Personal Service Companies - Select Committee on Personal Service Companies Contents


Introduction and Background

184.  The use of personal service companies (and other 'off-payroll' arrangements) by the public sector came to prominence in 2012 following a Freedom of Information request concerning the appointment of the Chief Executive of the Student Loans Company. The Chief Executive was first appointed on an interim basis in May 2010; a subsequent 2-year contract was finalised in December 2010, following a competitive recruitment process. Both of these appointments were made through the Chief Executive's personal service company.

185.  On 31 January 2012, following media coverage of this case, the Chief Secretary to the Treasury, the Rt Hon. Danny Alexander MP, commissioned a review to examine the extent of off-payroll arrangements in central Government.[179] The aim of the review was to ascertain the extent of arrangements which could allow public sector appointees to minimise their tax payments, and to make appropriate recommendations. The review found that 2,400 staff earning more than £58,200 a year were engaged off-payroll in central Government and arms length bodies. Senior management positions accounted for around 5% of these cases.[180]

186.  The review was published on 23 May 2012. At the same time, the Chief Secretary announced various changes to departmental practice when 'off-payroll' appointments were agreed.[181] These included:

·  A presumption that the most senior staff must be on the payroll, unless there are exceptional temporary circumstances. Any such circumstances would require Accounting Officer sign-off, and can last no longer than six months.

·  For appointments of contractors lasting longer than six months and costing over £220 per day, all Government departments must be able to seek formal assurances that income tax and National Insurance obligations are being met. Departments should terminate the contract if such assurances are not provided.

·  Any department found to be non-compliant with these new rules faced being 'fined' up to five times the cost of the salary by the Treasury.

187.  These rules were formalised in Procurement Policy Note (PPN) 07/12, published by the Cabinet Office in August 2012. The PPN sets out illustrative contract clauses which allow assurances about tax arrangements to be sought; these were to be inserted into all new contracts (and contract renewals) from August 2012. The PPN also sets out a process, with guidance, for seeking assurances on tax and National Insurance from contractors. The scope of the PPN is outlined as "all central Government departments, including their executive agencies and Non Departmental Public Bodies".

188.  In considering the use of personal service companies in the public sector, we were keen to understand the extent to which the Treasury Review had provided a comprehensive understanding of personal service company use across the sector, and the extent to which the Treasury Guidance, and PPN 07/12, had been implemented and taken effect. We began, however, by considering the broader principle of public sector use of personal service companies.

The principle of public sector use of personal service companies

189.  Our Call for Evidence asked the following question:

    "To what extent are personal service companies still used in the public sector? Should those engaged in public bodies and similar organisations be prevented from working through a personal service company? If so, would the public sector experience difficulties in obtaining the skills and expertise that are needed?"

190.  We were told that public sector use of personal service companies typically fell into three categories. These were for interim management appointments, for time-limited project roles (particularly for IT infrastructure development projects) and for roles that had temporary or time-limited grant funding.[182] HMRC told us that they currently had eight workers engaged through personal service companies; all eight were occupational psychologists.[183]

191.  We consistently heard that any blanket restriction on public sector use of personal service companies would be unhelpful. The REC suggested that the public sector might require highly skilled, flexible labour to carry out project work in much the same way that many private sector businesses require additional skills and capabilities from time-to-time. The IMA suggested that personal service companies are widely used for flexible deployment of people within the public sector, and that restrictions on their use would lead to escalating labour and recruitment costs.

192.  This view was echoed by the PCG:

    "The use of 'personal service companies' within the public sector is vital to the successful and efficient delivery of public services … Freelancers provide a way for the public sector to engage specialists with experience outside the public sector on a short term basis, without the associated costs of full employment. Any blanket restriction on the ability of public sector bodies to acquire the services required in the most cost-effective manner risks being clearly detrimental to the value-for-money delivery of public services to the taxpayer, if the impact of the commercial strait-jacket effectively imposed is disproportional to the impact on tax".[184]

193.  We were told that personal service companies in the public sector were largely used to meet the same needs as those met by personal service companies in the private sector; as such, it was considered that the public sector would be disadvantaged by any 'tougher' rules on their use. The BBC told us that:

    "The growth of the flexible workforce in the UK cuts across all work requirements, from large creative IT projects to project management of infrastructure requirements. These are as applicable in the public sector as well as the private sector and there is no reason to create different 'legislation', either disadvantaging or creating an advantageous environment for either sector. The legislative framework should be applied consistently, irrespective of the funding of the engager".[185]

194.  This view was echoed by the ICAEW and the Giant Group, amongst others. The IIM expressed a similar view, but noted that Government departments need to understand when off-payroll appointments are appropriate, and when they are inappropriate.

