Friday, 5 October 2012

Shaken and stirred by tax dodge debate

Turned on the radio just before 7am this morning and immediately heard Monty Norman’s famous James Bond theme, played to mark fifty years since the film franchise was launched with the release of Dr No. In a reverse of the way Bond likes his favourite tipple fixed, I was stirred rather than shaken by the music. But within seconds a phone call from BBC Radio 5 live, asking me to give a live interview at 7:10, kick started the adrenaline.

The House of Commons Public Accounts committee has published a report looking at the contractual arrangements of people hired by public bodies, notably the BBC, which enables them to pay less tax. These so-called ‘off payroll’ staff are self-employed service providing contractors who control their own limited companies. They can avoid the income tax and national insurance they would pay if engaged by public sector organisations on the payroll as employees. While such arrangements are perfectly legal the concern is that these contractors, especially if they work for just one public body or do so for a prolonged period of time, are merely employees dressed up as self-employed to cut their tax bill.   

The issue surfaced earlier this year when it was revealed that the head of the Student Loans Company was employed full-time on this basis, which led MPs on the Commons committee to inquire into the scale of the practice. HM Treasury has also been undertaking an investigation and is currently reviewing submissions to a public consultation exercise which it ran until August.  

The perceived avoidance caused by ‘disguised self-employment’ was initially tackled almost a decade ago by the IR35 legislation but it’s generally reckoned that this is being bypassed because of more widespread hiring of ‘controlling persons’ , so ministers are considering tighter regulation. The aim now is therefore to ensure that where an organisation hires a controlling person to perform a role, that organisation (unless a private sector firm with fewer than 10 staff) will have to deduct PAYE and NI at source, just as if the contractor were an employee. 

Judging by the tone of today’s Commons report, not to mention loads of anti-tax avoidance stories in this morning’s newspapers, there is likely to be widespread political and popular support for such a move. For example, the shadow chancellor Ed Balls spoke of cracking down on ‘bogus self-employment’ when addressing the Labour Party conference at the start of the week. However, those taking tough action must take care not to undermine the important source of flexibility that ‘off payroll’ work provides both to hiring organisations and the economy more generally.  

The Treasury has yet to calculate how much revenue a tightening of tax rules in this area might generate, though it does conclude that there will be ‘no significant economic impact’ and only ‘minimal impact’ on public service delivery, a conclusion I find somewhat surprising.

It’s silly to portray off payroll contractors as tax avoiding ‘fat cats’ who can afford to cough up extra taxes without any side effects. Only a minority are the ‘top talent’ media personalities that attract criticism, the majority are working long hours for comparatively little financial reward. The most obvious possibility therefore is that if required to pay higher tax and national insurance these contractors will simply raise their fees. This will either dent any hoped for addition to the government’s coffers or mean that public sector bodies will cut back on their use of contractors, which will be bad news for those hoping to improve public service delivery as well as contractors themselves. If private sector organisations (which will also be covered by changes to tax rules) end up having to cut back too, work will be left undone with no guarantee that more employees will be hired on the employee payroll to compensate.

It’s perfectly understandable that at a time of fiscal austerity, with either ‘we’re all in this together’ or ‘One Nation’ essential mantras for politicians looking to respond to popular sentiment, there is a policy imperative to ensure everyone pays their fair share of tax. But it’s daft to go about improving tax transparency in a way that could easily harm public sector reform, economic growth and jobs. We may not need our politicians to be as ruthlessly efficient as James Bond, but we don’t want them to act like Bond’s hapless comic opposite Johnny English and shoot us all in the foot either.  

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