Committee of Public Accounts - Off-payroll arrangements in the public sector - Minutes of EvidenceHC 532i

Back to Report

HOUSE OF COMMONS

ORAL EVIDENCE

TAKEN BEFORE THE

PUBLIC ACCOUNTS COMMITTEE

HM TREASURY’S REVIEW OF THE TAXATION ARRANGEMENTS OF PUBLIC SECTOR EMPLOYEES

MONDAY 16 JULY 2012

ZARIN PATEL, CAROLYN DOWNS and DAVID SMITH

SIR NICHOLAS MACPHERSON KCB, LIN HOMER, HOWARD ORME and WILLIAM HAGUE

USE OF THE TRANSCRIPT

Oral Evidence

Taken before the Committee of Public Accounts

on Monday 16 July 2012

Members present:

Margaret Hodge (Chair)

Mr Richard Bacon

Stephen Barclay

Jackie Doyle-Price

Matthew Hancock

Chris Heaton-Harris

Meg Hillier

Stewart Jackson

Fiona Mactaggart

Nick Smith

________________

Amyas Morse, Comptroller and Auditor General, National Audit Office, Gabrielle Cohen, Assistant Auditor General, NAO, Steve Corbishley, Director, NAO, and Marius Gallaher, Alternate Treasury Officer of Accounts, HM Treasury, were in attendance.

Examination of Witnesses

Witnesses: Zarin Patel, BBC Group Finance Director, Carolyn Downs, Chief Executive, Local Government Association, and David Smith, BBC Head of Employment Tax, gave evidence.

Q1 Chair: Thank you all for agreeing to attend. Normally this initial session is a short one, but today we are in slightly different circumstances. We have asked you both to attend because you have not been covered by the review undertaken by the Treasury for Danny Alexander. I will start with local government and then we will move to the BBC-we are hoping to keep this quite tight-then we will move on to a discussion with the Treasury and other officials on the Treasury review.

Starting with local government and Carolyn Downs: is anybody in the LGA employed on a personal service contract?

Carolyn Downs: I think we no longer have anybody. We did have two people earlier this year, but we employ everybody on an interim basis now directly, wherever we can.

Q2 Chair: "I think" and "where we can" is almost-do you or don’t you?

Carolyn Downs: We have what we call associates. They are consultants who are not directly employed by us, but they are not people who are covering permanent positions.

Q3 Chair: How do you define a permanent position?

Carolyn Downs: A permanent position is a job that would be on the general payroll of the organisation, so it is a job for which there is a permanency required-we always require that job to be undertaken. We employ associates who are experts in particular fields. They may work for a couple of hours a week. They may sometimes work for two or three days a week, or they may be doing a specific one-off project where you would not want to employ somebody permanently. In terms of covering our permanent establishment, we do not employ people on these contracts.

Q4 Chair: You do not employ people. You would not have a permanent housing adviser to the LGA <?oasys [pc10p0] ?>employed on a personal service contract. If they have been advising the LGA for the last two years or six months-let us say more than six months-I would classify that as pretty permanent.

Carolyn Downs: We may have somebody who is employed to do that on specific projects, or somebody who is employed one or two hours a week. We also employ permanently our payroll housing advisers-all kinds of policy advisers- but they are on our permanent establishment. We employ them directly. We employ specialists, but they work irregular hours for us.

Q5 Chair: If we turn to local government generally-I appreciate you cannot speak for every council-are councils now required to review their use of personal service contracts?

Carolyn Downs: Yes-

Chair: Required?

Carolyn Downs: Every council is now required to publish an annual pay policy. I have two examples with me today: Hertfordshire county council and Trafford metropolitan borough council. Every year, members of the council-the politicians-are expected to review the pay policy. Within both these policies, it includes specifically this issue, so Trafford states: "Where the Council is unable to recruit Chief Officers, or there is a need for interim support...the Council will, where necessary, consider engaging individuals under a ‘contract for service’. These will be sourced through a relevant procurement process ensuring the council is able to demonstrate the maximum value for money benefits from competition in securing the relevant service." All of that now has to be published for councils.

Q6 Chair: Let us go into the detail. Do you, on behalf of local government, accept the premise, which appears to be accepted here in Parliament by all political parties, that if you are in a job that is funded by the taxpayer, you have a moral duty that may go <?oasys [pc10p0] ?>beyond a legal obligation to ensure that you employ people in such a way that they contribute through PAYE and national insurance contributions back to the public purse? Do you and your members accept that?

Carolyn Downs: I would say very largely yes, but I think-

Chair: Very largely?

Carolyn Downs: I was going to say because I believe there are circumstances in which you may wish to employ somebody as a consultant, but, for the permanent employees, I accept that that has cross-party agreement, yes.

Q7 Matthew Hancock: Can I push you a bit more on these exceptional circumstances? Can you describe what is an acceptable exceptional circumstance?

Carolyn Downs: Yes. For example, if a council lost its chief executive overnight, which can and does happen, and the council needed to bring in a chief executive immediately, it would be appropriate, both in my view and, I am sure, in the view of councillors, to use an interim in that very short circumstance before you go through the recruitment process to put someone in permanently.

Q8 Matthew Hancock: For a period of up to how many months?

Carolyn Downs: I personally think that you should be able to recruit within a period of six months. There will be very few cases in local government where it would go beyond a six-month period.

Q9 Chair: As I understand it, Barnet council has nine people on personal service contracts. Is that right?

Carolyn Downs: I cannot comment specifically on Barnet council. Over £50,000 a year is the remit I was asked to look at. We asked all the regional employers-there are nine-to find out exactly how many local government people were employed on a personal service contract above £50,000, rather than £58,000. From the seven regional employers that responded to us, there are 13 nationally. I am struggling if Barnet has seven-

Q10 Chair: Was London one of the ones? Barnet, and Hammersmith and Fulham, are two that have constantly been identified as having a large number of people on personal service contracts.

Carolyn Downs: Hammersmith and Fulham did indeed have an issue. Since that was brought to their attention, they have now brought in a very detailed and rigorous procedure to ensure that that no longer happens.

Q11 Chair: And Barnet?

Carolyn Downs: I cannot comment on Barnet, I am sorry.

Q12 Chair: But did Barnet respond to your survey?

Carolyn Downs: The London employers-I personally asked them on Friday and I got nothing back from Barnet to say that they employ personal services. I just cannot comment for them.

Q13 Chair: So, you had seven regional people reply, but they may not have covered all the authorities in their area.

Carolyn Downs: Well, they will largely have done so. I was asked to come here a week ago, so I did whatever I could in that week.

Chair: Thank you; I am very grateful.

Carolyn Downs: Let me put it in context. There are 1.6 million employees in local government-that is employees rather than full-time contracts. Of those, 19,950 are paid over £50,000 a year, and, of those, 13 were brought to our attention. Even if you times that by three, that comes to 39 which, out of 19,950 and, again, out of 1.6 million, would not under any circumstances give the impression that this was systemic or endemic in the system. Furthermore, every single council has had FOI requests into them about this very matter since it was made much more public earlier this year. My view is that if this was completely awash throughout the system, you would be inundated with that in the press, both national and local, and that is not the case.

Q14 Chris Heaton-Harris: Were any of the people who were identified chief executives?

Carolyn Downs: Not permanent chief executives, but interim ones-without a doubt.

Q15 Mr Bacon: What is the longest period of time?

Carolyn Downs: There was nobody over a year from the 13 that were highlighted to us. The overwhelming majority were under six months.

Q16 Chris Heaton-Harris: Have you got their job titles there?

Carolyn Downs: I have not personally got them here. The employers were keen to ensure that the individuals were not identified, but I would be able to provide you with the kind of job titles.

Q17 Chair: Given that Barnet has been identified-I am glad to hear about Hammersmith and Fulham-it would be really helpful if you, in co-operation with Barnet council, could provide the Committee with information on its current status and on how many people it has on personal service contracts.

Carolyn Downs: I will do that.

Q18 Mr Bacon: Not just its current status, but how it has been over the past two years or so. If it has changed recently because it knew that we were doing this inquiry, we would like to know when it changed.

Carolyn Downs: Yes, okay, and what systems it has put in place if it has changed-absolutely.

Q19 Chris Heaton-Harris: I wonder whether you have done any research into how many local government authorities are using contractors for positions that were previously filled by long-term employees.

Carolyn Downs: I have not got that figure. For people who were full-time employees and those posts that have been taken off the establishment?

Chris Heaton-Harris: Yes.

Carolyn Downs: Although I cannot evidence it-I do not have that information-I very much imagine that some people will be employed to do part-time roles, a few hours or specific projects, as opposed to being employed full time. I have to say that we do not agree about the tax avoidance issue, but local government does have a duty to ensure that we have the best value for the taxpayer and the public purse in the round, particularly if we have Government grants and projects that come to an end over a specific period. Those require a high level of expertise going into them, with the Government grant specifically saying, "We are not prepared to pay for the termination of contracts at the end"; then local government will definitely use on contract people who are self-employed or who come through a personal service company, because that is the best value that they can get for the local taxpayer.

Q20 Chris Heaton-Harris: Just over the past few years, have you seen more and more contractors working for local government, rather than people being full time, on the establishment figure?

Carolyn Downs: Not that I am aware, because there is so much accountability and transparency about everything that we do. Last time I was here, I think I was talking about every single contract payment over £500-that has now gone to £250 in local government, across the board. So every single contracted payment will be published monthly on the council’s website. That level of accountability and transparency makes sure that you have got systems in which councillors are checking the employment of contractors in a way that, maybe, was not the case a few years ago.

Q21 Chair: Good. Thank you. I turn now to the BBC and thank the two of you-Ms Patel in particular-for supplying us with the information so swiftly. Apologies for doing this on the same day as the BBC annual report-that was not deliberate, but we are where we are.

It is quite muddling, finding your way through the figures. Let me start by asking you about the 12,000 people you talk about who are employed through these personal service companies-freelancers, in some way. That is not your talent staff-am I right about that?

Zarin Patel: No, it is not. Talent is about 13,000 individual contracts over the course of a year.

Q22 Chair: So, if you included talent, you would go up to 13,000.

Zarin Patel: No, another 13,000.

Q23 Chair: So you have got 12,000 employed in not appearing on radio or television, basically.

Zarin Patel: With the Committee’s indulgence, when we employ a freelancer, it will be for a short period of time. So these are not 12,000 people employed for the full year. In any one year, we will have 12,000 individual engagements, some of which may be for a few months, some for six months; so, for off-air-such as cameramen, behind-the-scenes staff-about 12,000 in a typical year, but at any one point in time that will be significantly less. For on-air talent-contributors, presenters, artists, actors-again, the figure is about 13,000, and that will depend on and change with the kind of activity in the BBC. At the moment, with the diamond jubilee and the Olympics, you can expect that number, when you see the figures next year, to be slightly higher.

Q24 Chair: I want to ask about one category in particular but, to give me some idea, out of the 12,000, how many people do you employ totally? What proportion of your total work force is employed? That is what I am trying to get at-accepting that it will be a crude figure, but a lot of your figures are approximates anyway. How many do you employ who are not talent? How many are on your books?

