As hon. Members are aware, in February I announced a review of the tax arrangements of public sector appointees. I said that I would report back to the House on the results of that review, which is what I would like to do in this statement today. As I said at the time to the House, there is absolutely no place for tax avoidance in government. That is especially so at a time when money is tight and we all have to pay our fair share to help tackle the deficit.
As I told the House in February, senior civil servant appointments are audited against the Treasury’s “Managing Public Money” guidance. That document states that
“public sector organisations should avoid using tax advisers or tax avoidance schemes as any apparent savings can only be made at the expense of other taxpayers or other parts of the public sector.”
That is why when questions were raised about the tax arrangements for senior public service appointees, I immediately put this review in place, and I would like to thank the investigative journalists at ExaroNews for bringing the issue to our attention.
The review looked at the extent of off-payroll engagements in Government Departments and their arm’s length bodies. With respect to the NHS, the review was limited to the boards of NHS organisations. None the less, the “Managing Public Money” guidance, and the new principles that I will set out today, apply in full to the NHS. The review could not include either local government or the BBC, which are not under direct control from central Government—it will be for those organisations to justify their own off-payroll arrangements, in the light of the unprecedented transparency we are showing today. Nor does it include devolved Administrations, and I hope they will now also follow the example we are setting.
Let me be clear to the House: the review published today did not seek to identify evidence of tax avoidance—that is the role of Her Majesty’s Revenue and Customs. The review looked at off-payroll engagements, because the opaque nature of those engagements has created the conditions where tax avoidance could be taking place. Let me also make it clear there are circumstances where it may be necessary and appropriate for an employer to appoint an individual off payroll—for instance, where Departments need to employ specialists to carry out short-term roles when there is no available civil service expertise. That practice will continue. However, the review has revealed the extensive and long-standing nature of off-payroll engagements in government. I can tell the House that the review has identified more than 2,400 off-payroll engagements in central Government Departments and their arm’s length bodies that were live on 31 January this year. That is an unacceptable number, given the lack of transparency on the tax arrangements of these contracts.
That lack of transparency cannot continue, so today each Department involved is publishing on its website a list of off-payroll appointees who, as of 31 January, were engaged at an annual cost to the Department of more than £58,200. The majority of cases relate to technical specialists; in fact, more than 40% relate specifically to IT specialists. The data also show that 70% of cases relate to arm’s length bodies. About 10% of the cases relate to payments made directly to a personal services company. More than 85% relate to intermediaries such as employment agencies, where it is not possible to know whether the individual is or is not using a personal service company. The other 5% relate to the self-employed, who are therefore subject to self-assessment in the normal way. About 70% of all those in the identified cases are paid more than £400 a day, and more than 70 cases cost Departments more than £1,000 a day. About 900 of the cases—approximately 40%—date back longer than two years. In fact, more than 20 cases date back more than 10 years, which some might consider an astonishing length of time to be on a contract. It is also worth noting that since January this year, more than 350 off-payroll contracts identified by this review have since ended. In about 10% of those cases the individual remained with the Department but is now on the payroll.
It is clear that off-payroll engagement without sufficient tax transparency has been endemic in the public sector for too many years. It is a problem that built up and was presided over by the previous Government. Indeed, it is likely that under their watch many more thousands of cases of off-payroll payment have come and gone, yet no one said a word.
The solution to the problem is not to turn a blind eye or brush it under the carpet. We must bring an end to the “don’t ask, don’t tell’ approach to the issue and it is clear that the tax arrangements for off-payroll employees in the public sector are not as transparent to the employer as they should be. At the moment, contracts with off-payroll employees do not give Departments the right to request detailed tax assurance from individuals; nor can HMRC provide that information due to taxpayer confidentiality. Even when off-payroll employees are in fact paying the correct amount of income tax and national insurance, the employer has no means of reassuring themselves that that is the case. It is right that we should tackle that lack of transparency.
Today I can announce new tighter rules on off-payroll appointments. First, the presumption is that in the future the most senior staff must be put on the payroll. Secondly, all Departments must put in place provisions that allow them to seek formal assurance that anyone paid a senior rate and employed off-payroll for more than six months is meeting their income tax and national insurance obligations in full. If that reassurance is not provided when requested, Departments should terminate the contract.
