The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:
"Avoiding tax and national insurance when paying public sector staff is almost always staggeringly inappropriate.
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 avoid the practice of using off-payroll arrangements for staff who should be on the payroll - a practice which generates suspicions of complicity in tax avoidance and which fails to meet the standards expected of public officials.
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.
We welcome the prompt response by the Treasury following revelations about the appointment of the Chief Executive of the Student Loans Company through a personal service company. But it is of great concern to learn that no part of government - including the Treasury - Cabinet Office and HMRC - had properly challenged that appointment.
It was also shocking to find out that no fewer than 2,400 central government appointees were benefiting from off-payroll arrangements. Furthermore, the Treasury Review only covered civil servants. Tax avoidance in the public sector goes much wider.
We were shocked, for example, to discover that the BBC has about 25,000 off-payroll contracts. 13,000 of these are for individuals who are on our screens and on the radio every day. They are the public face of the BBC.
It told us that it intends to review these arrangements. 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.
We also want to know how the government will implement the Treasury's recommendations. The Department has yet to define what it means by the 'exceptional circumstances' under which personal service companies might still be approved. Accounting Officers must be required to seek Treasury approval of such exceptions and to pass on to HMRC information they gather about their off-payroll staff.
The dependence of government on interim staff is down to a continuing and prevalent lack of specialist and professional skills. We have twice recommended that the government properly plan for how it is going to meet its long-term skills requirements. The Cabinet Office needs to address this as part of implementing the Civil Service Reform Plan."
Margaret Hodge was speaking as the Committee published its 12th Report of this Session which, on the basis of evidence from the BBC, Local Government Association, HM Treasury, Cabinet Office, HM Revenue & Customs and the Department for Business, Innovation and Skills, examined the use of personal service companies in the public sector.
The public sector must itself maintain the highest standards of propriety in its employment practices if it is to show leadership in the fight against tax avoidance. It must avoid the practice of using off-payroll arrangements for staff who should be on the payroll - a practice which generates suspicions of complicity in tax avoidance and which fails to meet the standards expected of public officials. 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.
In May 2012 HM Treasury published its report on the use of off-payroll arrangements in central government, which showed that over 2,400 staff, each earning more than £58,200 a year, were being paid 'off-payroll'. We consider that the report's recommendations should go some way to reducing the prevalence of the practice.
However, the Treasury Review was limited in scope to central government and did not cover other public services, like Local Government, the NHS and the BBC. We still do not fully know how endemic the use of personal service companies is in other parts of the public sector. The Local Government Association does not consider the practice to be widespread in local authorities but does not have accurate data. the BBC told us that short term engagements are commonplace in the broadcast industry, and that it paid about 25,000 people off-payroll in a year. However, it acknowledged that the contracts of presenters employed through personal service companies can often share the characteristics of typical PAYE contracts.
The Treasury Review followed media stories about the appointment of the Chief Executive of the Student Loans Company, and his payment through a personal service company. There was a catalogue of errors across government in this case, involving the Department for Business, Innovation and Skills, the Student Loans Company, HM Revenue & Customs, the Treasury and the Cabinet Office, with none of bodies involved properly challenging the terms of the appointment and the associated tax arrangements.
Whilst we welcome the speed with which the Government acted, doubts about their proposals remain. The Treasury Review states that off-payroll arrangements can be used in 'exceptional circumstances' but the Review does not clarify what these exceptional circumstances are. In addition, the Treasury Review recommended that departments seek assurance that those staff who remain off-payroll are paying the appropriate amount of tax, but did not specify how departments could or should do this.
Ultimately, whether those paid off-payroll are paying the right amount of tax is dependent on HM Revenue & Customs properly enforcing tax rules to ensure employees, regardless of whether of not there is a personal service company, pay tax as employees. However, HM Revenue & Customs has progressively reduced its enforcement of the legislation designed to eliminate the avoidance of tax and National Insurance Contributions through the use of intermediaries, such as personal service companies, putting at risk any deterrent effect the rules might have on tax avoidance. In 2010-11, only 23 investigations took place; down from over 1,000 in 2003-04.