Zarin Patel: We have in full-time employment, and disclosed in our annual report-

Chair: Some of them may be part time but on the books.

Zarin Patel: Of course, but full-time equivalence is what I meant. We have about 20,000 people in the public service, which is the World Service, BBC Monitoring and the BBC-

Q25 Chair: That is not talent.

Zarin Patel: That is not talent; that is staff such as me and David.

Q26 Chair: Crudely, a third of the people you employ are not on the books.

Zarin Patel: They are freelance workers. In our industry, this has been a pretty standard model for a long period of time. Again with the Committee’s indulgence, it is worth explaining why freelancers are important to the economics of the BBC. You will know that the BBC has to commission programmes from the independent sector. In television, 40% of our programmes currently come from outside the BBC. In radio, it is 20%. In online, it is 30%.

Q27 Chair: No, let’s stop for a minute, because if you have a contract with an independent company to produce a programme, that is completely outside the remit of what we are looking at.

Zarin Patel: You are completely right.

Q28 Chair: It is pretty shocking that a third of those who are not appearing on radio or television, but who are employed by the BBC, are not paying income tax through PAYE.

Zarin Patel: I must assure you that nothing we do is designed to avoid tax.

Can I just go back to the point that I was trying to make, which is not about independent production companies? In one year, a drama may be produced by the BBC, and the cameramen, the director, the writer and the actor will be on freelance contracts working for the BBC. In the next year, that commission may be won by an independent producer and we would not need those staff. If we employed everyone on a full-time basis, the BBC would be carrying a lot of staff who were doing nothing. So what the BBC does, particularly in television, is to have its fixed and permanent staff base at the level of the in-house guarantee; 50% of our TV programmes are guaranteed to in-house production. When we win a commission from an independent company or in the WoCC-the window of creative competition-we use the freelance market to staff up and staff up very rapidly. That therefore means that the value for money for licence fee payers is assured. That is a really important issue in the BBC.

The other issue, of course, is that a lot of cameramen, make-up artists and craft editors work across the industry on programmes, and they will go where the programme is made, rather than stick with one broadcaster.

Chair: Okay.

Zarin Patel: That is an important aspect of the model.

Q29 Chair: We could quarrel with that, but let me just deal with one other issue. How many presenters do you have in total at the BBC? I am not looking for names.

Zarin Patel: We have 148 presenters in news -

Q30 Chair: Earning over £50,000? How many presenters in total?

Zarin Patel: In total, we have 148 presenters on long-term contracts through service companies. In the table that we have provided-

Q31 Chair: How many presenters do you have at the BBC? How many presenters do you employ at any one time?

Zarin Patel: 148.

Q32 Chair: No. Those are on personal service contracts. How many presenters?

Zarin Patel: 467.

Q33 Chair: And how many of those 467 are on the books?

Zarin Patel: Of the 467, 148.

Q34 Chair: Out of the 467 presenters, how many are employed by the BBC and pay PAYE tax and national insurance contributions?

Zarin Patel: It will be about 320. So 320 are on staff contracts, and 148 are on long-term contracts through service companies.

Q35 Chair: It is quite interesting, because you say in your first bit of written evidence: "We are not aware of any instance where someone who is eligible to be a staff member has requested this status and has been denied it." Well, as is usual when we come to do these inquiries, I have had a number of approaches from people who work in the BBC, and somebody who has been a presenter with the BBC for over 20 years was told that he had to go off books and into a service company and was told that he would not be employed unless he did so. When he asked for that to be put in writing, that was refused. That’s the first thing. What comment do you have on that? I have absolutely no reason whatsoever to think that he was telling me anything other than the truth.

Zarin Patel: I appreciate that, but I am not aware-we have checked with all our line managers to ensure that when people ask to be on staff contracts, we review their position. If they are in full-time employment-

Q36 Chair: I do hope that you are being full and frank with us this afternoon.

Zarin Patel: I am absolutely being full and frank with you, Chair. We are not aware of any-

Q37 Chair: He works full time for the BBC, has no other employment and has been on his contract for probably getting on for 20 years. He goes on to say that he was told by the person with whom he was negotiating, "Don’t worry. If you have a service company, HMRC is much less likely to investigate you." That is what he was told by the person who employed him.

Zarin Patel: That would be completely unacceptable.

Q38 Chair: I think we’ve got somebody called Stephen Mitchell.

Zarin Patel: We will follow that up, because we take this seriously. Again, I must emphasise that nothing we do is designed to avoid paying PAYE and NIC. As you know, the IR35 legislation is pretty strong in this area. The BBC makes sure that all of its tax processes are properly reviewed by HMRC. In addition, annually, just like any employer, we give HMRC details of every single personal service company, every freelance contract and every self-employed person.

Q39 Matthew Hancock: What is the justification for the 147 people who have been paid long term? This is not short term, as in local government.

Zarin Patel: It is custom and practice that presenters in our industry-this is not just the BBC, but ITV and Channel 4-are on long-term contracts through service companies.

Q40 Chair: The BBC is funded by the taxpayer through the licence fee. That is a completely different set of circumstances, which makes it utterly unacceptable for anybody to be on a contract that in any way avoids tax.

Zarin Patel: I emphasise that the processes we use and IR35 should not result in any loss to the Exchequer.

Q41 Chair: This individual has been on this sort of contract for between 15 and 20 years. When he attempted, yet again, with the support of an adviser, to get back on the books and pay his proper PAYE, he was told that he would have to take a substantial pay cut.

Zarin Patel: I cannot comment on that individual’s circumstance, because I am not aware of it.

Q42 Matthew Hancock: Hold on; there is an inconsistency in two of your answers. You have just said that IR35 means that you do not avoid any tax through using personal service companies. Is that correct?

Zarin Patel: Yes.

Q43 Matthew Hancock: Why do you use them, then, other than to ensure that you pay less tax?

Zarin Patel: That goes back to the point I made about freelancers being a big part of our work force. When it comes to presenters: first, it is custom and practice; but, secondly, as the BBC’s needs-

Q44 Chair: It is common practice-where?-not in the public sector. We all think it is unacceptable in the public sector for people funded by the taxpayer not to pay their fair dues. That is unacceptable.

Zarin Patel: I am going to emphasise-

Q45 Mr Bacon: Can I just distinguish? You gave, I thought, a fair characterisation of the structure of the industry and why you have the staff levels that you do, given the obligations placed on you to farm out work commissioned and provided by independent production companies in television, radio and online. You gave a good example of a drama that may be commissioned by the BBC or commissioned by somebody else and published by the BBC, as it were, which is something that we can easily understand, whether it is an actor, editor or cameraman. There are lots of situations where that could be seen to be the right thing to do. Presumably, if an independent production company won the same drama, those folk, or many of them, would go to work for the independent production company. That is easy to understand.

Your justification in relation to presenters was that it is custom and practice-in other words, "We have always done it that way"-but if you are presenting for the BBC year in, year out for many years, you are not simultaneously, in the ordinary course of business, being a presenter for Sky or ITV, are you?

Zarin Patel: No, but people have outside earnings as well.

Q46 Stephen Barclay: Let us come on to that, because you are quite right that each case is judged on its own merits, but looking at the BBC contract, one of the impediments to people working elsewhere is that the contract prohibits them, as I understand it, from doing similar work within the UK. So there are quite strict controls. When you say, "Well, someone is freelance because they are doing a job with the BBC and a whole load of other things," but, actually, within the contract you restrict the work they can do elsewhere. Do you also, within the contract, restrict whether someone else can provide the services? In other words, the right of substitution-do you apply that within the BBC contract?

Zarin Patel: David, will you answer that?

David Smith: It would be for the editor of the relevant programme to determine the appropriateness of anybody who was put forward.

Q47 Stephen Barclay: The contract is cleverly drafted, and, clearly, it has been drafted with a degree of ambiguity. For example, clause 13.1.1(a), on termination, states, "If the contributor is unable personally to provide the services". Clause 3.1 also refers to the personal nature of the services. Of course these things would have to be looked at on a case-by-case basis. But what is unclear to me is this: if this contract does not allow substitution-so it has to be that person who provides the service-if the payment is made a month in arrears, in essence it is the same as paying salary. It is along the same lines. If you limit the ability to work outside, or that limit is so strictly defined that, while you can go and work in some far-flung country, in essence it is restricted within the UK; and if it is silent on control and yet logic would suggest that there is a degree of control in the way people work, does it not look as if the terms of employment are there, even though you are calling it something else?

David Smith: I accept what you are saying. This is not an easy answer to give. HMRC themselves have recently issued guidance on determination of IR35 and the examples they have given are not dissimilar to control and length of service. The document that they issued in May gives a number of examples that are not dissimilar to our type of contracts.

Q48 Stephen Barclay: So what I’m saying is that HMRC issued guidance that said the sort of things you should look at are the following-but it is always on a case-by-case basis. But those four tests I read out, along with control, are in essence the five key tests, as I understand it, which, if they are not satisfied, would strongly point to employment rather than a contractor. Your contract seems to entail all five.

David Smith: I accept that. But as I say, the guidance that they give and the examples that they give highlight that it is not as straightforward as you suggest.

Q49 Chair: I am a bit puzzled. If you accept that, are you accepting that you are offering contracts that are not in compliance with the law?

David Smith: No, no, not at all. The guidance and the examples given by HMRC in their own publications are very much in line with the sort of clauses that you took about. These examples don’t give a clear decision. What they do is to grant for the individual the rules under which they can get clearance, be that in or outside IR35.

Q50 Stephen Barclay: But it would depend on the facts of the case. I appreciate that it depends and one would have to see. We are not given the information to see, unfortunately, because it is confidential. But for example, if someone’s hours are fairly defined and they are not free to come and go as they please, if they are not free to allow someone else from their consultancy service to substitute for them, these are the sort of indications from which HMRC would conclude that they are operating as an employee. What I am pointing to is that if you look at your contract there is some ambiguity around financial risk and intention of the parties, where it looks neutral; and provision of equipment at clause 7.2 could lead towards self-employment; but it looks as if there are a number of factors within this contract that point to, in essence, these people being employed. I don’t get a sense of the extent to which your compliance department, the BBC Trust, or someone reviews these to look at whether these people are being employed or whether HMRC, which we will come on to, are reviewing to see whether these are, in essence, employment contracts.

Zarin Patel: Let me explain that. As the BBC senior responsible officer on tax matters, I annually have to certify the BBC’s compliance with all due tax processes. So every one of our tax processes is properly documented and reviewed by HMRC to ensure that the BBC is paying the right tax at the right time. In addition, as I said before, we ensure that HMRC annually in our return have details of every freelance contract; self-employed sole trader or a personal service company; the name of the individual; the name of the service company; all fees, expenses and VAT paid by the BBC to those companies. In this way, HMRC have complete visibility to monitor service companies. In addition-

Q51 Chair: Are you, as the employer, completely satisfied that in issuing these thousands of contracts you are complying with the law?

Zarin Patel: Yes, I am. We also put a very strict legal obligation on those on service company and freelancer contracts to ensure-

Q52 Chair: No. You put the obligation on either HMRC or the individual, and the individual with whom I talked felt really bullied by those obligations. I am anxious to establish whether you, as the employer, feel completely satisfied, with the contracts of all these presenters, producers, directors or whatever-many of them the face of the BBC-that you are working within the law.

