Interim Judgement

Starting a storm: The unfortunate (but wealthy) Mr Lester

Two weeks ago we had a sense that the unmasking of Ed Lester from the Student Loans Company as the sole employee of his own personal services company was going to lead to a bit of a public sector witch hunt and so it has proven.

But whilst the majority of the heat so far has been on the civil service and the QUANGO sector it was only a matter of time before Eric Pickles jumped into the fray. And whilst others had been pussy footing around the issue (after all, other ministers are meant to be defending their own departments) Mr Pickles has typically been able to come out with both guns blazing and a nifty soundbite.

Mr Pickles on Friday called for Local Authorities to target ‘town hall tax-dodgers’ arguing that:

Local people have a right to know whether town hall tax-dodgers are short-changing the public purse; whether bumper bonuses are being awarded to poorly performing workers; or whether pay is being hiked up for execs who’ve boomeranged from post to post.

I am actually quite sympathetic to Eric Pickles.

My first job in local government was on a team that involved about eight staff; of which I think five of them were interims and all of those were in some form of separate company which enabled them to pay less tax. It doesn’t take a rocket scientist to work out what happened next; within a year the two members of the team who were on the payroll had left to take interim roles elsewhere and had set up PSCs (or joined a different umbrella company which apparently did the same thing… Who said tax isn’t meant to be taxing?!?).

I also don’t really like the idea of any member of staff setting up arrangements that enable them to pay less tax than I do. It just feels wrong.

And yet and yet…

I have found myself spending the last couple of weeks defending my interim colleagues and getting increasingly frustrated with the Government.

My husband thinks I’ve gone soft (I probably have) but here are a few reasons I’m feeling a little uncomfortable with Mr Pickles’ latest crusade:

  1. I work with these people: I like the people I know who have their own PSCs. In general they are better than those ‘on salary’. They usually live by their last contract; if they are good they get more work if they are not good then often they don’t get any more work. The market is fallible but in general those who take up the work face more risk as well as being able to reap more rewards.
  2. No-one has actually broken any rules here: If the Government are so upset about the use of Personal Services Companies then the Government should change the Inland Revenue rules. Instead they seem to be saying that PSCs are ok for staff who contract with other organisations but if they contract with the public sector then they should give up those rights. That is a just too hypocritical for me.
  3. What are the alternatives: If we need interims then often the alternative to paying for an individual through their own PSC is either to employ them on a fixed term contract (which is often inappropriate as we don’t want them on contract with all that entails) or to pay them through a recruitment company. I’m not sure paying a slug of commission to a recruitment agent every month is actually much preferable to paying a temporary member of staff through their own company. Indeed, it might even end up being more expensive to the local authority and surely that is not a good thing?
  4. This seems like a witch-hunt: It feels like another witch hunt and I might just be resisting it because of that.

So I don’t really like the idea of interims and the tax arrangements of PSCs don’t seem quite right but like it or not local government does make use of, an admittedly pretty small number of, interims and right now I’m not sure I can think of a good reason why they shouldn’t be allowed to be paid through whichever sort of company the council is comfortable with; provided it is legal and is prudentially sound (i.e. value for money for the local taxpayer).

And judging those two criteria seems like a decision for each local authority on it’s own rather than a panicky Government hunting around for another scapegoat.

PS. As many of you will know these issues are not really our area of expertise. For some really good commentary I’d check out the writing of Flip Chart Rick here and here.

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3 Comments on “Interim Judgement”

  1. Gary Bandy Says:

    I am an accountant and I work as an interim manager through my own limited company. Without getting too technical about it, the potential for reducing my tax bill is not that great, not since the Inland Revenue introduced IR35. Prior to that people working through companies could pay themselves minimal salaries and take the rest of the money as dividends, upon which income tax is paid but not national insurance. Even with that device, you have to pay corporation tax on the profit before you can take the dividends.

    There are other possible tax advantages one could implement. Eg the company could employ the interim’s spouse or offspring and thus take advantage of two or more people’s personal tax allowances, reducing the interim’s total tax paid at the higher rates. Dare I say it, this is something MPs have been doing with office allowances for years.

    I think I should also mention the reason such companies are attractive to employers, especially for hiring interims: it reduces their liability as an employer. As far as the council or other body is concerned they have a service contract. That means they are not responsible for employment duties such as the working time directive, they don’t have to make national insurance contributions, they don’t have to pay for holidays, they don’t have to apply their equal pay scheme to the position, they can fire the person without having a long winded investigation and disciplinary hearing, and so on. They also don’t have to allow the person to join the pension scheme and thereby they can save themselves the pension contributions.

    He downside is VAT is payable on the service contract. Local government and ministries don’t worry about that because they can reclaim it from the treasury. The picture is different in the NHS and I’d be surprised if the witch hunt uncovered the same sort of arrangements in the trusts and PCTs.

  2. Performance Officer Says:

    I used to work as a recruitment consultant (I know, I know) in a completely different sector, and we frequently used people in these companies. They were usually hired for specific projects, much the same as a consultant, and as such it never seemed to me that odd that they were set up this way.

    My point is really that there’s some sort of continuum from a ‘genuine’ consultant who happens to be a one man band and therefore has one of these to those who are effectively permanent and this is therefore JUST a (limited if the previous poster is right, as I’m sure he is) tax wheeze. Most people are probably in the grey middle and drawing a line is going to be difficult.

    So we have a slightly grey area, based on complicated legislation across different departments. Why does it not surprise me that Pickles has taken this opportunity to declare it a very black and white situation?

  3. kriswith Says:

    If councils or other public sector bodies are using interims for time limited project work, to cover maternity leave or for a clear short term purpose I think we should be flexible enough to use PSC’s. However many of these cases are long term arrangements involving senior managers and this seems wrong. It just confirms a culture of ‘getting away with it’ which seems to be prevelent at the moment – MPs, journos, bankers, looters, etc. If the post is a permanent one then do the recruitment properly, but if not make the case for using an interim openly and honestly.

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