Off-payroll arrangements in the public sector - Public Accounts Committee Contents

Conclusions and recommendations

1.  Too many public sector staff have been paid using off-payroll arrangements for too long. The use of off-payroll arrangements for permanent employees generates suspicions of tax avoidance, places value for money at risk, and fails to meet the standards expected of public officials. We welcome the fact that the Treasury moved quickly to carry out a review, following revelations about the Chief Executive of the Student Loans Company. It was shocking to find that over 2,400 central government appointees are paid off-payroll, though it is encouraging to hear that, since the Review, at least some of these off-payroll arrangements have come to an end. Our recommendations are designed to further reduce the scope for any abuse of the off-payroll arrangements in the public sector.

2.  The appointment of the Chief Executive of the Student Loans Company through a personal service company should not have gone unchallenged by any part of government. The Student Loans Company and the Department for Business, Innovation and Skills paid too little attention to the need for its officials to uphold the highest standards in public life, and produced a flawed case for paying the Chief Executive off-payroll. However, also of concern is the fact that HM Treasury, Cabinet Office and HM Revenue & Customs all failed to properly challenge the appointment, giving the appearance of endorsing the use of off-payroll tax arrangements. The Treasury and Cabinet Office should ensure that controls over the appointments of senior officials include an assessment of the full cost of the appointment to the Exchequer and the propriety of the tax arrangements.

3.  It remains unclear how prevalent the use of inappropriate off-payroll arrangements is beyond central government. The Treasury Review only looked at central government and its arm's length bodies, so did not include local government, public corporations, publicly owned banks or the NHS below board level. In addition, the review only included those who earned more than £58,200 in 2011-12. We do welcome the Treasury's assurance to us that the recommendations would be implemented across the NHS. The Treasury, working with other departments, should establish how widespread the practice is in all parts of the public sector, including entities not covered by Managing Public Money such as local government, and use its powers to ensure that public servants are not employed through arrangements which could lead to tax avoidance.

4.  The BBC has identified 25,000 off-payroll contracts, including 13,000 contracts for 'talent', but cannot provide any assurance that these individuals are paying the correct amount of tax. The BBC told us that the use of freelance workers is a key part of their business model. However, the BBC accepted that many of its contracts with presenters who are paid through personal service companies could share the same features as typical PAYE employment contracts. Although the BBC told us it provides information on its off-payroll arrangements to HM Revenue & Customs, it has no means of ensuring that its freelancers are paying the right amount of tax. The BBC told us that it would be carrying out a detailed review of its off-payroll arrangements. The BBC's review should specifically consider whether the contracts resemble typical employment contracts, their duration and the number of repeat contracts, and the salaries involved. The review should set out how it will gain assurance that its staff pay the right level of income tax and national insurance on their income.

5.  There is insufficient clarity on how government will implement the Treasury Review's recommendations. The Treasury has not defined what constitutes the 'exceptional circumstances' under which an Accounting Officer may still approve the use of personal service companies. There is a risk that Treasury guidance may be interpreted inconsistently across the public sector and the mistakes of the Student Loans Company case could be repeated. The Treasury has also not set out how departments should seek assurance that those using personal service companies are paying the right amount of income tax and national insurance on income they receive from the public purse. The Treasury should clearly define what it means by 'exceptional circumstances', require Accounting Officers to seek Treasury approval of any such exceptions, and require departments to pass on information they gather about the tax arrangements of their off-payroll staff to HM Revenue & Customs to inform investigations and compliance work.

6.  The deterrent effect of anti-avoidance legislation has been placed at risk by the reduction in the number of investigations by HM Revenue & Customs. 'IR35' legislation is designed to eliminate the avoidance of tax and National Insurance Contributions through the use of intermediaries, such as personal service companies. The number of IR35 investigations has decreased significantly from over 1,000 in 2003-04 to just 23 in 2010-11, undermining the IR35 system as an effective deterrent to tax avoiders. We welcome HM Revenue & Customs' intention to increase this to at least 230 a year and to carry out a risk-based review of the 2,400 cases found in the Treasury's Review and the 25,000 cases identified by the BBC. HM Revenue & Customs should report the outcome of its review to us in three months' time, and should set an optimum number of IR35 investigations that maintains an effective deterrent, including any arising from information passed to it by public bodies.

7.  The public sector's dependence on interim staff reflects a lack of specialist and professional skills within government. It has been recognised for some time that the civil service lacks programme and project management and IT skills, and the frequent use of interims in these areas presents a risk to value for money. We have twice recommended in recent years that government should plan its long terms skills needs, identify core skills gaps and develop the capabilities to meet the skill requirements. The Cabinet Office should demonstrate how the Civil Service Reform Plan will address the issues the key skills gaps that remain prevalent in government.

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© Parliamentary copyright 2012
Prepared 5 October 2012