Zarin Patel: Yes, I am. Nothing we do is designed to avoid tax.

Chair: Goodness!

Q53 Fiona Mactaggart: I was ready to ask you for a list of these people. I am grateful that you have produced a list. It seems that, if you compare the list of job roles and how they are paid that you have issued with the one the Government have put on the Treasury website, there is one very important difference that goes to the heart of what the Chair is talking about. On the Government website, there is a column that refers to engagement length, which in these cases is between nought and six months, and in some cases four to five years. If the Chair is right that there is someone who has been on a personal service contract for decades, that seems to breach the intention of the legislation. Can you provide the Committee with a further column to the data that you have helpfully given us that says specifically the length of employment of people in these roles who are on personal service contracts?

Zarin Patel: Yes, I am sure we can do that.

Stephen Barclay: I think the key is not just how long that the current PSC is, but how many they have had over a period of time; obviously, if in essence you are churning the same staff.

Q54 Chris Heaton-Harris: You have 140-plus long-term staff on this sort of contract. Mr Barclay has identified that the contract is pretty much the same as a full-time employee’s contract in terms. Mr Hancock has identified that essentially they should be paying roughly the same amount of tax. Mrs Patel, you have just said that the BBC ensures it pays the right tax at the right time-I think that is right. Could you tell us what the average tax rate is that these individuals are paying?

Zarin Patel: I am not sure that we would have that information. David, can you comment?

David Smith: We provide HMRC with all of the fees that we pay to them, but what we do not have is the knowledge of any other income that they have.

Q55 Chris Heaton-Harris: So you can’t actually identify that they are paying the right tax at the right time.

David Smith: We provide HMRC with all of the details of what we pay them. We couldn’t comment on any other income that they have got; whether this is an instant of a far bigger trade that they may be running. It is simply not the information that we have.

Q56 Chris Heaton-Harris: So you are completely sure they are paying the right tax at the right time, but you can’t identify what they are paying, so you can’t give us a rough estimation. Most service companies are set up a bit like-excuse me for being slightly partisan-the Ken Livingstone thing, where you pay yourself dividends and pay as little tax as possible.

Zarin Patel: Let me explain our tax process. Our tax process will look at whether someone is a full-time employee. All of our ongoing employees are not on service companies. So that would be rule one.

Q57 Chris Heaton-Harris: I think we are talking about the 140-plus.

Zarin Patel: I understand that. If you take the example of the news presenter that the Chair talked about, we will look at what the employment pattern is. We have very strong rules to determine whether they are on employment or freelance contracts or personal service companies.

Q58 Chris Heaton-Harris: I am sorry; the point I was getting at is that you have told us that they pay the right tax at the right time. You can’t honestly say that can you?

Zarin Patel: Our processes are designed to ensure-

Q59 Chris Heaton-Harris: Can you guarantee to me that the 140, whatever it is-143, 148-on these contracts, are paying the right tax at the right time?

Zarin Patel: I strongly believe they would be, because their contracts clearly-

Q60 Chris Heaton-Harris: We have moved from definitely guaranteeing to strongly believing. I don’t think you can.

Zarin Patel: Well, I cannot in terms of their personal tax affairs, but the processes that the BBC puts in place and follows and that HMRC has reviewed are designed to ensure that the right tax is payable. Of course, I can’t pierce the veil of personal financial companies to ensure that they are doing that.

Q61 Mr Bacon: Indeed; you can’t pierce that particular veil, but there is something else that you can do. Do you send HMRC a list of people to whom you have made payments, which has the total sum of payments that have been made to that individual attached to it?

Zarin Patel: Absolutely.

Q62 Mr Bacon: You do? So it is then up to HMRC whether it tracks back and investigates, but it has, from you, the information that it needs to do so.

Zarin Patel: Exactly.

Q63 Matthew Hancock: Following on from that question, you just said that all your ongoing employees pay the full amount of tax.

Zarin Patel: They wouldn’t be on personal service companies; they would be full-time employees of the BBC.

Matthew Hancock: If they are ongoing employees-

Zarin Patel: We have a strict rule that says if you are an ongoing employee in a permanent role-I am in a permanent role, as is David-you cannot be on a personal service company. In addition, if you have any financial and budgetary authority, you cannot be on a personal service company. If you are directing the affairs of the BBC, you cannot be on a service company.

Matthew Hancock: That would be illegal, so that is hardly surprising. Carry on.

Zarin Patel: And the last one is leading significant teams of people, so none of those people who have permanent, ongoing roles in the organisation will be on a personal service company, including interim directors.

Q64 Matthew Hancock: Those criteria match the law, so I am very glad to hear that they are similar, at least. Ongoing employees, as I understand it and as it is reasonable to understand, means people who are employed by the BBC for a long period of time. How long is the longest period of employment for somebody on a personal service company?

Zarin Patel: I do not have that information to hand, but we will be able to-

Matthew Hancock: You don’t know?

Zarin Patel: I said that I do not have the information to hand, but we will provide it to the Committee.

Q65 Matthew Hancock: Thank you. Could it be more than five years?

Zarin Patel: I suspect, on average, not.

Q66 Matthew Hancock: No, I did not ask for the average; I asked for the longest. Five years?

Zarin Patel: I wouldn’t commit. I would rather check and let the Committee have that information.

Q67 Mr Bacon: Indeed, to speak to Mr Barclay’s point, it is an issue of filtering out whether they have had several contracts, just to make each contract look shorter.

Zarin Patel: Yes.

Q68 Matthew Hancock: Following that, the Chair has had somebody approach her with someone who has been on one of these for 20 years, which seems to me to be an ongoing employee. Does that not seem to you to be an ongoing employee?

Zarin Patel: It does, and I think that it would be really important for that to be reported on a confidential basis. We have a confidential department that can-

Q69 Matthew Hancock: Okay, but I want to get on to this broader point: earlier, in answer to a question from me, you said that people on the service companies and people on PAYE pay the same amount of tax.

Zarin Patel: The effect of the legislation IR35 is to ensure that they do.

Matthew Hancock: They pay the same amount of tax.

Zarin Patel: They pay the same amount of tax-employer’s NIC, employee’s NIC and PAYE-and David can explain how the legislation works in more detail.

Q70 Matthew Hancock: Hold on-but you do not know how much tax people with personal service companies pay. You have just admitted that you do not know.

Zarin Patel: No, but the process we have designed-we work with HMRC to follow their guidelines really carefully-is to ensure that we put ourselves in a position where we can be sure that personal service companies are used appropriately in the first instance, and then we ensure that HMRC have complete visibility of each payment to each individual for each engagement, to make sure that HMRC can properly monitor the use of personal service companies and apply the deemed IR35 payment, should it be like an employment.

Q71 Matthew Hancock: And when you said that they pay the same amount of tax, do you include national insurance with that?

Zarin Patel: Yes, we do.

Q72 Chair: You don’t pay national insurance contributions for them, do you?

Zarin Patel: No, but the service company would have to as though they were in employment.

Chair: But you do not.

Q73 Matthew Hancock: The service company would pay the employer’s national insurance as well as the employee’s national insurance.

Chair: But the BBC wouldn’t.

Zarin Patel: Typically, a freelance contract will be at a higher rate than someone on full-time employment, because it takes account of the fact that the personal service company will pay employer’s NIC, PAYE and pension as well. So, from the BBC perspective, there is no real saving.

Q74 Matthew Hancock: Okay. Help me get to the bottom of this. Either there is no benefit at all to using a personal service company, or people pay less tax if they are employed through a personal service company. One of those has to be true, right?

Zarin Patel: In my judgment, the IR35 anti-avoidance legislation is very strongly crafted, so that if you work through a service company, on an employment-type contract or quasi-employed, you will pay the same amount of tax.

Q75 Stephen Barclay: The liability is with the individual to pay the right amount of tax, but if the impression is that they are working for more than one party, which is the rationale for being on the personal service company, they will be saying that IR35 does not apply. Therefore, to come to Mr Hancock’s point, they will be paying far less tax; whereas what you are saying is, assuming that they are not working for any other parties through the PSC, they would not. But the whole point of them being on the PSC is in order to say that IR35 does not apply.

Zarin Patel: No, I don’t think so.

David Smith: No. HMRC themselves grant a ruling in advance of everything. It is very clear in the documentation. From a personal position, if somebody wants to get a ruling determining whether or not the BBC in isolation is caught within IR35, or if you look at their affairs in the round and they are outside IR35, they can get a very clear ruling in advance.

Q76 Chris Heaton-Harris: These 148 are essentially your better-paid presenters, aren’t they? What a personal service company allows you to do is to pay them a slightly bigger premium, so you are competing against the other companies out there and you actually pay less national insurance yourself. It is a win-win all round, isn’t it?

David Smith: Not really. It is a flexible model. The people we are talking about, generally, within the industry would be people who regard themselves as working and sell their services on a freelance basis.

Q77 Chair: Let me put this to you, because it seems to me, having had this conversation, that there is no advantage in what you allege to the individual, because the individual will pay their national insurance and tax. There is an advantage to the BBC-this is building on what Chris said-because you save yourself your own employer national insurance contributions, you save any sickness pay, you save holiday pay and you save pension contributions. Given that most of your income comes from the taxpayer through the licence fee, is it right that an organisation like the BBC should use these mechanisms, which may be lawful but are not morally right, either to avoid giving the individual their pension contributions and their sickness benefit, or to avoid giving your contributions back to the state through NICs? Is it right?

Zarin Patel: Of course it is not right, but the BBC does not do that. Typically, a freelance contract rate will be higher than for an employed presenter because of exactly the things you talked about.

Q78 Chair: But you avoid paying employer national insurance contributions. On that basis, if somebody is on a personal service contract, you are not paying your bit of the tax due from your organisation back to the Treasury to be used to fund much-needed services for the community.

Zarin Patel: Typically, when you check freelance rates, you will see that they are 25% higher than some of-

Chair: You are not answering the question.

Zarin Patel: I am trying to answer the question.

Q79 Chair: It is your national insurance contributions-you are not paying them.

Zarin Patel: But we are ensuring that through the service company, which is an important part of custom and practice in this industry, we follow due process. A freelancer will typically be paid far more than a member of staff.

Q80 Chair: Are you paying the national insurance contributions?

Zarin Patel: We are paying the freelancer an all-in rate, and as IR35 works properly they will pay it to the Exchequer.

Q81 Chris Heaton-Harris: So you are paying the freelancer some money for them to pay national insurance on?

Zarin Patel: Typically, if you pay a freelancer, you tend to pay a higher rate, because they have to pay their NICs and their pensions.

Q82 Chris Heaton-Harris: I have been a freelancer in my time, so I know exactly the contract you are talking about. The reason why you go as a freelancer is so that, as a presenter, you can therefore write for a British national newspaper and get paid for that as well. That is two employers, so they can be self-employed and therefore you can benefit from a better taxation rate. But what you are saying is, I think, technically wrong, because you cannot guarantee to anyone in this room that the bit of money that you are paying them-the 25% premium-is for national insurance, pension and other things. What it is, and I am happy for you to be much more honest about this, is a way of enabling the BBC to compete in a marketplace for presenters that are of a higher rate than you would normally get. If that is what it is, tell us, because that is great.

