Nearly 100 ‘permanent staff’ in councils are paid through companies

By Frederika Whitehead and Alison Winward | 13 March 2012

Parliament holds second debate on tax rowMPs today demanded an end to the “offensive” practice of allowing senior public officials to minimise tax – in a second parliamentary debate on the issue.

Andy Slaughter, Labour MP and shadow justice minister, condemned what he described as “a new elite in the public sector”.

He told Parliament: “Such practices would be offensive at any time, but when the country is in recession, when many workers in the public sector at a lower level are facing pay freezes and when there are hundreds of thousands of redundancies, it is particularly offensive that what I can only describe as a new elite in the public sector appears to be immune to the worries, fears and constraints of ordinary working life.”

The debate followed an investigation by Exaro, in conjunction with BBC2’s Newsnight, that revealed last month how the Student Loans Company (SLC) was paying its chief executive, Ed Lester, through a personal-service company rather than as an employee.

And it comes as BBC Radio 4’s File on 4 programme will tonight say that almost 100 “permanent employees” at councils throughout the UK are being paid through limited companies.

Under such arrangements, public bodies do not deduct tax through the PAYE system, or pay national insurance contributions.

Slaughter began the debate by saying: “I intend to cover three closely related issues, which, I believe, raise the question of financial, moral and – in some cases – legal abuses in the employment practices of public-sector organisations.”

The 90-minute session at Westminster Hall, the second debating chamber of the House of Commons, was well-attended by MPs. They were keen to out examples of such public officials in their own constituencies, and demand greater government action.

Slaughter said that excessive pay, overuse of consultants, “tax avoidance – and sometimes evasion – by the improper classification of employees as consultants,” often went together.

He told MPs that, according to Treasury guidance, public bodies should avoid using tax-avoidance schemes because any apparent savings can only be made at the expense of other taxpayers or other parts of the public sector.

He said that this debate “is about people who are employed by the public sector – they are actually employees – who are receiving, in many cases, high remuneration, but who are falsifying their employment status not only to make more money for themselves and possibly for the organisation for which they work, but effectively to defraud the taxman.”

Jeremy Corbyn, Labour MP, said: “Anyone working directly for the public sector in any capacity should be employed by, and accountable to, the public sector. There should be utter transparency about their employment, and we should not have these ludicrous schemes that are probably to do with tax avoidance and lack of accountability.”

Danny Alexander, chief secretary to the Treasury, ordered a Whitehall-wide review into the use of such contracts after hearing about Exaro’s revelations on Lester. The minister had approved Lester’s appointment, but says that he was unaware of the tax consequences.

The day after Exaro’s story broke, Parliament held an urgent debate and Alexander announced that Lester would, from then on, go on the payroll.

Documents later showed how civil servants were worried about whether Lester should be paid in a way that enabled him to reduce his tax.

MPs today asked whether the review would extend beyond central government and its agencies, and examine other publicly funded organisations.

Ministers have already extended the inquiry beyond Whitehall.

Chloe Smith, economic secretary to the Treasury, confirmed to Parliament that the review would examine all central government bodies and their arm’s-length bodies.

She also confirmed that Eric Pickles, communities and local government secretary, has written to ask the Local Government Association, which represents councils in England and Wales, to carry out a similar exercise.

However, ministers have decided against telling the BBC to review its contracts. Jeremy Hunt, culture secretary, had pointed out that ministers cannot order the BBC to do so.

Meanwhile, two London borough councils will be highlighted by File on 4 tonight over the use of such contracts. According to the programme, Hackney in London admitted that 39 “permanent employees” were paid through external companies.

Hammersmith and Fulham said that it had 11 posts filled in this way. The programme will also say that the chief executive of its housing arm, Hammersmith and Fulham Homes Limited, Nick Johnson, was paid more than £900,000 through his company over a four-year period from early 2008.

In a confidential report, Pricewaterhouse Coopers, the accountancy firm, told the council: “Normally the position of chief executive is considered to be an office-holder.

“On that basis there would be a medium-to-high risk that there was a PAYE obligation on Hammersmith and Fulham Homes Ltd.”

This mirrors advice that KPMG, another accountancy giant, initially gave to the SLC.

The council told the programme that none of the 11 was required to be on its payroll, adding that HM Revenue and Customs had raised no concerns about the issue.

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