Two things about civil servants and service companies

Two thousand senior civil servants could be minimising their tax by being paid off the Government payroll, it has emerged.

That people who are not really eligible for not PAYE are getting paid through not PAYE is indeed pretty dodgy.

However, this of course is bollocks:

Being paid through a service company allows the recipient to be taxed at the corporation rate tax rate of 21 per cent rather than pay up to 50 per cent in income tax.

The deal was estimated to allow Mr Lester – who received £182,000 a year via a headhunter to his own service company – to save as much as £40,000 a year in tax.

Because when you take the money out of the company as a dividend then you\’ve got to pay the extra income tax to take you up to the regular rate.

Where you do save is on national insurance. But this causes another problem:

But he added: “I also believe that departments should be able to assure themselves that highly paid specialist staff are meeting their income tax and [national insurance] obligations.”

Under the new crackdown Mr Alexander will force any official who is not on the pay roll, has been employed for more than six months and is paid over £220 a day – the equivalent of a senior civil servant’s salary – to prove that they are paying their fair share of tax.

If cannot prove they are paying the same income tax and National Insurance Contributions as an employee, they will have their contracts terminated.

The major saving is in fact on employers\’ national insurance. And it is that that the government itself hasn\’t been paying on these wages as a result of the paying through service companies. So it is in fact the government that has been dodging taxes here.

Which is amusing, isn\’t it?

And to add to John B\’s comment:

\”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,\” he said, before adding that around 1,500 are paid more than £380 a day.

He continued by stating that around 1,600 people have been working for their departments for more than six months. Of these, 1,200 have been working for in excess of a year and 800 of them have been working for at least two years.

16 thoughts on “Two things about civil servants and service companies”

  1. Generally, this happens when you appoint a contractor to fill a post temporarily (quite rightly, since that’s *how the system’s supposed to work*).

    It’s noticeable that neither the Exaro or Telegraph reports break down the 2,000 into permanent versus temporary staff; I’ll be surprised if more than a handful of the 2,000 are permanent.

  2. I’m no accountant, but I doubt if the motivation is to get out of paying employer’s NIC. It’s to be able to get rid of the people once the job is done.
    And how does the VAT on these service companies work?

  3. @blokeinfrance

    A major advantage for the government or indeed any company in paying someone in this way is that they are not an employee; they will have no employee rights, no pensions, no paid holiday, no company perks, and can be got rid of a very short notice with no fuss – good for the government if a project gets cancelled for example. It means that they don’t have to find that person anything else to do or go through the redundancy process. Another significant advantage is that the government can bring in specialist resource to fill a skills gap short term. If your contractor is still on the same contract after a year then you’re not managing your resources particularly efficiently.
    If the government forces contractors to pay themselves everything that they’ve billed through PAYE but without all the advantages of being an employee, then nobody will want to take the work on, at least not anyone who is any good.

    As for VAT, the contractor will present the government with a bill for whatever their daily rate is plus VAT at the usual rate. This would be paid over to HMRC less any offsets for purchases. However, if the contractor has registered on the flat rate scheme, they will pay over a smaller percentage than 20% to HMRC, although they won’t normally be able to reclaim VAT on purchases.

  4. All industries do this. IT in particular has had a massive contractor market for years and out works out very well for all involved.
    Employers get their flexibility, contractors get paid well for taking the gamble of being out of work at the drop of a hat.
    As Blue said above, no one in their right mind is going to do contract work with no permie benefits for permie money.

  5. I’ve seen “temporary” workers in place for well over two years. Hiring new staff in government is difficult at the best of times, and if you have a good contractor it’s easier to just keen him* rather than fight the HR battle and end up recruiting somebody less talented.

    That said, IR35 should have killed off this loophole. The fact that it didn’t is purely down to enforcement – 90% of contractors I’ve met are flagrantly in breach of IR35 but they know there’s little chance of an investigation. You can even take out insurance against an investigation.

    (*contractors are nearly all male, in my experience)

  6. @AndrewM Couldn’t another nail in the coffin for IR35 be the fact that when HMRC do decide to pick on a company they nearly always fail? I think it’s about 90% failure rate for HMRC. It doesn’t help that the law was badly written.

    IR35 wasn’t meant to close the loophole of keeping a contractor for more than two years or longer. That’s a business decision not a tax one. IR35 was an attempt to stop couples from taking advantage of the tax laws which allowed a wife* to handler her own tax affairs seperate from that of her husband – a very “progressive” thing to do. IR35 tried to bring the wife back in under the husband’s tax affairs.

    (*contractors’ partners are nearly all female, in my experience)

  7. I’d imagine that the contracts for these people won’t be of the “we can fire you in a week” variety. I imagine there will be substantial parachute payments and gold playing involved.

    Still, when the State evades the taxes It created it is a good sign that those taxes are absurdly high.

  8. @SadButMadLad,
    You’re thinking of S660, which prevents husbands paying their wives for work they didn’t do. IR35 is specifically targeted at “disguised employment”.

    Yes it’s a terribly written rule, and yes HMRC haven’t had much luck pursuing cases, but the intent was there.

    Needless to say the whole charade could be avoided by simply merging both NIs (employers and employees) and income tax into a single payroll tax. A solution so simple that it will never happen.

  9. I think the purpose is to get round limits on departmental budgets. As you said the main saving is on Employers’ NI, so one’s departmental budget performance looks better if one reduces departmental expenditure and HMRC receipts by an equal number of millions. Cue congratulations from one’s Permanent Secretary after he’s looked good and improved promotion prospects.
    The number of highly paid professionals working full-time in the NHS and Social Services whose sole job is to make the other side pay as much as possible is almost incredible and completely horrendous.

  10. Why do cunts say “in excess of” rather than “more than”?

    Word count.

    There’s a 50% productivity increase in that phrase alone.

  11. Rob says:

    ,blockquote>I’d imagine that the contracts for these people won’t be of the “we can fire you in a week” variety. I imagine there will be substantial parachute payments and gold playing involved.

    i suspect, from considerable experience, that Rob is wrong.

  12. My public sector contract says I have to give them 1 month notice and they can give me 7 days notice.

  13. the humorous thing is that, if a crackdown is implemented, these people will just leave and take up contracts elsewhere.

    there is generally a reason why you pay someone £300 per day. And other companies around the world also require those skills. £220 per day for a contractor is low-scale….what do they do, make the sandwiches?

  14. I’ve flip-flopped from being a contractor to a permie and back to a contractor again over the last 20-years.

    I’m currently taking a 6-month break in the Far East where I have my home before returning to contracting in Europe.

    The way IR35 was originally written when proposed it would have been the companies doing the hiring (i.e. the ones with the deep pockets) that would have taken the risk associated with taking on contractors.

    They lobbied MP’s to transfer the risk from them to the contractor and effectively broke IR35 before it had even started. This is why it has become largely unenforceable.

    The current statistics are that PCG has defended 1,508 cases of which 1,498 were won by the contractor and 10 were won by HMRC.

    So that is an effective rate of 99.34% loss to HMRC or 0.66% win to HMRC.

    Those are pretty appalling statistics, which is why HMRC have lately resorted to threatening lots of people with IR35, but as soon as they hand matters over to PCG insurers HMRC drops the case.

    Some of us have taken to putting the PCG logo on our websites and stationary so that HMRC don’t even bother.

  15. Some of us have taken to putting the PCG logo on our websites and stationary so that HMRC don’t even bother.

    Quick update to website seems to be in order…

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