Finally, these new tighter rules will be monitored carefully and any Department that does not comply will be fined up to five times the cost of the salary by the Treasury. In addition to those changes, we have shared all the detailed information from the review with HMRC, which will be able to take any further action it decides is necessary in individual cases. There will be no lengthy transition period for the new rules, either. They will be implemented by September this year and will be applied to existing contracts too, subject to value for money. Departments will report to Parliament on the outcome as part of the 2012-13 annual report and accounts process.
There is one further measure I want to announce today. Working through an intermediary provides an opportunity to minimise, or in some cases avoid completely, paying income tax and national insurance that would otherwise be payable. We already have anti-avoidance legislation, commonly known as IR35. That rule ensures that where there is in effect an employment relationship, if it was not for the interposition of a personal service company, the person concerned pays the appropriate amount of tax and national insurance. The rule is a vital tool in tackling tax avoidance and helps to ensure that people pay the right amount of tax.
Let us take as an example an individual earning £120,000 a year. In that instance, there could be as much as a £23,000 difference between the amount of tax and national insurance paid compared with that paid by somebody on the payroll. When IR35 was introduced 10 years ago, it was comparatively rare for controlling persons of an organisation to work through a personal service company. In the past few years, however, there have been high-profile reports of that happening, so today the Government are also consulting on the Budget proposal that all so-called “controlling persons” must by law be on the payroll of their organisation. This proposed tightening of the rules will apply to any organisation, be it public or private. It is right that when an individual is in a position to control the major activities of an organisation, they should be on the payroll of that organisation.
At a time of tight public finances, it is vital that everyone pays their fair share. The changes I have outlined today help to ensure that senior public staff pay, and are seen to pay, their full and fair share of income tax, and they demonstrate yet again the Government’s determination to clamp down on all forms of tax avoidance. I commend the statement to the House.
I thank the Chief Secretary for his statement and for providing advance notice of it. We welcome this review of the pay and tax arrangements of senior public servants.
At a time when ordinary families and businesses are bearing the brunt of the recession that this Government have created and at a time when more than 700,000 jobs in the public sector are being cut while ordinary public service workers who keep our NHS, schools and police services running have had their pay frozen and their pension contributions increased, people will be shocked that more than 2,000 senior public servants, many earning several times the average public sector wage, have been paid in a way that allows them to avoid paying their fair share of tax, and that 1,200 of these deals have been done by the present Government in the past two years.
The vast majority of working people in this country have no choice over how or whether to pay the tax that they owe and they will feel that those who benefit from the highest public sector salaries have a special responsibility to make their proper contribution to the funding of the public services on which we all rely and to which they owe their generous salaries. We should all be clear that if the taxpayer is paying someone a living, particularly a better living than the vast majority of taxpayers enjoy, that person has a duty to pay their fair share of tax and the Government have a duty to ensure that they do so.
The statement is a valuable step towards greater transparency and accountability and we welcome that, but I have a number of questions that I hope the Chief Secretary can answer today. First, on the question of the chief executive of the Student Loans Company, we now know that he was appointed at a salary significantly higher than that of his predecessor and that he potentially avoided paying around £42,000 annually in tax, an amount almost twice the average public sector salary. Will the Chief Secretary tell us which members of the Government agreed to the arrangement made with the chief executive of the Student Loans Company and which members of the Government were aware of the arrangements before the matter came to the public attention in February? Have changes been made to his payment arrangements since then and can we be assured that he is now paying his full share of income tax and national insurance? If not, when can we have that assurance? If his contract has been altered, has there been any cost to the taxpayer in doing so?
The Government committed to publishing details of all public servants paid more than £150,000, yet the chief executive of the Student Loans Company was not on the list published in 2011 despite, as we know, earning £182,000 and despite the fact that his predecessor was listed. Will the Chief Secretary explain why the chief executive’s name was not on that list and can he tell us if any other public servants paid more than £150,000 have not been listed so far and whether they will be listed in the 2012 publication?
Secondly, on the subject of the extent of the problem and the scope of the review, will the Chief Secretary confirm how many such deals were signed off since February, when the affairs of the chief executive of the Student Loans Company came to light? Will he confirm that those individuals paid more than the Prime Minister will have been personally approved by the Chief Secretary? How many has he personally approved? If any did not come to him for approval, can he explain why?
