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Committee blames lack of IR35 deterrent for public sector ‘off payroll’ issues

The Public Accounts Committee has released a report into the use of ‘off payroll’ payment procedures in the public sector organisations, and criticises both the Government and HMRC over the widespread use of personal limited companies by public sector workers.

Background

In May 2012, the Treasury released new guidelines to clampdown on the use of personal service companies by public sector workers, following a series of cases in which high ranking civil servants (such as Ed Lester, the Student Loans Company boss) had been engaged by the Government via their own limited companies.

The new guidance requires workers who are engaged by Government departments via their own companies to provide formal assurances that they are paying the ‘correct’ amount of tax and National Insurance. In the case of public sector contractors, for example, they would have to provide proof that their contracts fall outside the scope of IR35 in order to comply.

The original Treasury audit only covered Central Government, however the Public Accounts Committee went further, and included local Government and other organisations, such as the BBC, within its investigation.

The Committee found that off-payroll remuneration was widespread in the public sector, and criticised the Treasury guidelines for their lack of clarity, and for the way the new rules are being applied in inconsistently by the various Government departments.

What about IR35?

The Committee also pointed out that the IR35 already exist to deal with situations where workers would ordinarily be deemed to be ’employees’ of an organisation were an intermediary (the personal limited company) not in place.

Although HMRC has recently published its plans to overhaul the way IR35 is administered, the report says that the lack of tax investigations in recent years means that the deterrent effect of IR35 has been minimised.

The report highlights the fact that only 23 IR35 investigations were carried out during the 2010/11 tax year, compared to over 1,000 in 2003/4.

BBC presenters and PSCs

The BBC currently has around 3,000 limited company workers on its books, in addition to around 25,000 ‘freelancers’ who are engaged on an ad hoc basis each year. The Corporation says that it does not know if the workers it hired are meeting their tax obligations, however it is to launch an internal investigation into the way it remunerates non-payroll staff in the near future.

Of its 467 presenters, the broadcaster says that 148 are engaged via their own personal service companies. Unlike ad hoc freelancers, who often work for a number of different organisations each year, presenters will typically work for one organisation on a long-term basis, which raises the question of whether or not some of the BBC’s high profile names are in the firing line for a possible IR35 enquiry!

Mixed reaction from contractor service providers

Stuart Davis, chairman of the FCSA, which represents some of the UK’s leading contractor accountants and umbrella companies said that it was disappointed over the criticism of contractors being hired by public sector bodies as “there is nothing wrong or inappropriate for any organisation, including public sector bodies to engage contractors at any level, if done properly, for the right reasons and where those concerned pay appropriate taxes.”

However, Davis says that his organisation fully agrees “with the Committee’s concern that HM Revenue & Customs is not properly enforcing the tax rules such as the current IR35 legislation. We believe that the right legislation is in place but that there is a failure to enforce it and we would support the Committee’s call for a strengthening of its enforcement.”

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