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Off-payroll arrangements: Deterrent effect of IR35 was put at risk, say MPs

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Today's report of the Commons Public Accounts Committee on off-payroll arrangements concluded that 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’.

The public sector must avoid the practice of using off-payroll arrangements for members of staff who should be on the payroll, it said. The practice ‘generates suspicions of complicity in tax avoidance’ and ‘fails to meet the standards expected of public officials’.

‘[The BBC] acknowledged that the contracts of presenters employed through personal service companies can often share the characteristics of typical PAYE contracts’

Public Accounts Committee

The PAC said those whose income is derived from money raised through taxation ‘have a particular obligation to make sure that they do not use tax avoidance schemes’.

The recommendations set out in HM Treasury’s report on the use of off-payroll arrangements in central government, published in May, should go some way to ‘reducing the prevalence of the practice’, the PAC said.

The Treasury recommended that in central government departments, for all new engagements and contract renewals, board members and senior officials with significant financial responsibility should be on the organisation’s payroll unless there are ‘exceptional circumstances’. Such exceptions should exist for no longer than six months, it said.

‘Engagements of more than six months in duration, for more than a daily rate of £220, should include contractual provisions that allow the department to seek assurance regarding the income tax and NICs obligations of the engagee – and to terminate the contract if that assurance is not provided,’ the Treasury added.

But the PAC pointed out today that the Treasury’s review did not cover other public services, such as 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 PAC said. The Local Government Association [LGA] does not consider the practice to be widespread in local authorities but does not have accurate data’.

The BBC and personal service companies

The PAC report said: ‘The BBC told us that it employs around 20,000 people who are on the BBC payroll and that in addition, in a typical year, it employs around 25,000 people using off-payroll arrangements, comprising around 12,000 off-air staff and 13,000 on-air talent.

‘It has 3,000 personal service company contracts. The BBC explained that the nature of the broadcast industry, which often requires production staff to work for short periods on programmes while also being free to take employment for other production companies, means that off-payroll arrangements are an important part of the BBC's business model.

‘However, 148 of its 467 presenters are employed by the BBC through personal service companies, despite them often being employed long-term, and the BBC acknowledged that their contracts can share characteristics with typical PAYE contracts.’

The committee pointed out that the Treasury review did not explain what it meant by ‘exceptional circumstances’, nor did it say how departments could or should seek assurance that ‘those staff who remain off-payroll are paying the appropriate amount of tax’.

The BBC had told the committee that ‘it provides information on payments to personal companies to HMRC, but it does not know whether the right tax has been paid, or whether HMRC has questioned the tax arrangements, because that is private information between the personal service company and HMRC’.

The PAC concluded: ‘Ultimately, whether those paid off-payroll are paying the right amount of tax is dependent on HMRC properly enforcing the tax rules that ensure employees, regardless of whether or not there is a personal service company, pay tax as employees.

‘However, HMRC has progressively reduced its enforcement of the legislation designed to eliminate the avoidance of tax and NICs 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.’

Last week Bloomsbury Professional disclosed that HMRC’s investigations into IR35 yielded £1.25m in 2011/12 compared to £219,000 in the previous year. ‘The number of investigations has more than doubled from 23 in 2010/11 to 59 in 2011/12,’ it said.

Martin Casimir, managing director of Bloomsbury Professional, said: ‘It looks like HMRC has been playing catch-up on IR35 in the past year. They’ve gone from almost ignoring IR35 breaches to getting tough around the time that the public sector personal service company scandal began to break.’

An HM Treasury spokesman said: ‘The government acted quickly earlier this year to tighten the rules on off-payroll appointments in central government departments. The BBC is wholly independent and local government pay is not controlled by central government. However the government has raised this issue with both the BBC and the LGA and we look forward to seeing the results of the BBC's own review, which is now under way.  We will study the PAC's report and respond formally in due course.’

However, David Whiscombe, director at chartered accountants Berg Kaprow Lewis, said it was ‘about time this old chestnut was buried’.

Whiscombe said, in a statement issued today by the UK200 Group of accountants: ‘If the people concerned are genuine freelancers there is no legal, moral, social or other reason why they should not trade through a limited company like any other “self-employed” person.

‘If they aren’t – in other words if they are “disguised employees” – there is already anti-avoidance legislation in place which prevents any loss of tax and it is up to HMRC to get off their backsides and impose penalties on any “household name” who is not complying with the law. If there is anything “staggeringly inappropriate” here it’s HMRC’s behaviour in enacting legislation and then not enforcing it.’