The review’s findings cover only people who earn more than £58,000, which is more than twice the average annual salary in this country. Will the Chief Secretary tell us why his review excluded anyone on less than £58,000 a year, and if he will return to the House with findings that include all such cases? In those cases where a public servant was not being paid on payroll, were the individuals concerned paying their proper share of income tax or national insurance? What was the cost to the Exchequer of those arrangements?
Despite the emphasis on transparency, the findings presented today do not include local authorities, non-maintained schools, public broadcasting authorities or other publicly owned companies. Those areas account for a substantial portion of the public sector pay bill. When will the Chief Secretary come to the House with figures that cover those areas? It is not enough for him merely to encourage the publication of that information by others.
The findings also do not cover publicly owned banks. I think that taxpayers who have paid to rescue those banks would expect those employed by the banks to be paying their tax at the appropriate rate. Will the Chief Secretary conduct a review of the extent of such arrangements in the publicly owned banks?
The findings also do not cover privatised or contracted-out services. Does the Chief Secretary think that those earning large incomes from taxpayer-funded contracts should be expected to pay their proper share of tax, and what steps will he take to ensure that that is happening?
Thirdly, as regards what the Government will do next, the Chief Secretary has told us that there will be a new presumption that the most senior staff must be on the payroll. How does he define “the most senior staff” for those purposes? Will he give a clearer definition of the exceptional circumstances in which he will allow some public servants to continue receiving their salaries off the public sector payroll? Will he give an undertaking that those cases for which those exceptions have been made will be made public and that the exceptional reasons for them will be given?
In future cases, will Departments be allowed to seek assurances about the tax affairs of public appointees with off-payroll arrangements, or will they be required to do so, as this morning’s news reports imply? If they will not be required to do so, why not? Why not have that duty to seek such assurances?
Where these arrangements are disallowed for current or future appointees, can the Chief Secretary give us his assurance that their salaries will not rise to compensate them for the loss of net income that may result? Can the Chief Secretary confirm that in accordance with previous commitments given on transparency and accountability, all those covered by the review whose earnings exceed £150,000 will be included in the Government’s annual list of people earning more than this figure?
On the wider issue that the Chief Secretary mentioned—how IR35 laws are used to avoid tax beyond the public sector, which clearly needs to be addressed—can he guarantee that HMRC will have sufficient resources to monitor, manage and enforce the full payment of taxes at a time when it is being asked to absorb £2 billion-worth of cuts to its budget?
In conclusion, the Government need to ensure value for money for every pound of taxpayer money spent, especially at a time of wage restraint for nurses, teachers and police, and huge cuts in the number of people working in the public sector, so the Opposition welcome the Chief Secretary’s commitment to rein in the avoidance of tax, but I hope this will apply to all those who are paid by the taxpayer, and that there will be genuine transparency in pay and in any exceptions to the rules set out today.
I am grateful for the shadow Chief Secretary’s welcome for the steps that I announced today, though it was striking that in her response there was no reference at all to the fact that many of these arrangements date back to the time of the previous Government. About 40% of the cases identified began work under the previous Government.
If the hon. Lady wants to know more about why those arrangements came into place, she could ask her Front-Bench colleagues if they were here. She could ask the Leader of the Opposition, for example, as two cases date back to his time as Secretary of State for Energy and Climate Change. She could ask the shadow Home Secretary, as nine cases date back to her time as Secretary of State for Work and Pensions. She could ask the shadow Health Secretary, as 45 cases date back to his time as Secretary of State for Health. She could ask her colleague the shadow Chancellor, because at least 24 cases date back to his time as Secretary of State for Education. Yes, it is once again their mess and we are cleaning it up.
The hon. Lady asked a few questions. With reference to the chief executive of the Student Loans Company, as I said in answer to the urgent question from the right hon. Member for Newcastle upon Tyne East (Mr Brown) in February, the individual concerned went on the payroll straight away—that day. I announced that at the time of that statement, which I think the hon. Lady responded to. Of course, going on the payroll was the appropriate thing to do. As I made clear then, I had no knowledge of any tax benefit to an individual. As is the practice with cases where those involved are earning more than the Prime Minister’s salary, the approval is given within the Department. My role as Chief Secretary is to examine the salary level to make sure that it is consistent with the pay restraint that we are properly putting in place across the public sector.
