Tax avoidance in the public sector

The Government is finding it mighty hard to clamp down on tax avoidance, and frequently appears not to know quite what it needs to do to raise more revenue to replenish its ever-leaking coffers.

This is not surprising. One would have thought, though, that it would not be so difficult toprevent some of the more obvious tax avoidance ideas taking root in the public sector. One thing that seems particularly to have become popular there is the use of personal service companies belonging to highly paid individuals in senior positions. This matters at three levels: firstly, are the contracts with the government body made with the service company or with the individual doing the work? Secondly, should IR35 be operated, and is it being? Thirdly, are these arrangements shifting income to people (generally spouses) on lower tax rates? The sums involved can be large. One man in the news recently was Ed Lester, of the Student Loans Company, and a very revealing article in Taxation on 16th February took a good look at those aspects of his arrangements that have become public (see http://www.taxation.co.uk/taxation/Articles/2012/02/15/35851/something-fishy). The author, Richard Curtis, had clearly done some digging. He did not get as far as to find out (or to reveal) what Mr Lester is on, but it looks as though it is in the region of £200,000 a year. Someone on this pay can expect to receive £114,619 in take-home pay as an employee, whereas if he operates a company outside IR35, jointly owned with his spouse, he ought to be able to get £136,811, a considerable increase.

The Government ought to be able to raise its tax take considerably by a few simple measures that will not require any legislation. This would only apply to central Government, but that does seem to be where much of the problem lies. It simply needs to introduce a few policies, and the great thing about policies is that they can just be imposed by ministers with the minimum of fuss.

So, to take the first level: with whom is the Government making its contracts? If with the individuals, then matters are quite simple: PAYE and NIC’s must be deducted from the payments, whether they be paid to Mr Lester or to his company. It should surely be a simple matter to say that in all cases where the Government, or any of its quangos, requires the personal services of an individual then it must contract with that individual and not with any company of his. It could make the agencies that it uses agree to the same condition as well. All that that would require is a policy decision.

However it appears that this is not what is happening now, if the Taxation article is anything to go by: the contortions that some of the officials and advisers that have responsibility for Mr Lester’s pay have gone through are otherwise inexplicable. So, even if Government accepts that it can make payments through companies, is IR35 being operated? In Mr Lester’s case we have no means of knowing, but I hope that it is, as it seems to me inconceivable that for a role like this the arrangements are such that it need not be.

Whether it is or nor, this ought to be a much easier matter for HMRC to police than private sector IR35 cases. All they have to do is to ask all central government organisations to give details of all companies that they have paid for personal services rendered by individuals, and then investigate them. The Finance Act 2008 gives them the power to do this with the consent of the Tribunal, which on an issue of as much public as this I am sure would be forthcoming. It might even be legal for Government departments to respond to requests from HMRC voluntarily – if so, it ought to be Government policy that they do so.

The difference between this and a private sector engagement is two-fold: firstly, they know where to look (and the organisations are generally very big, so one request may well net a lot of fish); secondly, one would expect both the contracts and the reality to be far more obviously ones to which IR35 applied.

There nevertheless seems to be some reluctance in Government to grasp this nettle, and one has to ask why. One suspects that it is high-earning individuals wanting to be paid through companies that is driving this at the top end, although lower down it may be more the effect of recruitment freezes and driven by Government itself. Either way, the fact that the public sector does not want to address this issue suggests that many people there know that they would have to pay substantially more to some of these high earners if they are going to be able to attract their services without using companies. This in turn suggests that either avoidance or evasion of IR35 is taking place in this sector, because if the rules were being operated the individualsconcerned would not have much to gain.

Is it, then, avoidance or evasion that is taking place? This depends on the contracts, and on the basis of what is in the public domain it is not possible to tell for sure. However, avoidance is unlikely: at the top level (and certainly in Mr Lester’s case if the Taxation article is to be believed), the individuals concerned are either officers of their organisations, or would be but for the interposition of their companies. This means that their companies are subject to IR35 at least on NIC’s. A contract that suggested that this was not so would require considerable collusion on the part of the Government body concerned, and if that collusion is taking place that is a cause for concern. Eradicating this ought to be a priority for the Treasury and ought not to be difficult. It just requires taking on other arms of Government – something at which it is already adept and, indeed, notorious.

© KDGK Limited, March 2012.