Taxman Targets Interims and Consultants on Local Authorities

20:00 Tuesday 13th March 2012
File on Four Radio Four

ANNOUNCER: With tax avoidance increasingly in the news, Fran Abrahams investigates the extent of the problem. ..
FRAN ABRAHAMS: HMRC is certainly facing criticism. MPs have been asking why it’s doing deals with big business over unpaid tax bills. There was anger over the revelation that the Chief Executive of the Student Loan Company wasn’t on its payroll. And we’ve discovered it isn’t just central government that’s under pressure on the issue. Hammersmith and Fulham Council has been thanking its residents for helping it cut costs. It’s even been able to reduce council tax bills. But there ‘s been concern it might also have been cutting back on another kind of bill, the tax bill. The issue arose over the employment of a man named Nick Johnson, who’s recently been working at Hammersmith in a senior role. Theresa Pearce, who’s now a Labour MP, knew him when he was Chief Executive of Bexley Council in South London. (TAPE)
THERESA PEARCE: I was a councillor in Bexley some years ago, so I knew Nick Johnson then. And I was aware towards the end of his career with Bexley that he’d been unwell. And then he was pensioned off. The year after he was pensioned off, someone sent me a copy of a magazine from Hammersmith and Fulham Homes. There was a picture of him in that magazine wearing a hard hat with a shovel, and a fluorescent jacket, out at some sort of building site, where they were building some new homes. And I remember thinking at the time he looks remarkably well. And I was pleased about that, because he had been very unwell. And then it came to my attention that he was employed there. As I worked in tax, and I used to work for HMRC, this got the investigator in me going a little bit, and I started to dig around. And I found that although he was the Chief Executive for Hammersmith and Fulham Homes, he wasn’t actually paid as an officer or an employee, but was paid directly through a Personal Services Company, which struck me as a little odd. (LIVE)
FRAN ABRAHAMS:  Mr Johnson ran Hammersmith and Fulham Homes for three years. He recently moved to a different Council role in regeneration. His fees, more than £900,000 in all, were paid into a company called DaviesJohnson Limited. Theresa Pearce says the law’s clear. The Council should have put him on the payroll. (TAPE)
THERESA PEARCE: There are certain tests that you need to look at, for instance, one of those tests is substitution. If you engage a plumber, he can send another plumber. Thats’ substitution. It doesn’t matter. If you engage an interim head of housing, he can’t send somebody else in to do that job. It’s clearly that person is engaged to do that job. If he is part and parcel of that organisation, which he clearly is, he’s employed. It’s as simple as that. (LIVE)
FRAN ABRAHAMS: The legislation makes it absolutely clear that if you are an office holder, if you hold an office that continues no matter who sits in that office, so for instance a Board member, or a Chair of a Board, or a Chief Executive, then you are liable to PAYE. And there is no leeway in that. It’s not a matter of opinion. It’s a matter of law. So I’m surprised that Hammersmith and Fulham didn’t know this, or if they did know it, why they didn’t get some sort of clearance from HMRC.
THERESA PEARCE: Wouldn’t this therefore be fairly standard practice for a human resources department, or a payroll department, to check with HMRC on something like that?
FRAN ABRAHAMS: If you are paying somebody, whether you’re a big organisation or a corner shop, you have responsibilities when you make those payments to make sure that they are routed through the correct tax regime. And the same for any size organisation. And you can understand, with a small business, might not have an HR Department, but clearly Hammersmith and Fulham does, and has people who are trained payroll specialists. And they should know that. (LIVE)
FRAN ABRAHAMS: There’s no suggestion Mr Johnson avoided paying PAYE, because ha may have done so via his own company. But we wanted to know why Hammersmith and Fulham chose to pay him in this way, even though he spent three years in the role. They wouldn’t be interviewed, but in a statement they said he wasn’t an office holder, so he didn’t need to be on the payroll.
VOICED:There is no reason why an organisation should not appoint someone as its Interim Chief Executive over an extended period. A decision was made by the Hammersmith and Fulham Homes Board that an interim appointment was more appropriate than seeking a permanent appointment, given the urgency of the challenges faced.
FRAN ABRAHAMS: But Nick Johnson wasn’t the only senior person at Hammersmith and Fulham who was paid through a company. We’ve discovered the Council were worried enough to appoint an accountancy firm, Deloitte, to report on the extent to which these contracts had been used throughout the Council. And we’ve seen the confidential report. It gives details of a long list of people who were paid through Personal Service Companies. The report’s also come to the attention of Stephen Cowan, the Leader of the Opposition. (TAPE)
STEPHEN COWAN: We discovered that there were 17 companies who were being employed as consultants, but actually were supplying one individual who was working within the Hammersmith and Fulham management structure.
FRAN ABRAHAMS: So 17 people were working for Hammersmith and Fulham Council on a full time basis, but were being paid through companies?
STEPHEN COWAN: That’s right. Yes. And some of those people have actually worked for us previously, had retired, and then come back. So it seemed to be fairly large scale, and we thought it needed to be investigated further.
FRAN ABRAHAMS: Were you surprised by the scale of it?
