Councils face huge hike in equal pay costs

18 Aug 05
Revenue ruling means that local authorities must pay backdated PAYE and NI contributions

19 August 2005

Revenue ruling means that local authorities must pay backdated PAYE and NI contributions

Revenue and Customs officials have dealt a huge blow to local government plans to settle equal pay claims by insisting that backdated payments to staff qualify for tax and National Insurance. The move will add hundreds of millions of pounds to councils' multi-billion pound bill.

Letters obtained by Public Finance this week show that Revenue and Customs has received legal advice compelling councils to stump up pay-as-you-earn tax and national insurance contributions relating to all 'arrears of pay' claims by employees.

The ruling is likely to increase the cash needed to settle backdated equal pay claims for hundreds of thousands of mostly female staff by around 25%, the Employers' Organisation for local government told PF.

The EO, together with the Local Government Association, had lobbied the government against declaring backdated payments as income for tax purposes because councils already faced equal pay bills in excess of £2bn.

One council treasurer told PF the decision was a 'kick in the teeth' for local authorities and amounted to a 'windfall' tax for the Treasury. The source added that he had been facing a 'tough, but relatively achievable' £13m bill, but would now need to find between £17m–£18m. 'That additional money is simply not available to us right now…without potentially cutting education or social services,' he warned.

Other authorities, particularly those that have made little progress against equal pay obligations, face even higher bills.

Andy Wilson, the EO's employment relations adviser, said: 'We are aghast at the decision, but we now have to work with the government to find ways of meeting large payments that councils have not yet accounted for.'

Backdated equal pay claims grew in importance during the 1990s when it emerged that men still earned far higher salaries than women performing similar jobs across the public sector, despite the 1970 Equal Pay Act.

In 2003, the Local Government Pay Commission reported that hourly wage disparities were as high as 33% despite the 1997 Single Status Agreement, which put white- and blue-collar workers on the same pay spine, leading to thousands of backdated claims.

A letter sent from Mike Harmon, technical adviser at Revenue and Customs, to Sarah Wood, LGA director of policy, on August 4, breaks down the department's advice into four categories.

Harmon advises that local authorities that obtained agreements that backdated awards were merely compensation for employees' 'hurt feelings',  which allowed some authorities to settle claims quickly, will not be subject to PAYE/NIC bills.

Redcar and Cleveland Council in the Northeast reached such an agreement with its local tax office in order to initiate overdue payments to staff. But these compromise arrangements incurred the wrath of the Treasury and former Inland Revenue and were vetoed from May 2005.

Local authorities that requested such agreements from Revenue and Customs but were refused, those that paid out equal pay awards without first contacting the department and those that must make future payments to staff are all subject to PAYE and NIC payments, Harmon's letter adds. Almost all councils across England and Wales fall into one of these latter categories.

Wood told PF that the LGA was 'unlikely' to appeal the decision. 'We're devastated, naturally, but if this is the government's ruling then our attention will turn to next year's finance settlement.

'The additional money must come from somewhere and we will be telling the government “you've got to stump up for this”. We don't want to see local government employees not getting their dues, but equally we don't want to see local taxpayers footing the bill,' she said.

Responding to the 'kick in the teeth' accusation, a Revenue and Customs spokesman said: 'We're operating on the basis of a legal analysis of tax law that treats these payments as income. But we're happy to talk to local authorities that want to work with us to find the best way forward. We're not simply saying “this is the ruling – where is your cheque”?'

A source at the Office of the Deputy Prime Minister said there was an additional rationale. 'When local government signed up to equal pay commitments, central government and councils understood the financial implications to be cost-neutral because local authorities could save cash from other expenditure areas,' the source said.

However, local government has fallen behind schedule in making those savings.

Heather Wakefield, head of local government at the trade union Unison, said the additional 'Gershon' savings drive across the sector, which requires councils to make savings of £6.5bn per year by 2008, had further hindered settlements.

'Councils have turned up to pay talks saying that the savings drive means there is no extra cash to settle equal pay claims.

'We're sympathetic towards that, but our actions must be in the best interests of our members and we will continue to chase the best financial package achievable for hundreds of thousands of hard-working women who were, and still are, low paid.'


 

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