This review looked at the salary level above £58,200 because that is the minimum salary level in the senior civil service, and it focused on senior public service appointments. These rules will be available for Departments to apply more generally, should they wish to do so. As I said in my statement, the review was not looking for evidence of tax avoidance because individual tax arrangements are a matter of taxpayer confidentiality, but all the results of the review from across Government have been passed to Her Majesty’s Revenue and Customs so that they can investigate if they choose to do so.
I referred in my statement to organisations that are not within the control of central Government, such as local authorities, the BBC and so on, but I am sure the many Labour councils around the country will have heard the shadow Chief Secretary’s remarks and will be bringing forward as a matter of urgency transparent publication of all the arrangements in their local authorities. I look forward very much to seeing that.
In relation to IR35, I should remind the House that in the spending review we provided an additional £900 million to Her Majesty’s Revenue and Customs specifically to focus on their work tackling tax evasion and tax avoidance. That will include resources to investigate cases caught out by the review or cases under IR35. The hon. Lady will know that the Office of Tax Simplification looked at the operation of IR35 last year and we are carrying forward some of its recommendations, but the proposal on which we are launching a consultation today—that controlling persons in organisations should, as a matter of course, be on the payroll—will strengthen the IR35 regime, which I hope Members on both sides of the House will welcome.
I listened carefully to my right hon. Friend’s statement, taking note of his comments regarding the BBC. A great number of my constituents pull their hair out at the huge salaries paid to people at the BBC, only to see them invest them in companies outside to try to avoid tax. Will the IR35 regime go some way towards trying to address the situation?
The arrangements at the BBC are a matter for the BBC. I know that my right hon. Friend the Secretary of State for Culture, Olympics, Media and Sport has drawn the review to the BBC’s attention, so it is aware of the focus that the Government are placing on the issue. IR35 potentially applies to any taxpayer in the relevant set of circumstances, whether that individual works for the BBC or for any other organisation.
I welcome the Chief Secretary’s statement and I join him in congratulating David Hencke on the work that he did in uncovering the situation. Will the right hon. Gentleman confirm that he and his officials will co-operate with the investigation that my Committee will now undertake on his review?
Will the Chief Secretary comment on the fact that HMRC authorised the payment to the Student Loan Company’s chief executive under this arrangement? What instructions has he given to HMRC to deal differently with exceptions, which he is still allowing? Scope matters. Although his review has looked at the senior civil service, it matters how people are paid, whether they work in NHS trusts or for private companies delivering public service funded through the taxpayer’s pound—
Order. The right hon. Lady is not asking a series of questions. This is a statement. I have given her considerable latitude, given her seniority, but I think she has asked enough questions now. Perhaps she should leave some for other Members who are rising.
I am grateful to the right hon. Member for Barking (Margaret Hodge) for her questions. Certainly, Treasury officials will co-operate with the investigation which I gather her Committee will undertake into these matters. I welcome that because, as I said in my statement, it is important that the light of transparency is shed on the issue as much as possible. I am sure that her Committee can play an incredibly valuable role in that, as it always does. I gather that the role of HMRC may be the subject of a soon-to-be-forthcoming report from her Committee. No doubt that will speak for itself, but of course the rules that I am putting in place today and the rules that exist for managing public money should be applied by all Departments in relation to public service appointments, and I made clear my view about the particular case that she referred to when I responded to the question from the right hon. Member for Newcastle upon Tyne East (Mr Brown).
I agree that scope matters. I should say in relation to the NHS that although the review looked at board members in NHS organisations, because I wanted it to be done quickly so that we could bring forward recommendations and change the practices across the public sector, its recommendations will apply across the NHS and will need to be applied there in the same way as in any other part of the public sector.
Will my right hon. Friend stress an important assurance which I think he made, that HMRC will continue to be blind as to whether they are dealing with somebody who works for the public sector or the private sector, that all people will be treated equally by HMRC, and that for the most part in his statement he was speaking as an employer? In his review of IR35, will he take great care not to catch up with musicians, artists and others who are traditionally regarded as self-employed but may have controlling roles in organisations? It would be a great mistake if we made the cost of employing those people, particularly international people, much more expensive, to the detriment of the arts in this country.