Zarin Patel: I really do not believe that is what it is. Let us take freelance presenters and long-term presenters. As the BBC’s needs change on a particular programme, we can change that contract really quickly. For example, you will see in our annual report this year that we have reported yet another drop in talent spend. We would not be able to achieve presenter salary and on-air talent spend reduction, by 25% in a year in some cases, if the freelance contracting model was not in place. Trying to change and reduce the costs paid on talent on employment contracts would be impossible.

Chair: But, Ms Patel, I have to tell you that all Government Departments employing people in a straightforward manner-paying their PAYE and their national insurance-have reduced their staffing, in some cases by a third, without having to use devious means and odd contracts. Looking at local government, probably even more has been cut there. You do not need to have devious means to do it.

Chris Heaton-Harris: It is very good of you to make the case for more employment flexibility in the labour market-a number of us around this room have been doing that for ages-but it is not necessarily what we are trying to drive at here. What we are partially worried about is the 148 individuals for whom you seem to be spuriously paying national insurance contributions. I very much doubt that the slice that you think is going to national insurance contributions in that contract actually goes to the Exchequer in any way, shape or form.

Q83 Mr Bacon: For these 148 on-air contributors or presenters, as you call them, for how long would somebody have to be a contributor before you thought that the right thing would be for them to be on the books, rather than being paid gross through a personal service company?

Zarin Patel: That is a good question. David?

David Smith: Again, I think it depends on the relationship that the individual has with the programme or how long we think the programme is going to-

Q84 Mr Bacon: Well, a news anchor-somebody who reads the "Six O’Clock News" or presents the "Today" programme, for example. I am just taking two examples; I am not trying invidiously to seek out particular programmes. A major news programme on television or on radio would be a good example. How long would somebody have to be on a programme like that before you would consider that the right thing to do would be to have them on the books?

David Smith: That is not something we have looked at internally-

Q85 Mr Bacon: Isn’t it? Surely, the HMRC rules, which you prayed in aid earlier, Ms Patel, require you to do that, do they not?

David Smith: No.

Zarin Patel: They require the service company to do that. In order to help the Committee, as we are giving you more information, perhaps we can analyse the 467 presenter contracts we have-with typical lengths and roughly what kind of roles they do-to illuminate this issue for the Committee.

Q86 Mr Bacon: Yes, although I am not only interested, to repeat Mr Barclay’s point, in the length of an individual contract, but whether it is then rolled over, repeated or renewed, so that it might end up being three or five contracts over five years or something.

Am I right in thinking that if you engage someone to read the news at 6 o’clock-the "Six O’Clock News"-you can control what they have to do? I am looking at a list of HMRC criteria. You control what they have to do. Is that right?

Zarin Patel: Yes. We can direct-

Q87 Mr Bacon: Do you control where it is done?

Zarin Patel: Yes, probably.

Q88 Mr Bacon: Do you control when it is done?

Zarin Patel: Yes.

Q89 Mr Bacon: Do you control how it is done?

Zarin Patel: Pretty much so.

Q90 Mr Bacon: So it is not merely, although this is the criterion, that you have the right to exert control-that is what is significant, not whether the right is exercised-but it is true in this case, for reading the news and for being a presenter, both that you have the right to exert control and that you actually do exercise that right. That is correct, isn’t it?

Zarin Patel: It is, which is why, of our 467 long-term presenters, over 300 are on staff contracts.

Q91 Mr Bacon: Because it is clear that you exercise control?

Zarin Patel: Yes.

Q92 Mr Bacon: If you have got a good case to put to defend your position, then let us hear it. I am not saying that the way you operate is necessarily wrong, although it sounds to me as though one or two of my colleagues may be thinking that. I want to hear the facts. As I said earlier, I thought that you gave a good characterisation of why the industry has a lot of freelancers.

David Smith: It is not a black and white situation, which I think is the position we are taking here. If you refer to the examples in HMRC’s document, even it talks about people with control-people with long-service contracts-and yet they fall outside some of the IR35 guidelines. Again, we do not necessarily have that level of information to be able to make that determination, but the control that you refer to is inherent in some of these contracts in here. We have to be able to protect the BBC from any exposure that may exist in a freelance contract. The service company arrangement is something that achieves that for the BBC.

Q93 Mr Bacon: The issue is, as you rightly say, not black and white. For us, the issue is within the grey: whether there are cases where a considered, balanced, objective view would say reasonably clearly that it should be one thing, but where it has turned out to be another thing, for reasons that mainly are to do with benefiting the individual through how much tax they pay, rather than to do with what ought to be the case. That is what we are interested in here.

David Smith: Yes; indeed. The anti-avoidance legislation is there to prevent that.

Q94 Stephen Barclay: Richard is right, and as you say, that it is not black and white, and each case would need to be looked at. Are you aware of any instances where HMRC has intervened and informed you that someone on a PSC is not meeting the criteria of that PSC?

David Smith: Not that far, no. I am aware that HMRC is reviewing a couple of PSCs, but I am not aware of the outcomes of those reviews.

Q95 Stephen Barclay: So not a single one has been challenged, to your knowledge, by HMRC?

David Smith: No. Again, it is not information that would necessarily be shared with us in the BBC. It is information that is personal between the PSC and HMRC.

Q96 Stephen Barclay: Can I clarify something, Miss Patel? You said that no one in a senior management role is on a PSC, or in a significant management function. Is anyone exercising a management role who is on a PSC?

Zarin Patel: Absolutely not. After the Alexander review, we reviewed all of our current 3,000 service company arrangements to ensure that that was not the case. As a result of that review, we put two people in our BBC training facility on full-time employment contracts. They were not senior managers at all, but project managers on a training project. We felt that there was an ongoing employment position, and therefore we put on them on PAYE.

Q97 Stephen Barclay: Just in terms of understanding this grey area, why were they on PSCs to start with?

Zarin Patel: They were initially brought in as interim project managers on a training project that we had. They were both very successful, so we kept extending their contract. We felt that that was kind of an ongoing role and that they should come on employment.

Q98 Mr Bacon: Can you remind the Committee about the reason why you had to do the Alexander review?

Zarin Patel: We felt that it was good practice to review all of our arrangements because there was public concern.

Q99 Mr Bacon: Even though he did not specify that it included you? You just thought it was good practice anyway?

Zarin Patel: We thought that it was good practice to do it.

Q100 Mr Bacon: What about further back? Was it the case in the past that senior managers were on personal service contracts?

Zarin Patel: I’m not aware of any. I think the BBC has some history-

Q101 Mr Bacon: But there was a rumour that was mentioned in the press-I have no idea whether it was true or not-that John Birt, when he was director-general, was on a personal service contract.

Zarin Patel: That was what I was going to say. The last time this happened to us was with the previous director-general.

Q102 Mr Bacon: Was that correct? Was he on a personal service contract?

Zarin Patel: I believe he was. I was not at the BBC at the time.

Q103 Mr Bacon: No, but you are now the finance director, and you are speaking here for the BBC. Does anybody in the room know if he was on a personal service contract?

Zarin Patel: I believe he was, but I was not at the BBC at the time. I think it was quite public at the time. It was then that the BBC changed its rules about senior managers not being personal service companies.

Q104 Chair: Just a final question, because we have probably been around the houses: in view of what is clear public concern that an organisation like the BBC may be employing mechanisms to minimise its expenditure and therefore its contribution to the Exchequer, as well as minimising the contribution from its employees, either permanent or temporary, are you intending to review your current use of personal service contracts, particularly in the talent group? We focused on presenters.

Zarin Patel: With the amount of public concern expressed today, I think I have to say, "Yes, we will review it." We will review it with real seriousness. Can I emphasise that none of this is designed to avoid tax? That is not why we use an extensive number of freelance contracts in the BBC.

Q105 Chair: Can I just put it to you that a lot of the people that are on these contracts are the faces of the BBC, so to pretend that they are anything other than pretty permanent features on our television screens and on the radio is a bit naive?

Zarin Patel: We understand the Committee’s concerns.

Q106 Stephen Barclay: If you are going to review it, could you just indicate the time scale and confirm that you will write to the Committee with the results of that review?

Zarin Patel: Of course.

Chair: Thank you very much indeed.

<?oasys [np[pg6,cwe1] ?>Examination of Witnesses

Witnesses: Sir Nicholas Macpherson KCB, Permanent Secretary to the Treasury, Lin Homer, Permanent Secretary to HM Revenue and Customs, Howard Orme, Director General Finance, Department for Business, Innovation and Skills, and William Hague, Executive Director of HR Policy, Efficiency and Reform Group, Cabinet Office, gave evidence.

Q107 Chair: Welcome to you all. The first thing the Committee would want to do is acknowledge the promptness with which people, particularly Ministers, responded to the revelation that there was a problem in the civil service with people who were basically full-time employees but were being paid through personal service companies. There is-this point is really to you, Nick-general support for the work that has been done in Government since this was first revealed by a journalist.

I am quite interested in the history of it, because, looking at your review, it looks like 15% of senior civil servants ended up being on these service contacts, which is a heck of a lot. Some 1% were on these contracts for more than 10 years, some 40%-that is more than 900 people-were on them for more than two years and some 120 were non-IT specialists, so it was not all an IT issue and, as some 70 people were earning more than £1,000 a day as well, a heck a lot of it was happening. How come it went on undetected? Can you give us an idea of how on earth this ever happened?

Sir Nicholas Macpherson: I think that the report is a wake-up call to all of us, and I shared your surprise. I would not compare the numbers with the numbers in the senior civil service, simply because the people in the senior civil service get paid more than £58,000 a year and on top of that they get a pension. If you are employing someone on a short-term consultancy project, there are good reasons-market reasons-why you might give them a higher payment per day than a permanent employee; but, nevertheless, it was the long-term nature of some of these arrangements that I found worrying. I think some of this is a hangover from the culture of employing consultants on a large scale. It started under the previous Government, but you will recall that there were progressive clampdowns on consultancy spend, which culminated with the current Paymaster General, Francis Maude, putting in place quite strict controls.

I think that that was necessary, because what has tended to happen is that at the point that these people were taken on to Whitehall’s books, some people thought-in some cases, they clearly did not think about this-about the wider implications around their tax affairs and so on, but what is disturbing is that the arrangements had clearly not been reviewed. There are some, I think, who have been employed under these arrangements for 10 years or more, and that to me is very odd indeed because-I think Lin has sent you a very useful note setting out some of the criteria which-

Q108 Chair: But over 900 had been in for more than two years. It shocked you; it shocked us, but what I am trying to get underneath is, why? Why did it happen?

Sir Nicholas Macpherson: I think the lesson of this is that you would think, if someone was being employed on that basis, there would be regular reviews or Departments would have in place systems which would say, "Hang on a second, this person’s now been employed on this basis for more than a year; we must stop or review it." What came out of the review for me was that if that was going on, it did not seem to be very effective. Before I start criticising other Departments, if you look at the data, the Treasury has some people employed on this basis.

