State to audit its own PSCs for tax abuse

A leaked Treasury paper is reigniting the limited company tax-saving row, showing that more than 2,000 civil servants reduce their liabilities by the government paying them as a personal service company (PSC), rather than as an individual.

In what one IR35 expert last night told CUK was a continued attempt to “put their own house in order,” the government says in the paper that the “off-payroll” servants will face sanctions to ensure each pays their “fair share” to the exchequer.

While Treasury Secretary Danny Alexander goes onto say that a ban on such arrangements is “not proportionate,” those PSC-using civil servants working at least six months, on upwards of £220 a day, will have to justify their tax position, or be terminated.

Although not stipulated in the paper, they may also face scrutiny from HM Revenue & Customs, which expects to be passed the Treasury’s findings with a view to “contacting the people concerned” – “civil servants or not” – for potential breaches of the disguised employment rules (IR35).

Either way, Mr Alexander states that the practice will be stamped out across Whitehall ‘within three months’, seeming to impose a countdown on the 2000 or so other Ed Lesters, the Student Loans Company boss stripped of his PSC for avoiding tax.

Mr Alexander’s timeframe seems to be alluding to his department’s plan, to make end-users deduct employment taxes at source from all workers who are “office holders” or “controlling persons" at the organisation, or "integral" to its running.

However he received warning yesterday against “rushed legislation” and “ill-thought-out timescales” by PCG, the contractor trade group, which fears that a “knee-jerk response” to the leaked Treasury paper could harm jobs, growth and the economy.

Managing director John Brazier said: “Disguised employment and tax evasion should be investigated and stopped; but genuine freelance contractors should not be penalised in the rush to ‘do something.’”

Fortunately, the three-month timeframe for the clampdown appears a bit ambitious. Former Revenue official Kate Cottrell, an IR35 specialist, told CUK: “As I understand it, we will have the consultation document fairly soon and once issued, all tax changes have to be subject to a consultation period which is 12 weeks in duration.

“They then gather the views of industry and stakeholders and respond to it, and only then can the process start to be put in the Financial Bill, so it should be effective from April 2013, at the earliest.”

Yet Mr Alexander may have some insurance in the event that the government acts sooner. In the leaked document, effectively a letter intended for chancellor George Osborne which has been obtained by the Exaro website, he claims:

“The sheer scale of off-payroll engagements across government, and the length and size of these contracts, suggests that scope for artificial tax minimisation may be greater than previously understood.”

He adds: “Departments have provided the Treasury with information in relation to all individuals engaged off-payroll – for payment in excess of £58,200. Over 2,000 such individuals have been identified.”

Since the leak, unfavourable press coverage about the size of daily pay packets being handed to some of the PSC servants, alongside the tone of the reporting, makes one industry advisory fear for the future.

“I worry that this is going to be a difficult time for contractors as the industry has not got the support of the public,” its founder said. “It’s the old problem of one-size-fits-all  again, with all limited company owners serving the public sector unfortunately and wrongly being tarred with the same brush – ‘tax avoiders the lot of them.’”

May 04, 2012