195.  We acknowledge that there will be circumstances in which public sector organisations, just like private sector organisations, may need to acquire services from those who operate through personal service companies. For this reason, we believe that any blanket restriction on public sector use of personal service companies would not be beneficial to the delivery of public services.

The limitations of the Treasury Review

196.  We were told that the Treasury Review had identified some cases of personal service company use within the public sector where IR35 should historically have been applied but had not been. Bauer & Cottrell told us that:

    "The assurance exercise brought to light many cases that were very clearly inside IR35 but the individuals had been declaring an outside IR35 position. Some of these engagements had been going on for many years … Many knew that they should have been treating themselves as IR35".[186]

These views were echoed elsewhere. The IIM told us that the review had "revealed that some engagements of personal service companies in the public sector had been in place for 10 years" and that this "appears to represent a failure on the part of Government departments to understand in what circumstances the use of off-payroll staff is appropriate and, more importantly, when staff should be on the payroll".[187]

197.  We also heard that the process of, and publicity around, the review had helped to raise awareness of the issue of off-payroll engagements, even in those parts of the public sector not directly affected by the review. Michael Coughlin, of the Local Government Association (LGA), told us that, whilst local councils were excluded from the review, the LGA and other partners had sought to promote the resulting guidance to local authorities. Mr Coughlin stated that: "although it does not directly apply to the local government sector it has had an impact by default in the way it has been promoted and distributed through councils across the country".[188]

198.  This evidence suggests that the Treasury Review has helped to encourage some greater degree of awareness within the public sector about good practice when engaging personnel off-payroll.

199.  We do not, however, believe that the Treasury Review provided a comprehensive assessment of public sector use of personal service companies. The Review considered only central government and its arm's length bodies and did not directly include local government, parts of the National Health Service (NHS) and other parts of the public sector. This was identified as a limitation by a number of respondents to the Committee's Call for Evidence; a similar conclusion was made by the House of Commons Public Accounts Committee in September 2012.[189]

200.  In addition, the Treasury Review only considered workers who were engaged on a rate of £220 per day or more (approximately £58,200 per annum, potentially). This compares with median gross annual earnings in the UK which are currently around £27,000.[190]

201.  We sought evidence on the extent of personal service company use in local government. Whilst local government was excluded from the scope of the review, the LGA had sought to promulgate the guidance to its 351 member authorities, and had sought voluntary information on personal service company use in the sector. This information suggested that between 5 and 10% of local authorities were engaging people through personal service companies and that, in each of these, between one and five individuals were engaged in this way. These were typically interim management appointments, IT specialists or short-term project specialists. These figures applied only to those earning more than £50,000 per annum.[191]

202.  The figures provided by the LGA were estimates, and covered by a number of caveats. It was clear to the Committee that, whilst the LGA had sought to take a responsible approach in promoting the Review and subsequent guidance to the local authority sector, no comprehensive figures for personal service company usage in local government are available. This reflects the fact that local government is not subject to the same degree of central control as central government and that the LGA is a body which serves its local authority members but does not direct them.

203.  We also considered the use of personal service companies in the NHS. We were told that, whilst the required scope of the Treasury Review was to consider all workers engaged on £220 per day or more, the Department of Health (DoH), in implementing the review, had restricted the survey to staff at Board level only. This was "because of the very large numbers of NHS organisations and staff".[192]

204.  This survey—conducted in early 2012 and limited to Board-level staff in NHS Trusts, Foundation Trusts, Primary Care Trusts and Strategic Health Authorities—found that fewer than 2% of such appointees were engaged off-payroll. Specific figures for personal service company usage were not available, though "it was apparent that a significant number of executive directors were engaged through personal service companies, including up to eight Chief Executives".[193]

205.  Whilst recognising the complexity of health service structures and providers, and the difficulty and potential cost of surveying all parts of the NHS, we believe that this work could have gone further. We do not believe that the Treasury Review has provided a comprehensive assessment of personal service company usage in the public provision of health services.

206.  We received further evidence that 'off-payroll' arrangements were being used more widely in the public sector. The NASUWT told us that such arrangements had grown exponentially in recent years, particularly for the provision of supply teachers.[194] This reflects the changing nature of education providers in the state sector with more providers independent of local authority control and less use by local authorities of an employed pool of supply teachers. These teachers, whilst not employed by the schools or local authorities in which they worked, were usually employed by umbrella companies. Personal service companies did not appear to be used.