In the case of the Treasury, I have had assurances that everybody has paid the right tax, but nevertheless I am uncomfortable with the number. It is striking that, even since the review, the number of people being employed or contracted on this basis has declined by 10%, I think, which suggests that the mere fact of the review has had an effect. I would expect that the Chief Secretary is going to-a year on we are going to have a follow up report, and it will be really interesting to see whether those numbers have come down further.

Q109 Chair: You are slightly evading my question. Let me ask you, perhaps more specifically: the Treasury authorised the appointment of the chief executive of the Student Loan Company-why?

Sir Nicholas Macpherson: Looking at the individual case of the chief executive of the Student Loan Company, I think this is one of those catalogues of errors.

Q110 Chair: Why did you authorise it?

Sir Nicholas Macpherson: The Treasury was initially consulted about whether it was possible to have an accounting officer who was employed as a consultant. The answer to that narrow question is, "Yes, you can have an interim head. You could have an interim employed through an agency." We failed to ask, "Hang on a second, what does that mean for the tax affairs?" I have looked at the advice the Chief Secretary received. At that time, there was an urgency to get someone doing that job, but no one in the Treasury had identified the tax issue. It had been drawn to our attention that the proposed form of employment was value for money, but we should have challenged that, because if you look at managing public money, which I do regularly-

Q111 Chair: You are in charge of HMRC.

Sir Nicholas Macpherson: Exactly. If you work in the Treasury, from the moment you join, if you work for a spending side, you know that in taking a view on value for money you need to look beyond the narrow interests of the Department to the wider public sector, which involves taking into account tax as well as the expenditure. We should have picked that up, but we did not. We did not draw it to the Chief Secretary’s attention, and so there are lessons for us.

Q112 Chair: You made a mistake.

Sir Nicholas Macpherson: We made a mistake.

Q113 Chair: So who is responsible? Presumably, you must have authorised other appointments of the same nature. Have you?

Sir Nicholas Macpherson: It is quite a recent innovation that the pay of chief executives goes to the Treasury; traditionally, this has all been devolved. When the new Government came in, it decided to adopt a policy where nobody could be paid more than the Prime Minister, without the agreement of the Chief Secretary, so this package came to the Treasury in that context.

Just to be clear on responsibility-and we have this discussion from time to time-the Treasury cannot police every individual pay contract in Whitehall. The framework we have is that the Treasury appoints an accounting officer, who is responsible for the principles of managing public money. In this case, I appoint, I think, Martin Donnelly as the accounting officer for the Department for Business. It is then down to him to satisfy himself that the pay arrangements in his Department are consistent with the principles of managing public money. Obviously, if something comes back to the Treasury, the Treasury has the responsibility for getting it right. As I said, in this instance, the Treasury failed to ask the right question, and I very much regret that, but it is the responsibility of the Department, and indeed Howard Orme is here representing the Department, to take a view. No doubt, BIS took a view-

Q114 Mr Bacon: Can I come in on this point? I completely accept your point, Nick, that ultimately-perhaps that is the wrong word to use in this context-but the principal responsibility in the first instance rests with the Department. Mr Orme, in this case, what happened is that BIS campaigned to get the decision it wanted, didn’t it? It looked at the situation and did not like what it saw, so it campaigned to get approval for it to be done off-payroll? That is right, isn’t it?

Howard Orme: Can I draw back? I will answer that question. Reading through the FOI has been very revealing for me to see the sort of issues that have been going on, and we will use this as a case study in how we should do this going forward-

Q115 Matthew Hancock: How you should do it.

Howard Orme: How we should do it, yes.

Q116 Mr Bacon: You mean you should campaign more vociferously or more successfully.

Howard Orme: Tax issues in these types of complex arrangements should be properly understood, and certainly we must not give the impression of or actually be party to tax avoidance measures, which clearly was unacceptable. I say that-

Q117 Mr Bacon: In fairness, Mr Orme, HMRC has managed to be party to significant tax avoidance through it is own property portfolio, but we will let that pass for now. Mr Orme, are you going to answer my question?

Howard Orme: I was going to say that there are two elements to this. One was the initial interim appointment-

Q118 Mr Bacon: And then there was when it stopped being interim, and it became a fixed-term contract.

Howard Orme: And the conversion to a fixed-term appointment.

Q119 Chair: Although he is now leaving, I understand.

Howard Orme: He will have completed his fixed-term appointment as planned, and we can go through a measured process to replace him. The issue at the time, as the Committee well knows because you have looked at it forensically-

Q120 Mr Bacon: We had him in front of us, and I asked him how many days a week he did. He said five.

Howard Orme: The Student Loans Company needed decisive and fast action on leadership. The way to do that was through an interim CEO, and I suggest that that was a successful process. We brought the right person in, at speed, and he began to turn the company round. Part of the arrangements, as well as being required to get that to happen, was to meet the agency’s requirement that we dealt the matter through it. As Lin outlined, one of the motives for having personal service companies was to work with the agency.

We also had to get a package that my colleagues in the Treasury and Cabinet Office were happy with and we thought was value for money, so there was negotiation down from £260,000 to under £200,000. The reason why I and BIS were involved at that time was that the chair of the Student Loans Company and the CEO had resigned, so BIS had to step into that void to get this appointment in place. That lasted for six months, and during that time the Student Loans Company, in a more measured way, went out to find a more permanent leader for the company. That process was free and open competition.

Chair: I think we know the history, Mr Orme. What we want to know is why.

Q121 Mr Bacon: Why did you campaign? That is what I am asking. You got advice-I can’t remember whether it was the company or BIS itself that asked KPMG for advice, but we all saw it on our televisions screens. The answer came back that this chap should be on the books. The BIS e-mails then said, "Do you know what? This is really unhelpful. I think we should try harder." That is the issue. You go out and get professional advice from one from the world’s leading accounting firms, and its advice is what you don’t want to hear, so you characterise it as unhelpful, and try again. That is what we don’t understand.

Howard Orme: Again, after reviewing the FOI trail myself after the event, because I was not seeing any of this, the original question to the KPMG-

Q122 Chair: We are not interested in the FOI trail; we are interested in the truth.

Howard Orme: The truth is this: the KPMG advice had a complication as to whether BIS was going to be party to this arrangement, because we had done the negotiation. When it became visible that that was the case, we were very clear that it had to be the Student Loans Company’s arrangement.

Chair: But you were complicit in that. This is awful.

Q123 Mr Bacon: Sorry, did you say that it had to be the Student Loans Company’s arrangement to keep it off the books, rather than yours?

Howard Orme: No, not to keep it off the books.

Q124 Mr Bacon: To keep it as a personal service company.

Howard Orme: No, the appropriate arrangement for having a CEO in one of our businesses is for the arrangement to be with the Student Loans Company, not the parent Department. Once that was clarified-

Q125 Stephen Barclay: An employee would be employed by the Student Loans Company as well.

Howard Orme: Yes. You were asking whether we campaigned because we did not like the advice. The issue was that the advice was not on the arrangements that were intended. The arrangements that were intended were to be between the Student Loans Company and Penna and, therefore, Ed Lester.

Q126 Mr Bacon: So you are admitting that you were poor commissioners of advice. You bought advice that was not the advice that you wanted.

Howard Orme: In the end, the advice was given. When the second set of advice came in, which was on the brief that was given, then that was clear.

Q127 Matthew Hancock: Are you saying that the difference between the two pieces of advice was because KPMG thought that it was not okay to employ through a personal service company when BIS was involved, but it was okay when the person in question was hired directly by the Student Loans Company for five days a week, full-time, and all the rest of the clauses that we know about? That seems implausible.

Howard Orme: As I have read the advice-I am not a tax expert-there is confusion in there as to the exact arrangements that were going to be in place. The arrangements would be for the Student Loans Company to contract for its CEO on an interim basis-

Chair: Could you answer Matt’s question?

Q128 Matthew Hancock: Are you saying that the first piece of advice received from KPMG said, "You cannot use a personal service company in this case,"-or rather "ought not to" as it was advice-and the reason that changed was that BIS were no longer involved in the employment?

Howard Orme: Look, this whole structure was evolving as this was going through. We did not know how we could bring in an interim CEO on this basis. That is why you can see quite a long and complicated exchange of e-mails in the FOI. This was problem solving: how do we manage to get an arrangement that Penna will find acceptable, that is acceptable for tax purposes and that enables us to get Ed in quickly? That was the advice that we were trying to get.

Q129 Chair: Mr Orme, I put it to you that what actually happened was that you got advice that it was not acceptable for tax purposes to put Mr Lester on a personal service company arrangement. You found that advice-

Mr Bacon: Unhelpful.

Chair: Thank you. And you therefore deliberately sought advice and found a mechanism that you thought would make it lawful for him to be employed on a personal service company arrangement, thereby avoiding tax.

Howard Orme: Sorry, you are making it sound as if it was I who had done this-

Q130 Chair: I’m putting it to you that that is what happened. The first bit of advice was unhelpful, so you sought some more to make it helpful.

Howard Orme: The first bit of advice was that the Penna agency’s arrangements were unacceptable, so we could not get Ed in. It was my understanding that we needed to be able to have a structure that would enable us to deal with him.

Q131 Chair: If that was the problem, you could have just paid him more and done it in a legitimate way, so that he paid his PAYE and national insurance contributions.

Howard Orme: Look, what I can say about it-

Q132 Chair: You could have done that, couldn’t you? That would have been acceptable. He did not care about that. What he cared about was what he got in his pocket.

Howard Orme: No, I do not think that is the case. The motive for the personal service company was the requirement that he was working through the agency. That is what I believed to be the case.

Q133 Mr Bacon: This leads immediately to another question for HMRC. Why did HMRC, when eventually approached to approve what became the final arrangement, agree to it? He was plainly an employee. He had stopped being an interim. He had become an accounting officer and chief executive who was on a permanent-let me rephrase that-a fixed-term contract, not interim. Why did HMRC find within itself that that was appropriate to be paid for through a personal services contract, rather than an employment arrangement?

Lin Homer: Chair, I think what happened in this case is that a narrower question was put into our general advice system-you will know as well as any how many calls and letters we receive-which was a more limited question about what you do if you are using the skills of someone you are taking through an agency. Can you pay gross? So we confirmed-

Q134 Mr Bacon: I think it was specifically signed off in relation to Mr Lester.

Lin Homer: But this was not signed off in the sense of the customer relationship manager for the Department, this was a general question to one of our advisers-

Q135 Fiona Mactaggart: Why?

Q136 Mr Bacon: There was an e-mail from an HMRC tax inspector approving the tax arrangements for Mr Lester, as a chief executive and accounting officer with a fixed-term contract for two years, who was plainly an employee, to be paid gross through a personal service company. I just want to know why.

Lin Homer: If you’ll permit me to just explain a little bit about personal service companies. I have sent you what I hope was a useful summary.

Mr Bacon: It was.

Lin Homer: The simple position HMRC is in is that we want people to pay tax. Arrangements like this that use an intermediary-there are a number of types of intermediary-run the risk that tax will not be paid at the appropriate rate, so HMRC tries to put together tests. We have explained those tests to you. We take the view that the engaging organisation has to consider whether it is contracting for a service or for labour. If it believes it is contracting for services, then we put obligations on the provider of those services, either themselves to deduct PAYE and NI-to be honest, as tax authority, I don’t mind if I get it from the intermediary or the engaging organisation-and if at the end of a period they don’t, we will use IR35 to require a broadly equivalent1.

