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

1  The extent and nature of off-payroll arrangements

1. Off-payroll arrangements are those where individuals, either self-employed or acting through a personal service company, are paid gross by the employer. While off-payroll arrangements may sometimes be appropriate in the public sector for those engaged on a genuinely interim basis, they are not appropriate for those in management positions or those working for a significant period with the same employer. Such arrangements reduce transparency and can be perceived as an endorsement of tax avoidance.

2. The public sector must maintain the highest standards of propriety in its employment practices if it is to show leadership in the fight against tax avoidance. It must therefore avoid the practice of using off-payroll arrangements for staff who should be on the payroll, because it fails to meet the standards expected of public officials. HM Treasury's rules are clear that public organisations should avoid the use of tax avoidance schemes. [2] However, the growth in the use of personal service companies across the public sector shows that these rules have been neglected in recent years.

3. The issue of the use of off-payroll tax arrangements in the public sector came to prominence following investigations by the press and the release of information by the Department for Business, Innovation and Skills and the Student Loans Company, following a Freedom of Information request, about the appointment of the Chief Executive of the Student Loans Company. The Chief Executive was appointed as interim Chief Executive in May 2010, and was reappointed on a 2-year contract in December 2010, following a competitive recruitment process. Both appointments were made through a recruitment agency and the Chief Executive's personal service company.

4. There were a number of errors across government which led to the appointment of the Chief Executive of the Student Loans Company.[3] The information released under the Freedom of Information Act points to the Student Loans Company and the Department for Business, Innovation and Skills having pushed for the Chief Executive to be appointed using the off-payroll arrangements. They paid too little attention to the need for officials to uphold the highest standards in public life. The Department received expert tax advice that the Chief Executive should be employed on the books, rather than through a personal service company. The Department could not explain to us why that advice became any less relevant once it was clarified that the 'employment' relationship would be with the Student Loans Company itself, as opposed to the Department.[4] In addition, the business case presented to the Treasury, which compared the cost of appointing the Chief Executive on the payroll or through the personal service company was flawed, particularly because it did not take into account the potential for lost tax revenue to the Exchequer from not putting him on the payroll. HM Treasury, the Cabinet Office and HM Revenue & Customs approved the arrangements without considering the broader tax implications.[5] The failure of these departments to properly challenge the appointment gave the appearance of them endorsing the use of off-payroll tax arrangements.

5. Following media reports about the case of the Chief Executive of the Student Loans Company, the Chief Secretary to the Treasury commissioned a review of the extent of off-payroll arrangements in central government. The Treasury Review found 2,400 off-payroll engagements with staff earning more than £58,200 a year in central government departments and their arm's length bodies. Around 85% of the 2,400 engagements had been for longer than six months, 40% for longer than two years and 1% for longer than 10 years. In addition, around 5% of cases related to senior management positions.[6] HM Treasury described the Review as a wake-up call for government.[7]

6. The Review was limited in scope to central government and it is still unclear how endemic the use of personal service companies is in other parts of the public sector, including the NHS below board level, public corporations like the BBC and local government. The Local Government Association, which we acknowledge was invited to attend our hearing at short notice, could not provide us with definitive numbers. However, the Local Government Association told us that returns from seven out of the nine regional employers had identified only 13 people nationally, employed on personal service contracts for more than £50,000 a year. We are sceptical about these numbers given reports about numbers within individual local authorities. The Local Government Association told us that, even if 13 did prove to be a significant under-estimate, it did not consider that the practice was endemic.[8]

7. The BBC told us that it employs around 20,000 people who are on the BBC payroll and that in addition, in a typical year, it employs around 25,000 people using off-payroll arrangements, comprising around 12,000 off-air staff and 13,000 on-air talent. It has 3,000 personal service company contracts.[9] The BBC explained that the nature of the broadcast industry, which often requires production staff to work for short periods on programmes while also being free to take employment for other production companies, means that off-payroll arrangements are an important part of the BBC's business model.[10] However, 148 of its 467 presenters are employed by the BBC through personal service companies, despite them often being employed long-term, and the BBC acknowledged that their contracts can share characteristics with typical PAYE contracts.[11]

2   HM Treasury, Managing Public Money  Back

3   Q 109 Back

4   Qq 114-116, 121-130 Back

5   Qq 109-110, 113-118, 136 Back

6   HM Treasury, Review of the tax arrangements of public sector appointees,  Back

7   Q 209  Back

8   Qq 9-13 Back

9   Qq 23-25, 96 Back

10   Q28 Back

11   Qq 44-50, 86-90 Back

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© Parliamentary copyright 2012
Prepared 5 October 2012