I can assure my hon. Friend that HMRC is completely blind as to whom any individual works for. Taxpayer confidentiality is an essential part of the way in which HMRC works and we are making no changes whatever to that. We have passed the information that we discovered through the review to HMRC. It will be for it to decide whether it wishes to make any further inquiries. That will be a confidential matter for it to pursue in its own right. This is not an overall review of IR35; it is a particular consultation in relation to controlling persons of organisations. I am certain that the point that he raised will be noted and perhaps brought forward by him or others in responding to the consultation, which opens today.
The Chief Secretary deserves credit for his handling of the issue since it came into the public domain. Like my right hon. Friend the Member for Barking (Margaret Hodge), I pay tribute to him and to the investigative journalists, David Hencke and others, who first drew it to our attention. It makes no difference whether those arrangements were agreed by Labour Ministers or Ministers in the coalition; they are wrong and he is proceeding in the right way to put a stop to things. Can he tell the House roughly the cost of unwinding the arrangements and whether that cost will fall on the individual Departments from within their existing allocations, or whether some supplemental allocations will be needed? Can he also say when the Secretary of State for Business, Innovation and Skills first knew about the arrangements for the head of the Student Loans Company and what he did to bring them to an end?
I am grateful for the right hon. Gentleman’s comments and for his role in bringing these matters to the House’s attention. I wholeheartedly agree that it makes no difference when the arrangements started and which Minister was responsible; frankly, the situation has grown up over a number of years and under Governments of different hues. It is right that we are taking action to bring the situation under control and ensure proper transparency so that there is no perception of the potential for tax avoidance. He and I agree 100% on that.
It is impossible to say at the moment what the costs, if any, of unwinding the existing arrangements will be. Of course, as I said in my statement, senior people must be brought on to the payroll, unless there are exceptional short-term circumstances. For others, we need arrangements in place that allow assurances to be given that the proper and full amount of tax is being paid, and that will depend on the outcome of those processes with individual members of staff. Of course, if there are costs to be borne, they will have to be borne from within existing departmental allocations. If Departments do not comply with those rules, there will be a fine of up to five times the salary involved, levied by the Treasury on departmental allocations, which I hope will give Departments a strong incentive to comply with the rules as quickly as possible.
My right hon. Friend and his colleagues have done some very important work in bringing these arrangements to light, but is it not the case that someone should be engaged in this way only in circumstances where there is a genuine short-term shortage in government of a particular expertise or if the individual genuinely has a wide portfolio of private sector clients unrelated to other public sector work? Is not what is needed an emphatic statement from him that these arrangements should be not commonplace, but truly exceptional?
I am grateful to my hon. Friend for his comments and his welcome. He is right that the arrangements should be exceptional and unusual, and should apply only in particular cases, such as when there is a short-term shortage, as he says, or a particular specialism is needed to deliver a project. That is why so many of these cases relate to IT professionals delivering individual projects. There is an employee test under the IR35 rules, which I am told is simple and straightforward, and that should be sufficient for determining on which side of the line someone sits.
I am interested to hear that there are particularly egregious offenders in North Tyneside and am grateful to the hon. Gentleman for drawing that to the House’s attention. My right hon. Friend the Secretary of State for Communities and Local Government has of course drawn this process to the attention of all local authorities precisely to get them to show a transparency similar to that which we have shown with the review today, and I very much hope that they will all follow that example. It is for HMRC to decide whether it wishes to investigate an individual case and whether there is a case to answer. As I have said, the existence of these arrangements does not in itself demonstrate that tax avoidance is taking place, because it is perfectly possible for the arrangements to be in place and for the proper amount of tax to be paid. The problem is a lack of transparency, so getting people to publish the information so that HMRC can decide whether it wishes to investigate must be the right process to go through.
I welcome my right hon. Friend’s statement. Everyone wants to see public servants paying their right and fair share of tax. I respect the fact that he cannot investigate the tax affairs of all the individuals concerned, given the scale of this activity and the length of time it has been going on for, but what estimate has he made of the total loss that would be caused to the Exchequer if all these people used this legal means to avoid paying tax?
