THE OFF-STAFF DEALS that approximately 2,000 senior public sector office-holders have been engaged in as a means of tax mitigation could cost the government as much as £30m annually.
Senior public sector staff were paid through their own companies which may have caused the government to lose out on PAYE tax deductions and national insurance payments.
Treasury secretary Danny Alexander ordered an investigation when it was discovered that one civil servant was receiving £182,000 per annum without paying tax or national insurance, before discovering the scale of the practice.
Alastair Kendrick of accountancy firm McIntyre Hudson says that lost PAYE and national insurance revenues could rise when information relating to other public sector areas such as health and education are released.
Kendrick reached this figure based on national insurance payments alone, and does not include staff from health or education as those figures are yet to be released.
“Not all government departments have provided the list of their workers who have been engaged on this basis – including health and education, among others. I would expect that as those disclose, the numbers would extensively increase.”
According to Kendrick, the £30m figure is based on staff members earning £58,000 per annum. Assuming all 2,000 staff are receiving that sum, the national insurance revenues missed out on is £16m. That rate, though, was the minimum, and many would have been on substantially higher rates, which would see the figure rise further – more than £20m if the average is £75,000-£80,000.
On top of that, however, Kendrick expects “quite a number” of these staff to have exceeded the £100,000-£150,000 mark, which brings the lost national insurance revenue up to £30m.
Alexander’s proposals to tackle the problem include a recommendation that anyone earning over £58,000 should be obliged to be paid directly rather than utilise the loophole to avoid paying tax. He recommends, too, that board members, senior officials and anyone earning over £220 per day for more than six months be compelled to become on-staff.
“If these people are taken onto an employed basis, they would have things like pension rights,” says Kendrick. “Additional sick pay and other employment rights would compound the cost. We are talking specifically about office holders and board members in public sector organisations. As they are office holders, the tax law is such as that would distinguish them from other workers and PAYE should apply to those payments. That is what Danny Alexander is trying to do.”
There has been criticism, though, of Alexander’s proposals, with some accusing him of failing to understand the tax rules.
Cormac Marum of Harwood Hutton is one of those critics, but he is not convinced the government will have missed out on tax due to the ‘IR35 rule’.
“When a public sector senior post becomes available, it can be filled either directly or via outsourcing the position,” he says. “When employed directly, they are added to the payroll in the same way all other employees are, paying tax and national insurance through PAY, meaning the public sector employer has to pay employer’s national insurance at 13.8%.”
Outsourcing the post sees a contract drawn up between the public sector and a service company, supplying the individual. Given that the public sector does not employ the individual, the arrangement does not go on the public sector payroll and the public sector does not have to pay employer’s national insurance.
The result is the outsourcing company pays the employer’s national insurance instead of the public sector, and so the tax is still paid.
“If the service company is owned by the individual concerned, there may be a temptation for him to pay himself a minimum wage and extract the rest of the money earned by the company by way of dividends”, says Marum. “Such an arrangement will not work as it falls well within the ‘IR35 rules’ and dividends will be reclassified as earnings, broadly forcing income tax and national insurance to be paid.”
“Why does the chief secretary to the Treasury not understand all this?” he asks. “By forcing the public sector to turn its back on outsourcing solutions, Danny Alexander is needlessly increasing their costs while achieving no noticeable increase in the overall tax take.”