So to the simple question can I employ, in that very narrow sense, the correct answer was given. I think it is unfortunate that that did not take place in the richer relationship with one of our customer relationship managers. We have talked about those before. We have one for the BBC-who you had here earlier. We have one for the top 100 or so local authorities. In that circumstance you can give ongoing advice but although it looks obvious looking back, for that inspector on that day looking at a number of things, I have to say I don’t think it clicked quite what a sensitive-

Chair: I have to say that the only thing that seems a bit odd about that is that we saw at the time a lot of e-mail exchange-

Q137Mr Bacon: It did look like a campaign. I have one final question on this from, as it were, the other side of the coin. Ms Patel from the BBC confirmed that one of the things they then do is give HMRC in detail a list of the entities and people associated with them who have been paid these moneys. Do you then systematically and as matter of course, knowing that you have this list of people have been paid gross through personal services companies, go back and make sure that the right amount of tax has been paid as a separate process from the one-off business that would happen anyway of a person doing their tax return and it being looked at? Do you, knowing what you know, go a stage further to double check that the right amount of tax is being paid, or do you just accept that each person files a tax return and that’s that?

Lin Homer: No. Very much part of having a customer relationship manager is first of all, over time, to get the best practice we can in any large employer. We would much rather it was done right first time. But in drawing out information we will do checks, usually risk-based checks. There are a number of different types of intermediary. If we can see a number of people coming through an intermediary, and normal arrangements for PAYE and NI contributions through that, we will not necessarily go through every line. But if we can see an arrangement where it is not clear that the tax is flowing we will use that as an indication to conduct an investigation-

Q138 Chair: You said that, but we always face a problem. I appreciate that you cannot talk about an individual’s personal circumstances, but I get the person at the BBC telling me this story that they have for almost 20 years been forced on to a personal service company, and we get the case from the Student Loans Company, which to all intents and purposes appeared to us not to be a legitimate personal service company structure. We have an appendix, which I am not sure you have seen, although you probably helped put it together, which showed the number of investigations Revenue and Customs has done on IR35.

Lin Homer: Yes.

Q139 Chair: If you look at that, what completely took me by surprise is that in 2005-06 you did 2.3 million, give or take a bit, but by 2009-10 you were only doing 155,000 or by 2010-11 219,000. Why? This is clearly an issue, which okay the public has alighted upon, but why have you done so few investigations?

Lin Homer: I think the figures you are quoting are the tax yielded, not the number of inquiries-

Chair: Ah!

Lin Homer: The number of inquiries has substantially dropped-

Chair: It has dropped; yes, it has gone down.

Lin Homer: I do not know if I have seen exactly what you have in front of you but, yes, we did provide the information. I think the explanation would be that when this approach started and IR35 was brought in, there was a significant amount of work to drive home that we would pursue this one way or the other. I think in one year there were over 1,000 inquiries, whereas last year it was about 20-

Q140 Chair: In 2009-10 you did 12, in 2010-11 23-

Lin Homer: Absolutely.

Chair: But the BBC told us that they had-I cannot remember how many-thousands of these things.

Lin Homer: Two things are happening. First, I do not think that we have done enough compliance, but we are building up our teams and will do more. Secondly, there has been a deterrent effect from IR35. What that does not show you is how many people are paying PAYE through their agent firm; we need to be clear that not everyone working through a personal service company is not paying PAYE; many of them are paying it to the organisation they are being employed through. A number of others will be submitting an IR35 at the end of the year. So we think that there has been a deterrent effect, but we have got to give it a good go as well.

Q141 Stephen Barclay: No, no, because the point is, as you correctly say, that it does not matter whether the service company is paying it or the employer. But as we established earlier, and as Mr Lester’s case shows, there are elements of grey between those who are working for a number of parties, and those who are not and should be paying it.

Lin Homer: Yes.

Stephen Barclay: What the figure that you did just 12 reviews in 2009-10 and 23 last year shows is that you are not investigating that area of grey, to check whether the service companies are indeed paying it when they should be.

Lin Homer: As I said to the Chairman, we clearly need to lift compliance. We are achieving a certain amount through the deterrent effect of the legislation and a certain amount through the work we do particularly with big organisations. One has to give credit to the tax professional industry, which will stay abreast of what is happening, and many will be giving that advice direct to their clients. But we need to increase, and we plan to this year2.

Q142 Matthew Hancock: Absolutely. I am almost reluctant to read out these figures, in case reading them out undermines the deterrent effect. I understand why there was a bulge of investigations after IR35 was first brought in-1,016 in 2002-03 and 1,066 in 2003-04; but the idea that bringing that level of reviews down to 25 in 2008-09, 12 in 2009-10 and then, almost doubled, to 23, provokes any deterrent is extraordinary. When you say you need to increase it, to what sort of level?

Lin Homer: I might make you laugh again by saying that we already have plans to increase that tenfold-

Matthew Hancock: Okay, then you are starting to get serious.

Lin Homer: That is beginning to be serious, but we also have to look at the big employers and to do work with them-just as Nick has done on behalf of Government, to get better standards in bulk in places where these arrangements might be used. I do think that the conversations that we have with people about how they organise go alongside that, but I say for the fourth time that we need to increase compliance.

Q143 Matthew Hancock: You are planning to increase it tenfold?

Lin Homer: This year.

Q144 Matthew Hancock: Why did it fall so sharply?

Lin Homer: In all enforcement in compliance, you tend to go in waves.

Q145 Matthew Hancock: Was it because of the resource constraints?

Lin Homer: It was probably because we found other areas-we have discussed this with you on a number of occasions this year. We sometimes get focused on our best return for investigation. As we discussed with you the last time we were here, sometimes you have to go for lower returns to ensure that people are clear that there is nowhere to hide. What we are now getting is the need to keep that balance, and that is where we are at the moment.

Q146 Matthew Hancock: Were there resource constraints that led to this sharp reduction?

Lin Homer: I think there are always places to put your resources. As I said last time, I have £970 million of extra income from the Treasury. I am clear that if I spend that well-the Chair has quoted us getting at least a 10:1 return. I am clear that if you asked him now, Nick would confirm that if we could get that rate of return he would give me more money.

Q147 Matthew Hancock: Can you confirm that?

Sir Nicholas Macpherson: I am a humble official. It is not an issue for me.

Mr Bacon: You are an official anyway.

Q148 Matthew Hancock: Of the 23 reviews opened by HMRC in the last tax year, how many were into public sector bodies?

Lin Homer: I do not know off the top of my head. Obviously, even if it was all of them, it is not a very big number.

Q149 Matthew Hancock: No, but can you let us know? Private compliance with IR35 is important and one thing, but the taxpayer funded public sector, including the BBC, has a greater burden of responsibility to ensure that it is not avoiding tax.

Lin Homer: What I can tell you is that we have about 250 people working with central Government generally on tax issues-not all on this type of tax issue, but about 60 of those people are experts in this area. I am confident that we have been doing work in this area.

Q150 Matthew Hancock: The numbers show that you have been doing work. The question is whether the work is significant.

Q151 Chair: It would be interesting, given the conversation we have just had with the BBC, if you could give us a proportion of the BBC’s personal service contracts that you have looked at in detail.

Lin Homer: I will see if I can give you those. What I want to say is that when you look at the overall number of the people you are talking with-from local government, civil service and the BBC-there are usually at least three different types of arrangement. Some are employed. Where that happens, we will expect the engaging organisation to deduct tax. Some are employed through an intermediary, and in those cases, it is a relatively easy question for us to establish that they have a payroll and that people are flowing through that payroll. We do not necessarily have to go and tick off everybody concerned. There is a smaller number where there are indicators of higher risk, and those are the ones that we really need to go after with some vigour.

Q152 Chair: May I go back to BIS? In the Treasury report, there is a chart; BIS is a small Department. I do not know how many people are in BIS, but it is not that big.

Howard Orme: Ten times as many people work in the BIS family as work in the core Department, so it is a Department of about 27,000.

Q153 Chair: As big as that. Do you count everybody working in universities?

Howard Orme: No, not universities.

Q154 Chair: Right. You are the second highest Department-one would expect the Department of Health to be high-in terms of use of personal service contracts. A high proportion-about a third-have been on personal service contracts for more than two years. Why?

Howard Orme: I do not think that is personal service contracts, it is those who are off payroll. Of the 364 off payroll, there are 40 personal service contracts. It is a significant number.

Q155 Chair: Page 8, chart 2a, "engagement length by sponsor Department".

Howard Orme: Yes, that’s of the 2,400 off payroll; those are the proportions. I think you were-

Q156 Chair: So you are the biggest culprit, bar the Department of Health. Can somebody explain? It was a really difficult chart. Mr Hague, did you write this chart?

William Hague: I co-chaired the committee that looked at this.

Q157 Chair: Explain it to me. Did I misinterpret it?

William Hague: No, you did not misinterpret that BIS was second, but I think the point that Howard was making was that they were not all personal service companies. Of course, this includes people through other vehicles, intermediaries, agencies or maybe even self-employed who are in there as well.

Q158 Chair: Why do you use all those mechanisms? It is more than any other Department, other than the Department of Health, which we will come back to.

Howard Orme: In terms of the characteristics of our use of these, we are very similar to the average use when you look at the characteristics-length of service or anything else.

Q159 Chair: Why? Why do you use more?

Howard Orme: We use a lot of this because we have 60 partner organisations who are in delivery who are often in the IT delivery space. We also have the Technology Strategy Board, which has a particular use of specialism. Within the public service ambit, in the type of operations where these mechanisms are used, we just have more of them than most.

Q160 Chair: You have more people working in IT?

Howard Orme: For example, we have major programmes in the schools funding agency and the Student Loans Company-

Chair: Everybody has major programmes.

Howard Orme: -which are more in the delivery end.

Q161 Stephen Barclay: Is it because of the number of non-departmental public bodies that the Department has?

Howard Orme: Yes.

Q162 Stephen Barclay: Therefore, you are using this as a vehicle in terms of the management of those? Is that right?

Howard Orme: In terms of delivering specific programmes that they do. This type of work-

Q163 Chair: It seems from what you have just said that the Technology Strategy Board comprises a bunch of people who are highly paid. Is this a way of paying them more, without breaching guidelines on civil service pay? Is that what you are doing?

Howard Orme: I don’t believe it is. I-

Q164 Chair: You’re bound to say that, but it looks like that. Let me put it to you that your only explanation is, "We have the Technology Strategy Board." I think, Technology Strategy Board, right, that is a bunch of quite highly paid people. You want to get around Government controls on pay so you shove them into a personal service company.

Howard Orme: The Technology Strategy Board has 49 arrangements of this type.

Q165 Chair: Forty-nine? Why?

Howard Orme: They have unwound 11 of them and made 38 offers of employment to the others.

Q166 Chair: But why? You are not answering why.

Howard Orme: I am just saying that is the scale of the issue. The Technology Strategy Board was set up, I think, in 2007 on a flexible basis. The type of programmes they do come and go-

Q167 Chair: Why? Can you just answer why?