I am grateful for my hon. Friend’s welcome for this work. I am sure that he would not wish Ministers to investigate the tax affairs of individuals, as that way would lie ruin for the country. I cannot make such an estimate for the reason behind my previous comment: taxpayer affairs are confidential and it is for HMRC to deal with particular cases when it finds that avoidance is taking place. What I can say is that there is a very large number of cases and that this relates to the wider question of consultancy and contingent labour in government. He might be interested to know that in 2009-10 the previous Government spent £2.4 billion on contingent labour of various sorts. In 2010-11, thanks to the additional controls on consultancy that we put in place, we reduced that to £1 billion, and I expect the bill to be reduced further in 2011-12. There are things that central Government can do to reduce dramatically those costs across government, and that is precisely what the coalition Government are seeking to do.
I thank the Chief Secretary for his statement and commend him for the action he has taken since the scandal became apparent. If we are to believe that Revenue and Customs is now boarding this Good Ship Lollipop, how will we know whether someone receiving amounts of money from the public purse over £58,200 in future will not exempt themselves simply by ensuring that they accumulate it from a number of Departments rather than one? The measures he has announced today relate to Departments reporting amounts over £58,200 that they are paying to individuals, but they do not seem to address the issue of people pocketing money from a number of contracts with different Departments.
The hon. Gentleman asks an interesting question, and he is right that someone might be earning small amounts of money from a number of different Departments. Of course, in that case it is likely to be a contractor, of the sort my hon. Friend the Member for Bristol West (Stephen Williams) referred to, who has multiple clients. It is not clear on the face of it that these rules should apply in those cases, but I will certainly consider the sort of case that the hon. Gentleman mentioned.
As someone who is not involved in a vendetta against the BBC, unlike some Tory Back Benchers, I can tell the Chief Secretary that, as a result of correspondence with the director-general of that organisation, I have been informed that there are just two full-time employees left at the BBC, both very high-earners, on personal service contracts and that that will end in July, which is certainly welcome. Why is it so difficult for the Treasury to close the loophole, whether in the public or private sectors, so that unless it is a genuine company there can be no way in which individuals pay less tax than they should be paying?
I am grateful for the hon. Gentleman’s remarks about the BBC, which is useful information for the House to have before it. I say to him in all seriousness that the rules relating to this sort of case—the IR35 rules—were put in place by the previous Government, and we are seeking to strengthen them through the consultation we have today. The coalition Government have done more than many previous Governments to take action on dealing with tax avoidance and evasion across the board, because it is vital in a time of austerity that everyone pays their fair share, and that is what we are doing. Frankly, it is what the Government of whom he was a part did not do.
I welcome the Chief Secretary’s statement, but should we not apply the rules to all individuals receiving money from the public purse, rather than allowing the BBC, local authorities and others off the hook? I fear that, unless they are forced to take this action on transparency, all sorts of obstacles will be put up. I know from correspondence with the BBC in Northern Ireland that it has not been as transparent there as it has been elsewhere. In fact, it has stonewalled and refused completely to give information to me as a Member of Parliament, so I urge him to go further and force organisations such as the BBC into transparency.
The new Treasury rules that I have announced today apply only to organisations under central Government control. That is how the rules work, but I encourage the right hon. Gentleman and other hon. Members who have made the point about local authorities to continue their campaigning in order to ensure that those organisations do reveal such information. He did not refer to the Northern Ireland Assembly Government, but he may very well want to take steps to ensure that that organisation also brings forward the appropriate degree of transparency about its arrangements, too.
The Chief Secretary to the Treasury is right to admit that without the work of Exaro and “Newsnight” he would not have a clue what is going on across Departments, but the action that he has announced today will affect no more than a tiny percentage of the abuse taking place throughout the public sector. He needs to do more than write letters to the NHS and to local government. One so-called consultant, Mr Nick Johnson, has received £1 million from Hammersmith and Fulham council in the five years since he retired on an ill-health pension of £60,000 a year from another local authority. On the Chief Secretary to the Treasury’s figures, Mr Johnson would have avoided £200,000 in tax, so when is the right hon. Gentleman going to act on such abuse?
The hon. Gentleman refers to the national health service, and I was very clear in my statement and in my response to the right hon. Member for Barking (Margaret Hodge), the Chair of the Public Accounts Committee, that the rules apply throughout the national health service and, indeed, to academy schools. I do not control the finances of local authorities, but I can make it very clear that I want to see them go through a similar process, and I am sure that campaigning local MPs such as the hon. Gentleman will not rest until their local authorities do so.