Statement by the Chief Secretary to the Treasury.
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As Honourable Members are aware, in February this year I announced a review of the tax arrangements of public sector appointees.
As I said at the time to the House, and as I reiterate today, there is absolutely no place for tax avoidance in Government.
That is especially so at a time when money is tight, where we all have to pay our full and fair share to tackle the deficit.
As I told the House in February senior civil servant appointments are audited against the Managing Public Money guidance.
That document states:
public sector organisations should avoid using tax advisers or tax avoidance schemes as any apparent savings can only be made at the expense of other taxpayers or other parts of the public sector.
That’s why when questions were raised about the tax arrangements for senior public sector appointees, I immediately put this review in place.
I’d like to thank the investigative journalists at Exaro news for bringing the issue to our attention.
The review looked at the extent of off payroll engagements in Government departments and their arms length bodies.
With respect to the NHS, the review was limited to Boards of NHS Organisations. Nonetheless, the Managing Public Guidance, and the new principles that I will set out today apply to the entire NHS.
The review could not include either Local Government or the BBC who are not under direct control from central Government.
It will be for those organisations to justify their own off payroll arrangements in the light of the unprecedented transparency we are showing today.
Nor does it include devolved administrations who I hope will now follow the example we have set.
Let me be clear to the House…the review published today did not seek to identify evidence of tax avoidance. That is the role of HMRC.
The review looked at off payroll engagements because the opaque nature of those engagements has created the conditions where tax avoidance could be taking place.
Let me also be clear there are circumstances where it may be necessary and appropriate for an employer to appoint an individual off payroll.
For instance where departments need to employ specialists to carry out short term roles where there is no available civil service expertise. This practice will continue.
However the review has revealed the extensive and longstanding nature of off payroll engagements in Government.
The review has identified over 2,400 off payroll engagements in central Government departments and their arm’s length bodies that were live on the 31 January this year.
That is an unacceptable number of off payroll engagements given the lack of transparency on the tax arrangements of the contracts.
Mr Speaker that lack of transparency cannot continue.
Today each department involved is publishing on their website a list of off payroll appointees who, as of 31 January, were engaged at an annual cost to the department of more than £58,200.
The majority of cases relate to technical specialists - in fact over 40 per cent relate specifically to IT specialists.
This data also shows that 70% of cases relate to arm’s length bodies.
Around 10% of the cases relate to payments made directly to a personal service company.
Over 85% are to intermediaries such as employment agencies, where it isn’t possible to know whether the individual is or isn’t using a personal service company.
The other 5% are self employed and therefore subject to self assessment in the normal way.
Around 70% of all the identified cases are paid more than £400 a day.
Over 70 cases cost departments more than £1000 a day.
And around 900 of the cases date back longer than two years.
In fact over 20 cases date back more than 10 years, which some might consider an astonishing length of time to be on a contract.
It is also worth noting that since January this year, over 350 off-payroll contracts identified by this review have since ended.
In around 10% of these cases the individual remained with the department but is now on the payroll.
Mr Speaker it’s clear that off payroll engagement without sufficient tax transparency has been endemic in the public sector for many years.
It’s a problem that built up and was presided over by the previous Government.
It is likely that under their watch many more thousands of cases of off payroll payment have come and gone, yet no one said a word.
The solution to this problem is not to turn a blind eye or brush it under the carpet.
We have to bring an end to the ‘don’t ask, don’t tell’ approach to this issue.
It is clear that the tax arrangements for off payroll employees in the public sector are not as transparent to the employer as they should be…
At the moment, contracts with off payroll employees do not give departments the right to request detailed tax assurance from individuals.
Nor can HMRC provide that information due to taxpayer confidentiality…
Even when off payroll employees are in fact paying the correct amount of income tax and National Insurance…the employer has no means to reassure themselves of that case.
It’s right that we tackle that lack of transparency.
So today I can announce new, tighter rules, on off payroll appointments.
Firstly, the presumption is that in the future the most senior staff must be put on the payroll.
Secondly, all Departments must put in place provisions that allow them to seek formal assurance that anyone paid a senior rate, and employed off payroll for more than six months, is meeting their income tax and national insurance obligations in full.
If that reassurance is not provided when requested departments should terminate the contract.
Finally, these new, tighter rules, will be monitored carefully.
Any department that does not comply will be fined up to five times the cost of the salary by the Treasury.
In addition to these changes, we have shared all the detailed information from the review with HMRC who will be able to take any further action where necessary in individual cases.
Mr Speaker there will be no lengthy transition period for these new rules either.
The new rules will be implemented by September this year and will be applied to existing contracts too, subject to value for money.
Departments will report to Parliament on the outcome as part of the 2012-13 annual report and accounts process.
Mr Speaker, there is one further measure I want to announce today.
Working through an intermediary provides an opportunity to minimise, or in some cases avoid completely paying income tax and National Insurance that would otherwise be payable.
We already have anti-avoidance legislation commonly known as IR 35
This rule ensures that where there is in effect an employment relationship, if it wasn’t for the interposition of the Personal Service Company, the person concerned pays the appropriate amount of tax and National Insurance.
This rule is a vital tool in tackling tax avoidance, and helps ensure that people are paying the right amount of tax.
Take for example, an individual earning £120,000 a year.
In that instance, there could be as much as a £23,000 difference between the amount of tax and National Insurance paid compared to somebody on the payroll.
When IR35 was introduced 10 years ago it was comparatively unusual for controlling persons of an organisation to be working through a Personal Service Company.
In the last few years however there have been high profile reports of this happening.
Today, the Government is consulting on the Budget proposal that all “controlling persons” must by law be on the payroll of their organisation.
This proposed tightening of the rules will apply to any organisation, be it public or private.
It is right that where an individual is in a position to control the major activities of organisation, they should be on the payroll of that organisation.
Mr Speaker, at a time of tight public finances, it is vital that we all pull in the same direction.
The changes I have outlined today help ensure that senior public staff pay, and are seen to pay, their full and fair share of tax.
And they demonstrate yet again our determination to clamp down on all forms of tax avoidance.
I commend this statement to the House.