Howard Orme: They use a very flexible resourcing model. That is now being reviewed. We have accepted, and we have had the support of the chair and chief executive, and they have moved that model on to a more sustainable basis, and those are captured by the civil service controls.

Q168 Chair: Why do they use a flexible model? Why?

Howard Orme: Historically, because of the nature of the type of work they do, which is setting up programmes with business and making the transition of technologies into programmes. They are very programme-based. It is a bit like in IT; you put together a team that is sector-specific. If that flies, it flies. If it continues for a while, you do it, and then your priorities move. That was the original architecture. That has now moved on, as these programmes have themselves.

Q169 Stephen Barclay: Can I just check? Given the myriad arrangements you are saying are in place, have you paid or have any of those individual agencies paid for tax advice, vis-à-vis those arrangements?

Howard Orme: I cannot answer that question; I don’t know.

Q170 Stephen Barclay: Could we have a note within a week with the answer to that, please?

Howard Orme: I will endeavour to do that.

Q171 Meg Hillier: Is there any connection between at least some of these companies and the need for some individuals to have professional indemnity insurance so that, if there were a problem-whether in the Department or across Government-action could be taken against that? I understand-you may know more than I do-that it is harder to do that as an individual than through a company structure.

Howard Orme: I think that’s one of the papers that-

Lin Homer: I think there are sometimes legitimate reasons why specialists want to be part of a company, rather than to be on the books of the engaging organisation. HMRC uses a number of expert witnesses, so if there is a case on petrochemicals, we may want to hire a petrochemical expert. You will sometimes find that those people want to stay within a group specialising in their area. They may have insurance. They may in some other areas have particular expertise or equipment that they want to be responsible for. There may be good reasons for incorporating, and we would stress the advice to big employers that they need to make sure that those reasons are sufficiently good. Both Nick and Howard have indicated that the review has shown that people were probably being drawn into these arrangements without sufficient thought. But I think it is important to say that there can be good reasons for incorporation, and that such arrangements can lead to the right tax being paid. It is important to keep saying that, although I think we all feel that the outcome of the review and the focus on an even higher standard in those very senior echelons of the public sector is right.

Q172 Fiona Mactaggart: I don’t know if I am quoting from the same chart as the Chair, but in the Alexander letter about Departments that had most of these employees, one thing that strikes me is the Departments that have people in such roles for more than two years. That feels very close to abusive. Although the Home Office is not one of the biggest Departments in this regard, it is when it comes to the number of people who have been employed through personal service contracts or agencies for more than two years. I think it has the second highest proportion after the NHS, and I wonder why.

William Hague: If the Home Office were here, I think they would probably cite the number of their critical projects, such as caseworking projects, and say that although they would love to have individuals with specialist skills in the market on permanent contracts, they are simply unable to get agreement with those individuals with the niche skills that they require. That is what many of the Departments said during our review and gathering of data for the report. Although we would like people with niche skills such as IT architects, and project and programme management specialists to be brought in permanently, they prefer to work flexibly. Of course, it is fair to say that, with hindsight, when the right individuals were in, Departments did not work hard enough to move them off those contracts back into permanent employment in the Department.

Q173 Fiona Mactaggart: Isn’t there a big problem for the Government here? I managed to miss the statement earlier today on the Olympics because this Committee was meeting, but it seems to me that there is an example there, whereby the Government has turned to the Army to deal with a process that it had contracted out. We seem to be losing skills in the public sector, and we do not seem to have a sufficiently robust risk management method to make sure we keep those skills. We will need project management skills in the public sector. There is no doubt about that. If we want value for money, which is the job of this Committee, we need those skills to rest in the public sector so that we do not constantly have to buy them in. I want to know from one of you-I don’t know which of you can answer this-how you are going to remedy that.

Sir Nicholas Macpherson: Why don’t I go first? This is something we have discussed a number of times in the past. It is clearly in the public sector’s interest to build and retain capacity. We occasionally have small success stories. I have occasionally talked to you about the Treasury. If a bank were to collapse tomorrow-I hasten to add that I am confident that that will not happen-the Treasury would be far less reliant on investment bank support because we have built up in-house expertise. Even on the very low pay that the Treasury tends to offer its staff, we can retain staff by virtue of the interest of the job. Admittedly, we sometimes struggle, but we retain enough people.

One of the key planks of the recent White Paper on civil service reform, which was published a month ago, is precisely this: how do we build capacity? There are some good examples, through the Major Projects Authority, where we have developed and retained expertise, and very occasionally this Committee sees a project that has been managed well and comes in on budget and on time.

Fiona Mactaggart: You are quite right that that is very occasionally.

Sir Nicholas Macpherson: Yes. The challenge for the management of the civil service is to build on that. The easy option would be to get your cheque book out and hand out large salaries. Indeed, that would be one way forward, but I do not think that that would be acceptable to the public. We need to develop a pay system that is just a little bit more responsive to paying the really hard-to-retain people a little more. That is not about making them millionaires, but there are issues there. That probably does not give you total reassurance, but I want you to understand that civil service management takes this very seriously and is trying to come to a solution on it.

Q174Mr Bacon: Can I pursue that a little more? The National Audit Office faces this problem, because it trains chartered accountants. It recruits graduates and the Comptroller and Auditor General has told us in the Public Accounts Commission that there are issues for him and the NAO in retaining people, because there is a big market out there of chartered accountancy firms that can hire people, and audit firms and management consultancy firms that like trained people. There is a big flow of those people and to some extent the NAO has to be able to respond to that. There is also the question of what professional training you are offering. This may be a question for you, Sir Nick, or it may be for Mr Hague-by the way, I have been dying to ask you, are you the William Hague?

William Hague: To me, I am.

Q175 Mr Bacon: I am reassured. I want to know something, however. You have a finance qualification. It is very reassuring that in Departments now the vast majority of what used to be called principal financial officers-they are finance directors now-have a finance qualification too. You are in the HR sphere and are a chartered member of the Chartered Institute of Personnel and Development and it is plain, whether you are talking about finance or HR or legal, that there has been a growth in professionalisation, which is welcome. Either one of you or both can answer this, but are you taking a same approach to programme and project management, because there is plenty of evidence out there that it makes a difference?

This Committee, when we were recently in Washington DC, met with the Project Management Institute. We have met them over here. We also met the Association of Project Management. I am not prescribing or suggesting which route you should go down, although there might come a point when you decide that you should go down a route, but how far advanced are those discussions and what difference will it make in terms of developing and growing in-house a programme and project management capability? It is surely what you have lacked and is surely what you need.

William Hague: Large steps have been taken. More are planned and are in the civil service reform plan, as Nick has set out. In terms of professionalisation, it was right for me in my career. It has been obvious over the past two or three years that we need to professionalise if we are to improve the public sector. That worked well for me in terms of finance as well. That is why we set up the Major Projects Authority for project and programme management. It is why in 2013-this is set out in the civil service reform plan-a commissioning academy will be set up. I think that what has happened over the past five or six years is that the heads of profession have grown in power and in their ability to push things through the system. The civil service reform plan sets out that heads of profession need to take a more proactive role to ensure that we are growing our own. Part of the genesis of the 2,400 that we have been speaking about and the charts is the fact that we have not grown our own and this is about growing our own.

Sir Nicholas Macpherson: I very much agree with that. This is about building and retaining in-house capacity. I believe that it can be done, but it requires far more careful development and management focus on how you retain talented staff.

Amyas Morse: Just a point of information. Do bear it in mind that we heard from the Major Projects Authority that it had set up a major projects academy. There is something happening. Admittedly, it is not for vast numbers of people, but it is a start. I absolutely agree with the thrust of what you are saying, Richard, but I do think there is an attempt to start building that expertise in the civil service, which I welcome.

Q176 Stephen Barclay: The White Paper said that Permanent Secretaries of operational Departments must, moving forward, have two years’ operational/commercial experience. Given that 70% of the civil service are in operational roles, is two years’ experience for a Permanent Secretary really a stretching target?

Sir Nicholas Macpherson: It is a start; it is symbolic. The reality is this. Take my very distinguished colleague sitting next to me. Lin has led a large number of big organisations, from Birmingham city council onwards. The days when you had a gifted amateur running big operational Departments are, I think, behind us.

Q177 Stephen Barclay: You mention Ms Homer. In a way, that is a case in point. Quite a lot of people, including Sir Gus O’Donnell, commented on the churn in Ministers. Ms Homer, in the last three years, as I understand it, you have gone from running our border force to running our transport system to being now our most senior tax commissioner, which suggests that among officials there is quite a churn in terms of what they are being asked to do.

Lin Homer: It gives me plenty of opportunity to come to see the PAC, but I think the question you asked was about experience of running big organisations. The thing that all of those roles and, indeed, my previous two local authority roles have in common is large numbers of staff, large amounts of project activity and large amounts of service delivery, so those are common themes.

Q178 Stephen Barclay: The point was slightly different. The point was: are you in post long enough? Was the period that you had at the Department for Transport long enough?

Lin Homer: No, I don’t think so. I would not have moved after 12 months were it not for the extraordinary circumstances in HMRC.

Sir Nicholas Macpherson: It would have been nice for Lin to stay at Transport longer, but there were special circumstances. Admittedly, I am biased, as I am entering my eighth year in post as Permanent Secretary at the Treasury, but I do think it is in Whitehall’s interest to have people in senior posts who are there for a reasonable length of time, not least so that you can hold them to account. I cannot blame my predecessor any more, whereas a lot of my colleagues can.

Q179 Stephen Barclay: But you are an exception. Three quarters of Permanent Secretaries have moved since the general election-the Department for Transport has had three Permanent Secretaries since the general election-so there is an issue.

Sir Nicholas Macpherson: I hope it is a transitional issue. I think it is important to have people with experience who stay the course.

Q180 Mr Bacon: What are the Government doing to alter that? I heard Sir Andrew Turnbull, when he was Sir Andrew Turnbull, making exactly this point many years ago. I know I’m going off-topic, but this is really interesting. What are the Government doing institutionally to make this change stick?

Lin Homer: Although you can point to particular examples-my stay in Transport was very brief-if you look more generally, most of us have done reasonable lengths of time. I spent five and a half years in the UK Border Agency. Indeed, prior to the DFT period, the shortest time that I had ever spent in a single job was three years. If you look at most of the Permanent Secretaries, they expect to be in position for three to five years at a minimum. There is a movement going on that. In the civil service reform, there is a proposition that SROs should stay for the duration of their projects.

Q181 Mr Bacon: I am talking about the two or three jobs prior to that. My question was: what institutionally is being done to help to make this change stick, because we do see a lot of this churn? I remember a Cabinet Minister saying of his policy area that after 18 months he knew more about it than the officials who were briefing him, and we weren’t talking about Permanent Secretaries; we were talking about those lower down.

Chair: Richard, I am going to stop you there, because there is a lot to do. We will, I promise, come back to this issue, because it’s hugely, hugely important.

Q182 Stephen Barclay: Coming back to the topic for the hearing, could I clarify something? Were the 2,400 cases that were examined as part of the review considered for tax avoidance? Assuming not, how many of those are going to be reviewed for tax avoidance?

