax on their income from the public purse. Similarly we suspect that many individuals and employers in local government and in the health service do not pay their proper tax and national insurance contributions."

Earlier this year it emerged that the former head of the Student Loans Company was being paid by a company, triggering an investigation by the Treasury. Its report, published in May, found that over 2,400 staff in central Government were being paid using off-payroll arrangements, such as personal service companies.

Although the recommendations made by the Treasury should "go some way" to cracking down on the practice this report was "limited in scope" and did not cover over public sector workers such as those in local government, the NHS and the BBC, the PAC said.

"We still do not fully know how endemic the use of personal service companies is in other parts of the public sector," the PAC said in its report. "The Local Government Association does not consider the practice to be widespread in local authorities but does not have accurate data. The BBC told us that short term engagements are commonplace in the broadcast industry, and that it paid about 25,000 people off-payroll in a year. However, it acknowledged that the contracts of presenters employed through personal service companies can often share the characteristics of typical [Pay As You Earn] contracts."

The Treasury Review stated that off-payroll arrangements could be used in "exceptional circumstances", the PAC said. However, it did not clarify what those circumstances where. In addition, despite recommending that departments "seek assurances" that those staff which remain off-payroll are paying the appropriate amount of tax, the Treasury did not specify how departments could or should do this.

HM Revenue and Customs (HMRC) uses intermediaries legislation, known as IR35, to stop contractors in "disguised employment" from reducing their tax and national insurance contributions by channelling their pay through a personal service company. These are typically limited companies, of which the worker is typically the owner and sole director, which are contracted to supply a professional service - for example, IT or engineering.

This service is delivered by the worker, but as payment is made to the company the worker can split income between salary and dividends. The IR35 rules apply where the relationship between the end client and the worker would be one of employment if it was not for the interposition of the personal service company or other intermediary.

In a joint consultation published in May, the Treasury and HMRC proposed that senior individuals who are 'controlling persons' should have income tax and national insurance deducted at source - even if they are contracted through a personal service company. Such a person would be defined as having "managerial control" over a "significant proportion" of the organisation's employees or budget.

We are processing your request. \n Thank you for your patience. An error occurred. This could be due to inactivity on the page - please try again.