1 The extent and nature of off-payroll
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.
 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
4. There were a number of errors across government
which led to the appointment of the Chief Executive of the Student
Loans Company. 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.
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.
The failure of these departments to properly challenge the appointment
gave the appearance of them endorsing the use of off-payroll tax
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
HM Treasury described the Review as a wake-up call for government.
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.
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.
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.
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.
2 HM Treasury, Managing Public Money http://www.hm-treasury.gov.uk/d/tax_pay_appointees_review_230512.pdf
Q 109 Back
Qq 114-116, 121-130 Back
Qq 109-110, 113-118, 136 Back
HM Treasury, Review of the tax arrangements of public sector
Q 209 Back
Qq 9-13 Back
Qq 23-25, 96 Back
Qq 44-50, 86-90 Back