IR35: PSC Byword for Tax Avoidance

The Commons Committee of Public Accounts has recently published its report of its findings on off-payroll arrangements in the public sector and has been shocked by the prevalence of the use of such arrangements.

Ed Lester

It was following the revelation earlier this year that the former head of the Student Loans Company (SLC), Ed Lester, was being paid via a personal service company (PSC), that prompted the Public Accounts Committee (PAC) to initiate its enquiries. The Ed Lester affair came to light following investigations by the press and the release of information by the Department for Business, Innovation and Skills (BIS) and the SLC, following a Freedom of Information request about the appointment of the Chief Executive of the SLC. The Chief Executive was appointed on an interim basis in May 2010 and was reappointed on a 2 year contract in December 2010, following a competitive recruitment process. Both appointments were made through a recruitment agency.

The PAC were critical of the number of errors across government which led to Mr Lester's appointment. BIS did not pay enough attention 'to the need for officials to uphold the highest standards in public life'. The department ignored expert tax advice that the Chief Executive should be employed on a PAYE basis rather than through a PSC.

Furthermore, the Treasury, Cabinet Office and HMRC approved the arrangements without considering the broader tax implications, such as the loss of tax revenue to the Exchequer by not putting Ed Lester on the books. The PAC report said that the 'failure of these departments to properly challenge the appointment gave the appearance of them endorsing the use of off-payroll arrangements.'

A Treasury review then ensued of the extent of the use of off-payroll arrangements in central government, which revealed 2,400 civil servants, earning more than £58,200 per annum, were not being subjected to PAYE. Around 85% of those engagements lasted longer than 6 months, 40% for more than 2 years and 1% longer than 10 years. Additionally, approximately 5% of cases related to senior management positions.

Part of the reason for those 2,400 individuals earning in excess of £58,200, so explained the Cabinet Office, was that the Civil Service has not developed sufficient in-house skills which in turn has placed an over reliance on interim staff and consultants.

Following the Treasury Review in May of this year, measures have been put into place that will require those contractors working in the public sector and earning a daily rate of more than £220 for more than 6 months to provide assurances about their income tax and NIC's obligations.

Margaret Hodge, Labour MP and Chair of the PAC, considered the Treasury Review to be too narrow as it did not cover other parts of the public sector, including the NHS below board level, public corporations like the BBC and local government.

The Local Government Association informed the PAC that seven out of the nine regional employers had only identified 13 people, on a national level, engaged through PSC's and earning more than £50,000 a year. These numbers were however treated with scepticism by the PAC.

BBC

The BBC employs around 20,000 staff who are on its payroll. In addition, during a typical year, the corporation engages approximately 25,000 people who are off-payroll, 12,000 of whom are off-air staff and 13,000 on-air talent.

As a result of the Treasury Review, the BBC reviewed its 3,000 engagements that involved the use of PSC's. The Beeb explained that the very nature of broadcasting often requires production staff to work for short periods on programmes whilst remaining free to provide their services to other production companies. As such, off-payroll arrangements play an important part in the BBC's business model.

Of the 467 of the BBC's presenters, 148 are paid via PSC's, despite often being long term engagees. The corporation also accepted that their contracts can share characteristics with typical employment contracts.

IR35 Reviews

HMRC told the PAC that IR35 has been an effective deterrent since its inception from 6^th April 2000 but the decreasing number of investigations over recent years has undermined the effectiveness of the legislation. IR35 enquiries fell from 1,000 in 2003/04 to only 23 in 2010/11.

The Revenue plan to increase the number of IR35 reviews by tenfold in the next year as well as conducting a risk based review of those 2,400 public sector appointees identified in the Treasury Review. It is also to examine the BBC's payments to PSC's.

PAC Recommendations

1. To further reduce the scope for any abuse of the off-payroll arrangements in the public sector.
2. The Treasury and Cabinet Office should ensure that controls over the appointments of senior officials include an assessment of the full cost of the engagement to the Exchequer and the propriety of the tax arrangements.
3. The Treasury should establish how widespread the practice of off-payroll arrangements is in all parts of the public sector, including entities not covered by Managing Public Money, such as local government, and use its powers to ensure that public servants are not employed through arrangements which could lead to tax avoidance.
4. The BBC's review should consider whether contracts are more typical of employment contracts, their duration and the number of repeat contracts and the fees involved. The review should demonstrate how it will secure assurance that its staff pay the right level of income tax and NIC's.
5. One of the Treasury Review's recommendations was that an Accounting Officer may still approve the use of PSC's where there are 'exceptional circumstances' but these need to be clearly defined. Accounting Officers should also be required to seek Treasury approval of any such exceptions and require departments to pass on information they assemble about the tax arrangements of their off-payroll appointees to HMRC.
6. HMRC to report the outcome of its review of the 2,400 public sector cases and the 25,000 BBC cases in 3 months’ time. The Revenue should also set an optimum number of IR35 enquiries that maintains an effective deterrent to include any arising out of intelligence passed to them by public bodies.
7. Cabinet Office should demonstrate how the Civil Service Reform Plan will remedy the issue of the key skills gap that remain prevalent in government.

The rhetoric of Margaret Hodge and her fellow committee members makes it clear that they foolishly equate the use of PSC's to tax avoidance. Launching the PAC's report she said,“Avoiding tax and national insurance when paying public sector staff is almost always staggeringly inappropriate.

The public sector must maintain the highest standards of propriety in its employment practices if it is to show leadership in the fight against tax avoidance. It must avoid the practice of using off-payroll arrangements for staff who should be on the payroll – a practice which generates suspicions of complicity in tax avoidance and which fails to meet the standards expected of public officials.

Those whose income is derived from monies raised through taxation have a particular obligation to make sure that they do not use tax avoidance schemes.”

Thankfully, John Whiting, director of tax policy at the Chartered Institute of Taxation and Tax Director of the Office of Tax Simplification, brought a sense of balance to the issue on BBC Radio 4's Today Programme, saying, “If you are just an ordinary freelancer, which is very prevalent these days – anyone from a plumber to journalist – working here and there, working through a company, then it is a perfectly sensible way of organising your affairs.

What this report is targeting are people who are in what is often termed as 'disguised employment' – they're really an employee but they are putting the aura of 'No, I'm operating for a company'.”