Minister calls on councils to follow stricter rules on paying people "off payroll"

Local Government Minister Bob Neill has called on councils to adopt similar principles to new Treasury rules on paying people working for the public sector "off payroll".

The Government announced plans to tighten the rules after a review found that more than 2,400 people working for Whitehall departments and their arm’s length bodies have been paid in this way.

The review also revealed that 1% of those individuals had been engaged in this way for more than a decade. Two in five (40%) have been paid off payroll for more than two years.

The Government said that under the new rules – which will be implemented within three months – the most senior staff must be on the payroll, “unless there are exceptional temporary circumstances”.

Whitehall departments will also be able to seek formal assurance from contractors with off payroll arrangements lasting more than six months and costing over £220 per day “that income tax and national insurance obligations are being met”.

“Departments should consider terminating the contract if that assurance is not provided,” the Treasury said.

The new rules will be monitored carefully with financial sanctions for departments that do not comply, it added.

The Government has also launched a consultation on a proposal in the Budget that all ‘controlling persons’ must by law be on the payroll of the engaging organisation.

“The Government believes that where an individual is in a position to control the major activities of an organisation, but is engaged through an intermediary, rather than on the payroll, the engaging organisation must be able to be confident that the individual is meeting their tax obligations,” the Treasury said.

Local authorities were not covered by the review, but Neill urged councils to follow "similar principles" to the new rules in a public letter to the Local Government Association.

The Department for Communities and Local Government also pointed out that the Localism Act required councils to publish and be accountable for their pay policies.

Other key findings from the Treasury review include that:

• Departments paid intermediaries, such as employment agencies, in around 85% of cases, personal service companies in around 10% and the self-employed in less than 5%;
• More than 40% of those identified were IT contractors; 
• The majority of those identified were paid on a daily basis, with around 70% costing the appointing department more than £400 per day.

The review acknowledged that there were circumstances where it might be appropriate for an employer to appoint an individual off payroll “and that the fact that an individual is engaged in this way does not mean that they are not paying the correct amount of tax”.

Chief Secretary to the Treasury Danny Alexander, who commissioned the review, said: "The review has identified almost 2,500 off payroll engagements in central government departments and their arm’s length bodies. The opaque nature of those engagements has created the conditions where tax avoidance could be taking place.

“We have to bring an end to the ‘don’t ask, don’t tell’ approach to this issue. That’s why I am announcing these new, tighter rules on off payroll appointments in Government and passing the detailed findings of the review to HMRC.”

A copy of the review document can be viewed on the Treasury website. The site also provides information from central government departments and their arm’s length bodies in relation to all individuals engaged off payroll as of 31 January 2012, where the cost to the department is in excess of £58,200 per annum.