STEPHEN COWAN: Shocked I think was really the issue. Because there’s quite a lot of squeeze at the moment in employing people. And indeed, the administration argues it’s not employing so many people. But to find out that we were employing 17 people on fairly large salaries in almost every case via the limited company mechanism, was more than a little surprising to all of us investigating this. (LIVE)
FRAN ABRAHAMS: Hammersmith said the number employed through companies, previously 17, had now dropped to 11.
VOICED:Following an extensive external review, we are confident that Hammersmith and Fulham Council’s procurement and deployment of individuals via Personal Service Companies is effectively controlled and monitored, and that the risk of any PAYE or National Insurance non-compliance has been minimised.”
FRAN ABRAHAMS: But Hammersmith and Fulham aren’t alone. Lots of other authorities are doing it too. Using Freedom of Information legislation, we asked all the councils in the UK how many people they had in permanent posts, but paid through companies. I’m looking at some of the emails we had back from councils. Quite a few of them say they don’t even know how many people are employed in this way. But some of them have quite a lot. Hackney in London’s got 39. Lewisham’s got six. And some quite small councils are using the arrangements too. Craven District Council in North Yorkshire says it has eight. Ashfield in Nottinghamshire five. St Edmundsbury in Suffolk, five as well. Across the country our information shows there are certainly almost 100 people working for councils but paid through private companies.(TAPE)
MARGARET HODGE: I really strongly feel that this is a tax avoidance scheme which is totally wrong, where you’re a public servant. It is not right that you should find yourself paid in a way that avoids tax. (LIVE)
FRAN ABRAHAMS: Margaret Hodge, who’s the Chair of the Public Accounts Committee, says it’s time these arrangements were put to an end. (TAPE)
MARGARET HODGE: Anybody directly employed by Government should not be on such a scheme. I think very strong directives need to go up from Government to local authorities, that they should not be using tax avoidance schemes, and the terms under which you can run a Personal Services Company are defined by HMRC. And if those terms are being contravened, then HMRC have a duty to ensure that they bring to an end the tax avoidance scheme. The local authority, I have to say, also has a duty as a public sector body. This may not be a legal duty, but I think it’s a moral duty. (LIVE)
FRAN ABRAHAMS: John Brazier is the Managing Director of PCG, a body which represents freelance contractors. He says we don’t need to be too concerned. There are perfectly good reasons why such people shouldn’t be on the payroll. (TAPE)
JOHN BRAZIER: Tax paid by a limited company contractor is not just corporation tax on the revenues they bring into their company. They then have to pay themselves upon which they then pay income tax. And if they’re engaging somebody within their own business, it may only be one extra person on an employed basis to do some contracted work or something, then of course they have to pay National Insurance contributions on those people as well. So it’s not as straight forward as the press have been pointing out. Government and local government in particular could not function for the sake of many hundreds of thousands of contractors up and down the country who are engaged for short periods of work or indeed on fixed term periods of work. These individual businesses of you like, sometimes referred to as Personal Services Companies, should be allowed to operate in the same way that any limited company does currently.
FRAN ABRAHAMS: But surely what we’re getting here is a suspicion that companies are being used as vehicles for tax avoidance.
JOHN BRAZIER: I think you’re absolutely right. There can be suspicion, because people don’t understand. But I would just ask the general public to think very carefully. We musn’t build up a story here that suggests that these people are tax avoiders. This is absolutely not the case. There’s a tremendous amount of work being done by these people assisting companies and assisting Government up and down the country.
FRAN ABRAHAMS: We’ve seen examples where local authorities taking somebody on as an Interim Chief Executive. Three years later they’re still there, and they’re still being paid through their own company.
JOHN BRAZIER: Yes. I think there are some borderline cases. There are some contracts and some industries where by their very nature they would be more long term. Now you can take a view that somebody on a three year contract could equally be paid on a PAYE basis.
FRAN ABRAHAMS: You say some of these cases are borderline. If you’re a Chief Executive, you’re a Chief Executive. That’s an office, isn’t it?
JOHN BRAZIER: Yes it is. And I think there are some areas I think, if you’re a Chief Executive or a Managing Director of a company, unless you’ve gone in on an interim basis to cover some sort of crisis for example, that to my mind would normally be, under normal circumstances, would be a generally speaking an employed opportunity. Yes. Absolutely. (LIVE)
FRAN ABRAHAMS: But there have been questions about the use of Personal Services Companies in a wide variety of organisations. There’ve been similar arrangements in Hospital Trusts and Quangos too. And the Government has been expressing concern. Later this month, the Chief Secretary to the Treasury, Danny Alexander, is going to report to MPs on why some civil servants are paid through private companies, a review which followed the revelations about the Student Loan Company. And the Government’s also planning to announce in the Budget that there’ll be a new law to tackle the most egregious tax avoidance schemes. .. The Treasury Minister David Gauke said in a statement that the Government was devoting extra resources to collecting tax.
VOICED:The Government has invested an extra £900 million in HM Revenue and Customs to take action against those who don’t comply with the rules, a move that we expect to bring in an extra £7 billion a year in revenue by the end of the parliament. With 200 new criminal investigators already recruited, we anticipate that they will help deliver 1000 additional prosecutions by 2015.”