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The information was published in the second evaluation of the controversial scheme by the Chief Secretary to the Treasury Danny Alexander.
After wide-spread media criticism of the manner in which some senior public servant, including Head of Student Loans Company, Ed Lester, operated, the Government was forced to clean up its act with regard to the way in which it used the services of contractors.
Many highly-paid public sector workers were found to be operating through their own limited companies thereby mitigating their tax and NI liabilities
As a result, the Treasury established new tighter rules on off-payroll appointments in May 2012, to make Government Departments responsible for ensuring that their temporary off-payroll workers were meeting their tax obligations, and that board members and senior officials with significant financial responsibility are not off-payroll except in exceptional circumstances, and then only for up to six months. These rules stipulate that any public sector contractor earning more than £219 per day, or on an assignment lasting more than six months, must demonstrate they are paying the correct amount of tax.
Some saw this as a knee-jerk reaction which would also target the legitimate contracting community.
Breaches
The latest Government report now shows that of the 2,505 people that Departments sought assurance of their tax affairs from, four per cent (94 people) were asked to leave because they were unable to provide evidence that they were meeting their tax obligations.
While the majority of all departments have followed the guidance, sanctions will be imposed because of two breaches. The Ministry of Defence will be fined £1m for failing to seek assurance from a number of workers on their tax arrangements due to administrative error in 2012-13. The Department of Health will be sanctioned £470,740 for two breaches at NHS England, where two board members were off-payroll for over a year. In both cases the individuals provided the necessary assurance to NHS England regarding their tax arrangements.
These fines will be donated to relevant charities, with £1m earmarked for military charities and £470,740 for health charities.
The Treasury’s review has also found that the Department for Work and Pensions (DWP) made errors in its reporting of the policy, but the Department has since corrected its accounts and is not being fined as it did not breach the guidance. The Permanent Secretary to the Treasury has written to DWP requiring it to demonstrate that all further reporting will be in full compliance with the guidance. The Government Internal Audit Agency is to carry out an independent audit of the implementation of the guidance at UK Export Finance, as the review identified some concerns which require further investigation.
Tough rules
Chief Secretary to the Treasury Danny Alexander said: "I introduced tough new rules to tackle tax avoidance by off-payroll workers in the public sector in 2012, and it’s heartening that the vast majority of Departments are compliant in ensuring that all their contractors are paying the correct amount of tax.
"The Treasury review for 2013-14 shows that where senior or higher paid workers have been unable to provide assurance that they are paying the right tax, their contracts have been terminated and their details passed to HMRC.
"While 95 per cent of Government Departments are broadly following the new rules, the Ministry of Defence and an arm’s length body of the Department of Health have not been able to fully satisfy the strict rules. I am imposing fines on these Departments as a result."
Review
Freelancer an self-employment body, IPSE, called for a review of the public sector pay rules following the report, claiming that the rules were 'flawed'.
Andy Chamberlain, Deputy Director of Policy and External Affairs at IPSE, said: “Aggressive and artificial tax avoidance is wrong and the Government is right to stop it, though it is far from clear whether that is what has happened in these cases. We believe the current tax rules for public sector contractors are flawed and that they could force contractors out of the public sector altogether, putting at risk projects which are vital to national security.
“The reality is that the vast majority of these professionals are meeting their tax obligations in full. Reports such as those in this morning’s Telegraph that claim that limited company contractors pay ‘corporation tax – as low as 20 per cent – rather than personal income tax at up to 45 per cent’ are wholly misleading. In fact, as well as corporation tax, contractors additionally have to pay income tax on any profits they draw down from their company."
IPSE believes the rules which were introduced three years ago on the back of the media furore are 'unnecessary, unwise, and unclear and in any case have been unevenly and unfairly implemented by Departments'.
Mr Chamberlain said: “The public sector tax rules are a sledge hammer to crack a nut. What was designed to prevent clear tax evasion by board level staff has now destabilised the position of specialist contractors and the projects they are working on.
"Government has a responsibility to ensure that the specialists with the right skills, who are very often independent professionals, are not driven out of the public sector by these rules. In the case of the Ministry of Defence, this is a matter of national security."
Mr Chamberlain believes that in many cases departments are still using the discredited Business Entity Tests (BETs) as part of the assurance process. (See: HMRC abolishes controversial Business Entity Tests - Oct 14, Shout99 and Business tests for public sector freelancers should be abolished - Sept 14, Shout99).
He said: “It has been widely accepted, even by HMRC, that the BETs are not fit for purpose and are scheduled to be scrapped from April. Despite this we understand they are still being used by some Departments as part of their assurance process. The next Government should as a matter of urgency undertake a full review of the need for this unnecessary burden on independent professionals in the public sector.”
In order
ClearSky Contractor Accounting, welcomed the Treasury report as evidence of contractors’ determination to 'play by the rules.'
Juliet Byrne, their legal and technical director, said: “The off-payroll rules are a source of confusion and anxiety for public sector contractors, who would prefer to focus on their assignments.
“Despite this, they are taking the time to ensure they comply."
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IR35, BETs and more....
For general coverage of IR35 policy and cases - and the rise and fall of the BETs - see Shout99's News on IR35 section.
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Susie Hughes © Shout99 2015
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