Sir Nicholas Macpherson: The review just identified the particular ways in which these individuals were employed. It explicitly did not go into their tax affairs, mainly because there was real urgency and we wanted to get the review done, come up with results, introduce some changes and move on. We always recognised that there was a very legitimate tax interest in these individuals. Therefore, in effect this issue is handed over to HMRC.

Q183 Stephen Barclay: I appreciate that for phase 1. We are now on to phase 2, HMRC. How many of these are you going to review?

Lin Homer: We have had an initial look across the whole 2,400. We have divided them into three tranches of highest risk, medium and low. We have started with the highest risk, because that makes sense, but we will have a risk-based look at all of them.

Q184 Stephen Barclay: How many are in each tranche?

Lin Homer: There are three different sorts. About 85% are employed through an intermediary company. With those we have an opportunity to do a high-level look and see whether PAYE and NICs have been paid on the people going through. That will allow us, we think, to leave those not completely, but-

Q185 Stephen Barclay: You said there were high, medium and low risk. How many are there of each?

Lin Homer: We would put those into the low risk and then there are 15% that we think are worth a quicker look. You know that, with initial judgments like that, you will always find some in the higher risk that prove not to be. When we go through the lower risk, I am sure we will find some that we will escalate.

Q186 Chair: So you are going to look at all of them in that 15%.

Lin Homer: We will make a risk-based judgment on the level. We will look at all of them. The depth to which we will go will depend on what we see when we first go in.

Chair: Blimey. That’s a bit more than 20-whatever.

Q187 Stephen Barclay: How many are high risk?

Lin Homer: Well, 15% are in categories that sometimes give indications of high risk.

Q188 Stephen Barclay: You said there were three categories. Perhaps my maths are slow, but if 85% are low risk and 15% in middle risk-

Lin Homer: Within the other two, there are those where the arrangement would have required the engaging organisation to take some action; in other words, the Government Department. There are those where there is evidence of effectively self-employed status, and we will go on to those. So, there is 5% and 10% in the other two tranches.

Q189 Stephen Barclay: So, there is 5% and 10%. The tenfold increase that you mentioned earlier to Matt-the 230 cases-are those separate to these?

Lin Homer: We will do a number of these separate from that, yes. I don’t want to draw all my resource away from the rest.

Q190 Stephen Barclay: In other words, when you say you are going to look at 230 moving forward, that is not including these.

Lin Homer: That had been our aspiration before these came in. We will use our Government team to look at these without diminishing our resources.

Q191 Stephen Barclay: Given the Committee’s earlier concerns, what commitment can you give us on reviewing BBC cases? How many BBC cases will you be prepared to look at?

Lin Homer: We have a CRM, as I think the BBC told you earlier, so I think I would want to take an initial look at the kind of arrangements they have in place, and then do some risk analysis. As we told you last time we were here, when information is made available, sometimes in bulk, we set out mind to it and work through that. There is definitely some work to do with this.

Q192 Stephen Barclay: So you will do a risk assessment to determine that.

Lin Homer: Yes. As I said earlier, I want to emphasise that we are not assuming, and I ask the Committee not to, that everybody involved in those arrangements is not already paying tax. We anticipate seeing a very high proportion of these people who are already sorting out their own tax arrangements. There is not an absolute jump from personal service company to not paying tax.

Q193 Stephen Barclay: No one is suggesting that. One issue for the Committee is whether it follows up effectively. Can I get an assurance that within three months you will write back to the Committee, or liaise through the NAO if there are issues of confidentiality, with an update on the risk assessment, a breakdown of how many BBC contracts and the work commitment you would put into that, and an update on the 15% middle-high risk and what work will be done on that population?

Lin Homer: I am happy to do that. The amount of detail we give you on the BBC will depend on how much I can do within taxpayer confidentiality.

Stephen Barclay: It depends on how much work you do.

Q194 Matthew Hancock: I want to push the question of the interaction of this and civil service reform. Mr Hague, you have so far given an impeccable performance, not least because you have managed not to say very much, but I am now going to challenge that. You were saying that civil service reform and the agenda outlined by Sir Bob will mean that you have more home-grown talent and therefore less need to buy in external talent on a short-term basis. Wouldn’t more flexible working within the civil service also push the other way and mean that if you have more interaction for civil servants between private and public sector work and people coming in and out, as opposed to a monolithic career structure, you will have more use of personal service companies?

William Hague: No, I don’t think so, but there are two things that you brought out with your question. First, if we are moving more flexibly-as we are in, say, the Cabinet Office and in the Efficiency and Reform Group, where we have a flexible resourcing system and more interaction with the private sector-it will be through secondees that we will see the specialist niche skills come in. Because a secondee contract is very different from the things that we have discussed today, I don’t think that that would see any increase in personal service companies.

In terms of growing our own, part of the civil service reform plan, as you will have seen, talks about a five-year capability plan looking at the deficits of skills with a particular focus on specialisms-but not only specialisms-such as HR, legal profession and project and programme management. That is due to be published in the autumn. As that is published, we will look at ways of bringing in that expertise and growing that expertise from within. I don’t see why that, aligned to a flexible resourcing system, would require any addition in terms of personal service companies or people off-payroll. So it is doing both at the same time.

Q195 Fiona Mactaggart: I am wondering how you ensure that this policy works beyond the Whitehall bit of public servants. Specifically, the Alexander report refers to foundation schools and NHS trusts, but I am also interested in the odd little departments. One of things that I looked at was the Equality and Human Rights Commission, which has put aside £1.8 million-5% of the whole budget this year-to pay consultants. I am just wondering whether that means that they are actually following your guidance, or is someone doing something about this fact?

Sir Nicholas Macpherson: There are long-standing conventions around what the Treasury’s concordat with Parliament, through this Committee, covers. You had the BBC here earlier today. They are not covered by "Managing Public Money".

Q196 Chair: The EHRC are though, aren’t they?

Sir Nicholas Macpherson: They should be, yes. They would have an accounting officer and that accounting officer will have been appointed by the accounting officer of the sponsoring Department. I am now struggling to remember which Department the EHRC-

Q197 Chair: Mr Hague, can you help on this, because you must have looked at it?

William Hague: I think it is the Home Office.

Q198 Chair: What is the answer to Fiona’s question, because it is rather worrying?

William Hague: Anything that comes under the auspices of a central Government Department such as the Home Office or, for example, DCLG would absolutely have to follow the control that is set down by the accounting officer.

Q199 Mr Bacon: Is that why, on the day that the story broke, they ran through a whole load of interims very quickly?

William Hague: They should not be able to do that.

Q200 Mr Bacon: That’s what happened. I remember that I happened to go on "Newsnight" that evening to talk about it and I was told half an hour before I went on that the Equality and Human Rights Commission had run through 17 or 18 new appointments that very day.

Sir Nicholas Macpherson: My recollection is that it has had a few troubles. I think it may be in the process of being reformed, which may create a context where you need more interims. If you have an agency that is closing down or being reformed, it is sometimes difficult to retain people and you are more likely to end up employing interims. Nevertheless, they are part of our framework and they should be accountable.

Q201 Chair: Can we ask you-Mr Hague, I think it falls to you-to let us have a note on the specific issue that Fiona Mactaggart has raised, within a week, please? If they are not complying with the guidance, that is of concern to the Committee.

William Hague: I can ask the relevant Department to provide that note, yes.

Q202 Chair: Whatever. We want it in a week, if that’s all right. Can I just ask about the NHS? Am I absolutely clear now that every foundation trust and every commissioning group will be covered by the rules laid down by the Chief Secretary?

Sir Nicholas Macpherson: Yes, they certainly should be.

Q203 Chair: Should be? Will be?

Sir Nicholas Macpherson: Will be. They will be writing to all their relevant bodies to remind them of the rules.

Q204Chair: Who is accountable for that?

Sir Nicholas Macpherson: I am not an expert on the current framework within the NHS but I think this is the sort of thing you should ask their main accounting officer Una O’Brien and Sir David Nicholson, the chief executive.

Q205 Chair: Perhaps we can have that as a question when we see them in September on financial health. As my final question, there are always wiggle-room words in these documents, and if I look at your document, Mr Hague, in paragraph 3.12 you accept that there will be a small number of senior civil servants on non-standard contracts. In paragraph 4.5, you talk about exceptional circumstances. I just wanted to tease out of you what that means, how many we have and how many you expect to end up not paying their PAYE and NICs. Explain that to us.

William Hague: Paragraph 3.12, where we talk about non-standard contracts, does not relate to whether they are being paid off-payroll or not. This is predominantly approximately, off the top of my head, 100 senior civil servants who have non-standard contracts where more of their pay is at risk. When they were brought in, usually from the private sector, they did not take as high a salary as the equivalent grade within the civil service but their opportunity to earn a bonus was higher than that of normal civil servants. There were around 100 of those contracts, and we wanted to make absolutely clear that that had to be stringently looked after and reviewed in the same way as any of these cases. That is what paragraph 3.12 relates to. Proposals will be introduced as to how non-standard contracts could be put forward in the future, probably with the Minister for the Cabinet Office signing those off.

In terms of paragraph 4.5, this was merely to ensure that in exceptional circumstances-

Q206 Chair: Like? Give me an example. What is an exceptional circumstance?

William Hague: In the review we did not come with a particular example and think, "In this case"-

Q207 Stephen Barclay: Can you define it for us? To take another example, we saw that when it was announced that there was a recruitment freeze except for essential front-line services, each Department was free to interpret essential front-line services as they saw fit, so they could drive a coach and horses through the definition. "Major projects" was not defined prior to the Major Projects Authority being set up. Where do I go to read what the definition is of exceptional circumstances?

William Hague: There is no definition.

Q208 Chair: It just gives you that wiggle room, which we feel a bit uncomfortable about.

Sir Nicholas Macpherson: The accounting officer will have to approve each of these exceptional circumstances, so he or she must be able to explain to this Committee why they did it. Such exceptions should exist for no longer than six months, which I think gives you an additional assurance. I can envisage, going back to the example we were discussing earlier, that in a state of real urgency you might want to have an interim on a special basis just to ensure the organisation was managed. It is very clear, however, in terms of recommendations-the Chief Secretary has written out to Departments this week with guidance on how to carry out the recommendations-that you cannot do it for any longer than six months.

Q209 Stephen Barclay: The six months is a clear control, Sir Nicholas; I get that. What I do not get is that if each Department’s accounting officer is free to define what "exceptional circumstances" is, and BIS was paying for tax advice to try to get the student loans one through, in that circumstance I am sure that the accounting officer would agree to the definition of exceptional circumstance so that control would not work.

Sir Nicholas Macpherson: I think we have all learnt a lot from this exercise. It is a long-standing principle that the public sector should not indulge in tax planning. This has been a very strong wake-up call that the days of tax planning in the public sector are over. Personally, I would like to have far fewer of Lin’s people working on public sector cases, because the public sector should get a grip and ensure this does not happen. We are going to review the data in a year’s time. If there are still lots of outstanding cases, I think that all of us will need to return to the drawing board and introduce more stringent controls.

Q210 Chair: Will you publish that review?

Sir Nicholas Macpherson: Yes-he says, looking back at the author of this excellent review.

Chair: Thank you very much indeed.