A leaked letter from Danny Alexander, Chief Secretary of the Treasury, to Chancellor George Osborne has revealed that over 2,000 public sector workers are being remunerated via their own personal service companies.
Audit reveals scale of ‘off-payroll’ remuneration
Alexander commissioned a cross-departmental audit of how public sector officials are currently paid following the Ed Lester scandal earlier in the year, where the head of the Student Loans Company was accused of ‘tax dodging’ for being paid via his own company, rather than via the payroll, where he would have had full income tax and National Insurance Contributions deducted at source.
In the letter, which was made public by investigative website Exaro, Alexander expresses his shock at the “sheer scale of off-payroll engagements”, and has pledged to stamp out the practice of using the majority of limited company contract workers within three months.
According to the Treasury audit, there are currently 2,000 public sector workers earning the equivalent of £58,200 per year or more – via their own personal service companies. Of these, 1,500 are on rates of £380 per day or more.
The vast majority (1,600) have been in their current posts for at least six months, 1,200 for over a year, and 800 for two years or more.
New rules for public sector assignments
Although Alexander says he does not believe that it would be proportionate to ban all contracts in the future, he is determined to ensure that public sector workers can show that they are taxed in an equitable way:
“Departments should be able to assure themselves that highly paid specialist staff are meeting their income tax and national insurance obligations.”
According to the new proposals, “Board members and senior officials with significant financial responsibility” must now be placed on the public sector payroll, unless in exceptional circumstances.
In addition, individuals working through their own limited companies on public sector assignments lasting six months or more, at a daily rate of over £220, will have to demonstrate that they have met their income tax and National Insurance ‘obligations’, or face having their contracts terminated.
The proposals will be subject to a consultation period following publication of the full report later this month, and any changes are unlikely to be implemented until 2013.
Contractors’ group warns against over-reaction
Following news of this high-profile leak, contractors’ organisation, PCG, has warned the Government not to “destabilise and discourage the vast majority of talented, tax-paying freelancers in their search for a rogue minority.”
While the group fully backs any moves to stamp out disguised employment, and tax evasion, it is concerned that genuine freelancers may be penalised if any legislation is rushed in to deal with the use of personal service companies in the public sector.
John Brazier, Managing Director of the Group commented:
“We should reflect on the number of government departments which rely on the flexibility and skills of freelancers with a specific talent that can be used where and, importantly, when they are needed”