Ministers fail to force ban on ‘off payroll’ deals for top earners in local government

By Mark Conrad | 20 June 2012

“Authorities should actively review their approach to the terms of remuneration for their senior appointments”
– Eric Pickles, communities and local government secretary, writing to the LGA

Hundreds of council officials working ‘off payroll’ are set to escape a tax investigation because a review by local government has been thwarted.

Despite pledges from ministers to crack down on councils paying senior staff through personal-service companies, they fell short of forcing town halls to review the practice. They have also been powerless to halt such tax-beneficial contracts.

Instead, they have merely issued fresh Whitehall guidance on pay arrangements.

Bob Neill, a minister for local government, told Exaro: “I would urge the Local Government Association and councils to take an upfront and transparent approach when reviewing the tax arrangements of employees.

“All board members and officials should be on the local-authority payroll unless there are exceptional circumstances.”

The Treasury carried out a review of civil servants’ contracts immediately after an investigation by Exaro, together with BBC2’s Newsnight, revealed in February that the Student Loans Company was paying its chief executive, Ed Lester, without deducting tax or employee’s national insurance under concessions granted by HM Revenue & Customs (HMRC).

More than 2,400 senior officials were able to save themselves many thousands of pounds a year each in tax and national insurance. Government departments and agencies routed their pay through personal-service companies.

Eric Pickles, communities and local government secretary, also wrote to the Local Government Association (LGA), which represents councils in England and Wales, about officials’ contracts.

His letter to the LGA’s Conservative chairman, Sir Merrick Cockell, said: “You will wish to consider the government’s policy and approach on this matter and how the LGA can encourage the sector similarly to follow the principles.”

Pickles encouraged the association to take action because local authorities are not covered by the Treasury’s ‘Managing Public Money’ guidance.

He also issued updated guidance on behalf of the Department for Communities and Local Government (DCLG) on pay arrangements for senior council staff in England. It says: “Authorities should actively review their approach to the terms of remuneration for their senior appointments, particularly where arrangements exist which could be perceived as seeking to minimise tax payments.”

However, neither this letter – nor follow-up correspondence sent by Neill after Alexander’s review – asked the LGA to find out which council officials had tax-beneficial contracts.

HMRC is using the results of the Treasury review to launch an investigation into the practice of civil servants working ‘off payroll’.

But HMRC will not be able to carry out a similar exercise for local government because there has been no similar review.

The Treasury is planning a shake-up to the ‘IR35’ rules that are designed to stop so-called “disguised employees” avoid tax through the use of personal-service companies.

A Treasury spokeswoman confirmed that council officials would not come under the scrutiny of the HMRC investigation.

But an HMRC spokesman said that any council staff found to be using ‘off payroll’ practices in breach of the IR35 rules could still be investigated, as could anyone else.

Sources at the LGA said that it lacked powers to force councils to adopt specific pay arrangements.

Instead, it sent a joint letter with the Association of Local Authority Chief Executives merely reminding councils about the updated DCLG guidance.

It said: “The statutory guidance calls on local authorities to consider the value-for-money implications for the public sector as a whole of using such arrangements when developing their pay policies.”

Details released in March showed that two London borough councils – Hackney, and Hammersmith and Fulham – had several posts filled by officials paid through external companies.

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