207.  Bauer & Cottrell, however, told us that they regularly came across personal service companies engaged as social workers, within the NHS and in teaching, and that numerous roles within local authorities were filled with personal service company users.[195] It is likely that many individuals in these professions would earn below £58,200 and would, therefore, have been excluded from the Treasury Review. We sought details of the extent to which those at the lower end of the pay spectrum might be engaged using personal service companies, or other off-payroll arrangements. Neither the LGA or the DoH was able to provide such details; both suggested that individuals at this end of the income scale were more likely to be engaged via agencies, but did not provide information about the precise employment circumstances of these individuals.[196]

208.  It is clear, therefore, that the Treasury Review of off-payroll appointments had a number of limitations. The review excluded workers earning less than £220 per day. We consider this to be a significant shortcoming. The Review was also limited to Government departments and their Non-Departmental Public Bodies; major areas of public sector service provision sit outside this scope. These shortcomings have been highlighted in earlier reviews; in our work, we have seen little evidence that they have been addressed in the intervening period.

209.  The Treasury Review of off-payroll appointments provided only a limited assessment of the extent of such engagements; large areas of public service provision, such as local government and some health services, were not included in its scope.

210.  We recommend that the Government carry out an assessment of the extent to which off-payroll engagements are used elsewhere in the public sector, including by those earning less than £58,200 per annum. (Recommendation 15)

211.  Another public service provider exempted from the Treasury Review was the BBC. The BBC was subject to some earlier criticism resulting from the use of personal service companies to engage both on air talent and flexible workers; in 2012 the Corporation told the Public Accounts Committee that they had identified 25,000 off-payroll contracts, including 13,000 contracts for 'talent'.[197]

212.  We were told that the BBC "used to have a practice of requiring members of its flexible workforce to engage via a personal service company in certain circumstances", but had now agreed a new framework and employment status tests, with HMRC, that were applicable for the broadcasting industry.[198] As a result, this practice had been changed, and personal service companies were only used when the work undertaken would support self-employment status. We welcome the flexible approach demonstrated by HMRC in working with the BBC to develop specific employment status tests for this sector; the framework and tests developed with the BBC should be made more widely available.

Implementing the new guidance

213.  The guidance set out in Procurement Policy Note 07/12 was introduced in August 2012. In a report on off-payroll appointments published in September 2012 the House of Commons Public Accounts Committee concluded that there was "insufficient clarity on how government will implement the Treasury Review's recommendations" and that there "is a risk that Treasury guidance may be interpreted inconsistently across the public sector".[199]

214.  We heard evidence which suggested that this prediction may have come to pass. We were told that application of the guidance had not been consistent across, or even within, departments. Bauer & Cottrell suggested that there was a "complete lack of consistency across Departments" and that "some followed the guidance to the letter, some had the default approach that all personal service companies are within IR35 and some did not undertake the exercise at all".[200]

215.  We received further evidence to support this view. The FCSA told us that they had experience of public sector organisations "completely misunderstanding" the requirements of the new guidance. They suggested that some public sector bodies thought that the Business Entity Tests could be used to definitively determine employment status; this experience was also shared by the PCG. The PCG were of the view that recent moves within the public sector to reduce the number of off-payroll appointees had led to "widespread confusion".[201]

216.  The DoH set out some of the difficulties involved in implementing the guidance:

    "Some organisations found this guidance relatively complex and in some cases experienced difficulty obtaining advice from HMRC. HMRC officials were not all well informed about the HMT review … There is no doubt that many NHS organisations find the IR35 legislation complex and difficult to interpret and implement. We in the Department of Health also found difficulty obtaining help with this from HMT and HMRC".[202]

217.  The new guidance required all Government departments to put in place provisions that allowed them to seek formal assurances that anyone paid over £220 per day and employed off-payroll for more than six months is satisfying their income tax and NIC obligations in full. Gordon Fleck, from the DoH, told us that this "means that there is now much greater confidence that people employed off payroll in the NHS are in fact meeting their proper obligations for tax and national insurance".[203]

