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.