Roll on, roll off

Cutbacks iStock 000013353612XSmall 146x219In a move intended to end the 'don't ask, don't tell' approach to off-payroll appointees and contractors, Government departments now have more power to ensure that the tax obligations of their contractors are satisfied. Danielle Kentish and Richard Burgess explain the issues.

Concerned about the transparency of the tax arrangements of public sector appointees who did not have PAYE and NICs deducted at source and were therefore considered ‘off payroll’, Danny Alexander (Chief Secretary to the Treasury) launched a review of the public sector contractors' tax affairs.

The Treasury's report of May 2012, whilst recognising that public sector bodies would need to make such appointments to deal with specialist or temporary posts, found that that 2,400 workers were not on their relevant department's payroll. Consequently, it announced that measures should be introduced to allow those public bodies to seek assurance from these contractors that their income tax and national insurance obligations are satisfied.

Previously, departments have been limited in their ability to verify that tax has been paid as the workers' tax is not deducted from the fee prior to it being paid. The review has recommended that, in central government departments and their arm’s length bodies, in terms of all for all new engagements and contract renewals:

  • Board members and senior officials with significant financial responsibility should be on the organisation’s payroll, unless there are temporary exceptional circumstances; and
  • Off payroll arrangements lasting more than six months and costing over £220 per day, (the equivalent to £58,200 p/a) should include contractual provisions which allow the department to seek assurances that tax obligations are satisfied. Government departments, however, may apply the new rules to any contract, irrespective of whether it meets these criteria.

The Secretaries of State for Health and Education will also consider how to take forward the principles of this approach in the NHS organisations and non-maintained schools. Margaret Hodge, Chair of the Public Accounts Committee, highlighted that staff at academies are not directly answerable to the government and therefore are not currently required to provide assurances on their tax affairs, despite receiving government funding.

Departments are being encouraged to apply the changes to existing contracts and the Cabinet Office has called on departments to terminate contracts, where possible, with companies which do not provide the necessary assurances.

The recommendations were to be implemented by 23 August 2012 with the appropriate clauses inserted into new contracts from this date, and all contract renewals carried out after that date and the implementation of the policy will be monitored, with the possibility of financial sanctions for departments which do not comply with the new rules.

The monitoring process will take place in April 2013 when departments will be required to provide the number of off-payroll engagements for those earning more than £220 per day for longer than 6 months since 23 August 2012; the number of these for whom assurance as to their tax obligations has been sought; the number who have successfully provided assurance; and action taken against those who have not.

The manner in which a contractor is able to provide the necessary assurances depends on his or her manner of appointment. If an appointment is done under a limited company contracted by the department a number of options are available:

  • If the worker is engaged through a limited company (or other organisation e.g. a partnership or a university) and is on the payroll of that company and having PAYE and NICs deducted at source by the limited company then the worker can provide evidence that all of the money they are paid by the Department is put through that body and they are receiving/withdrawing it with PAYE/NICs deducted at source.
  • If the worker is engaged in their own limited company which is low risk for IR35, simply demonstrating this to the department will provide sufficient assurances. If the company is at medium or high risk for IR35, further assurances must be given.

Introducing thousands of additional employees to government departments' payrolls will incur the additional cost to the government of having to make national insurance and pension contributions. It is unclear whether the additional income from unpaid tax will outweigh these costs, however by taking these measures it is evident that the government places greater importance on transparency of public sector workers' tax affairs.

Whilst the new rules currently only apply to central government departments and arms-length bodies, it is likely that political pressure may be placed on the government to broaden the scope of the rules to local authorities.

Danielle Kentish and Richard Burgess are part of the team at Veale Wasbrough Vizards. For more information, contact David Hansom, the firm's head of public sector, on 020 7665 0808 or by This email address is being protected from spambots. You need JavaScript enabled to view it..