By Richard Johnstone | 5 October 2012
Many employees in local government and the NHS could be being paid in a way that can lead to tax avoidance, the Public Accounts Committee warned today.
In an examination of ‘off-payroll’ arrangements in the public sector, the MPs concluded that they were ‘almost always staggeringly inappropriate’.
Off-payroll contracts mean individuals are paid through personal companies and taxation is not paid at source. In May, an inquiry ordered by Chief Secretary to the Treasury Danny Alexander found that 2,400 Whitehall staff were being paid off-payroll, some for more than ten years. It followed the revelation that the chief executive of the Student Loans Company had been paid through a personal services company.
The committee today said use of these arrangements ‘generates suspicions of tax avoidance, places value for money at risk, and fails to meet the standards expected of public officials’.
Since Alexander’s review was published, some of these payment methods had come to an end, the committee said in its report, Off-payroll arrangements in the public sector.
It added that Alexander had looked only at Whitehall and not at other public services, such as local government, the NHS and the BBC.
The BBC told the MPs it paid about 25,000 people a year off-payroll. It acknowledged that the contracts of presenters employed through personal service companies could often share the characteristics of typical pay-as-you-earn contracts.
Chair Margaret Hodge said the PAC was ‘shocked’ by the extent of off-payroll contracts used by the public service broadcaster, 13,000 of whom are TV and radio presenters.
The BBC would now review the use of these arrangements, she added. ‘We want the review to explain how the BBC will gain assurance that the staff involved are paying the correct amount of tax on their income from the public purse.
‘Similarly, we suspect that many individuals and employers in local government and in the health service do not pay their proper tax and national insurance contributions.’
The Local Government Association told the committee that it did not consider the practice to be widespread in local authorities, although it did not have accurate data.
The PAC said clear guidance should be issued. For example, the Alexander review recommended that government departments and agencies ensure the most senior staff stayed on the payroll, unless there were ‘exceptional temporary circumstances’. These ‘circumstances’ needed to be clarified, the MPs said. They questioned what situations could justify payment through personal services companies.
Hodge said: ‘Accounting officers must be required to seek Treasury approval of such exceptions and to pass on to Revenue & Customs information they gather about their off-payroll staff.
‘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. Those whose income is derived from monies raised through taxation have a particular obligation to make sure that they do not use tax avoidance schemes.’