218.  We would question, however, the extent to which this is the case. Within the NHS alone, there is evidence of inconsistent application of, and adherence to, the guidance. In June 2013, at the request of HMT, the DoH undertook a further survey of the NHS to assess compliance with the earlier guidance. This identified 2,403 off-payroll engagements in the NHS—more than the total identified in the January 2012 exercise. It also identified 148 cases where assurance regarding tax and NICs had been requested but not received.[204]

219.  The NHS Trust Development Authority wrote to NHS Trusts on 6 September 2013, asking Trust Chairs to remedy all cases of non-compliance with the Treasury guidance. The Committee received evidence to suggest that there has been some progress in the situation since September 2013.[205]

220.  NHS Foundation Trusts, however, enjoy a greater degree of autonomy. The Secretary of State has the legal power to direct NHS Trusts, but cannot direct Foundation Trusts; the arms length body Monitor regulates Foundation Trusts. The June 2013 survey found that 65 Board members or senior staff with significant financial responsibility were engaged off-payroll in Foundation Trusts. This included two chief executives, one of whom was engaged through a personal service company. The survey also stated that there were 99 cases, across 24 Foundation Trusts, where assurance regarding tax and NIC obligations had not been received.[206]

221.  In September 2013 Monitor was asked, by the Secretary of State for Health, to investigate this non-compliance with the guidance by Foundation Trusts. We received an update on this work in March 2014; this stated that the number of off-payroll Board members or senior staff with significant financial responsibility now stands at 41.[207]

222.  It is apparent that, within the DoH, the guidance has not, thus far, enjoyed universal success in providing assurance that those engaged off-payroll are meeting their tax and NIC obligations. We were told that the DoH intends to work with HMT, the NHS Trust Development Authority and Monitor to develop new guidance on off-payroll engagements and to clarify areas that have caused confusion or uncertainty.[208]

223.  PPN 07/12 stated that HMT and Cabinet Office would carry out a monitoring process in April 2013, requesting information on the number of off-payroll engagements for those earning over £220 per day that have lasted longer than six months, and the extent to which assurances on tax obligations have been sought and obtained for these appointments. In addition, Departments were asked to include, within their 2012/13 annual report and accounts, details of the outcome of applying PPN 07/12 to existing contracts. A written statement, summarising monitoring activity, was published in March 2014.[209]

224.  Whilst this monitoring activity is to be welcomed it is clear, from the evidence that we have received, that different Departments have taken different approaches to implementing the guidance, and that the guidance has not enjoyed universal application and success across Government.

225.  Whilst recognising the complexity of the task, we are concerned that the implementation of PPN 07/12 appears to have been inconsistent, both across and within Departments. The guidance is already limited by its scope, which includes only higher levels of pay and limited parts of the public sector. Inconsistent application further limits its scope, and confusion around how it should be applied—both within Departments and within HMRC—runs the risk of undermining any future evaluation of the success of this initiative in encouraging tax compliance amongst off-payroll appointees in the public sector.

226.  As the guidance embodied in Procurement Policy Note 07/12 currently appears to be applied inconsistently across departments, we recommend that Her Majesty's Treasury take a leading role in ensuring consistency of application and that it should go to greater lengths to monitor the implementation of the Procurement Policy Note 07/12 guidance across Government departments. (Recommendation 16)

179   The review considered 'off-payroll' arrangements as a whole and was not, therefore, limited solely to personal service companies HC Deb 2 February 2012 cc 1001-2. Back

180   HC Deb, 23 May 2012 cols 1159-60. Back

181   IbidBack

182   QQ 63-65, evidence from LGA and DoH. Back

183   Q 8 Back

184   PCG Back

185   BBC Back

186   Bauer & Cottrell Back

187   IIM Back

188   Q 68 Back

189   Committee of Public Accounts, Off-payroll arrangements in the public sector: (12th Report, Session 2012-13, HC 532). Back

190   ONS, Annual Survey of Hours and Earnings, 2013 provisional results.  Back

191   Q 63 Back

192   DoH Back

193   IbidBack

194   NASUWT Back

195   Bauer & Cottrell Back

196   QQ 63-65 Back

197   Committee of Public Accounts, 12th Report of Session 2012-13, Op.Cit. Back

198   BBC Back

199   Committee of Public Accounts, 12th Report of Session 2012-13, Op.CitBack

200   Bauer & Cottrell Back

201   FCSA and PCG Back

202   DoH Back

203   Q 69 Back

204   DoH Back

205   IbidBack

206   IbidBack

207   DoH, supplementary written evidence. Back

208   IbidBack

209   HL Deb, 11 March 2014, col WS175. Back

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