Six Lewisham Council employees paid via "tax avoidance" scheme [UPDATED]

Tonight's File on 4 programme on Radio 4 focuses on Council employees being paid through limited companies, which allows high earners to "make their own tax arrangements rather than be paid through the PAYE system."

In the programme, the Chairman of the Public Accounts Committee, Margaret Hodge MP describes such arrangements as a tax avoidance scheme and says no government employee should be paid on this basis.

The programme has revealed that Lewisham has six employees paid on this basis. Hackney Council was the local council with the highest number of people paid through external companies, with 39.

Update: Cllr Mike Harris, who chairs the Council's Audit Panel, says this issue will be discussed at the next panel meeting on March 22nd.

61 comments:

Anonymous said...

Loads of people do this. I know several people who work for govt., set up as sole traders, who pay a lighter amount of tax because of it. It's entirely legal, it's the system that needs to change, not the people.

Mb said...

Governments and private sector, it's rife. Got less of an issue if the person is genuinely a consultant providing a specialist service for a limited amount of time but I've worked in public and private and have worked with people for years who are down a perfectly normal job through a limited company. No company pension, paid holiday, sick pay but paid well and pay limited tax. My mate Roger working at Alcatel used to have a couple of catch phrases "whats the rate?" and "Tax? Aren't they for holding carpets down?

It's a misused system throughout the economy, ban it in the public sector only would be lopsided.

Anonymous said...

Bet there's a few of your TfL buddies on it Monkeyboy! A nice little bonus for their Quintuple time and a week off in lieu they'll get for each hour spent on the Olympics.

Mb said...

Lots of TfL people on it, senior staff do not get overtime. Contractors some times do. Yes, a shocker. But so do private companies including the companies
TfL use to build trains, design singalong systems. So do the banks you deal bank with etc. do you really think that just because someone has a company email address they are staff? It's an issue that needs tackilng but it's not a public/private battle. It's all over, amazed that it's actually just occurred to people that it's an employment model that's been abused for decades.

Mb said...

Singalong systems? IPad strikes again. (apple will use staff employed as "consultants" I'm sure)

Anonymous said...

Well I'm flabbergasted to hear that TFL workers might be in on it.

Sometimes I think we should just pour a load of bleach down the tube and start again. You know like on those Domestos averts where all the little bacterial things scream when a tsunami of Dom' comes washing over them? Like that.

Mb said...

You clearly have never worked in an organisation that employes engineers, architects, designers, accountants, purchasing professionals, lawyers. Most employ consultants, public and private. If you think otherwise you simply have not asked the right question.

Anonymous said...

Actually I have and do and I know about their status. I'm referring to common or garden employees, as you know.

Mb said...

....anyway, this is about lewisham. Only six?

Mb said...

No I don't know. What do you mean by "common or garden"? Operational staff? Doubt there are many at all, if any actually.

I'll say again for the hard of thinking, it's rife across all sectors. It just is.

Brockley Nick said...

@MB - sure, lots of employers do it (the programme made that point) but no reputable employer should. And public sector organisations, whose employees often remind people that they "are tax payers too" should be doubly vigilant not to undermine the system.

mb said...

yep, but i suspect that the press (not discoraged by the government) will say this is a scandelous example of Public Sector ineptitude rahter than a systemic lack of rigour in income tax enforcement.

Anonymous said...

A certain Lewisham 'director of regeneration' has been stated as having been 'doing it for years', and he's been mentioned on this blog several times in the past - I knew him personally some time ago and I wasn't a bit surprised when the information became widespread - an ambitious man.

oryx said...

It's absolutely standard practice for temping agencies to encourage you to go self-employed - or at least it was a few years ago.

You just pay tax like any other self-employed person - at least that's my understanding.

I know people who have done it and they have plenty of contact with the Inland Revenue.

Personally, when it comes to tax avoidance I'm far more bothered about the likes of Vodafone than I am about a few temps at Lewisham and Hackney Council etc.

Anonymous said...

In my experience when you do the math there is a tax advantage only if you earn more than £85k, particularly when one contributes to his/her own pension / health insurance and follows the correct rules in terms of claiming expenses. If one doesn't that it is illegal.

The point is, either the Council pays this people in excess of £85k or they are evading tax by claiming expenses they should not claim.

The last alternative is that the Council prefers to use contractors just because they are not counted as employees, so they can avoid hiring restrictions.

Brockley Nick said...

@Oryx - the programme was not looking at short term / temp workers, which of course is not an issue. What the programme was focusing on was (often senior) long-term, full-time employees working in permanent posts employed on this basis for the specific purpose of avoiding taxes.

Mb said...

Mb said...
Not just temps though. It's often skilled professionals who work in a job that to all intents and purposes is permanent for years at a time, sometimes in a management role so can influence an organisations strategy and even appraise staff? That's wrong and a misuse of a useful system. It's wrong across the board but accept nicks point that it's moreso in the public domain. Just don't turn it into a convenient stick to beat the public sector.

Don't know the circumstances of the six mentioned above though.

Mb said...

Wot nick said.... Beat me to it.

Shame said...

This set up is wide spread - but should be used by contractors who have expenses and perhaps staff and so do not have to pay full income tax on their earnings as some of it is going out as expenditure. Often people will claim their partner is an employee to facilitate this (eh eh Mr Livingstone and your memoir typing wife).

What it is not meant for is people trying to pass off most of their income as expenditure and only pay the full rate of tax on a minimum of their earnings. I seriously doubt anyone on Lewisham council doing this can justify their actions.

More and more Lewisham council seems to be full of self serving bureaurats.

Shame said...

Anon is right - its not avoidance - I think in many cases it comes close to being evasion and illeagal.

Anonymous said...

Yes, Mr Livingstone I presume.

Lou Baker said...

It's good that this has been exposed by the BBC.

Which, as an organisation, isn't taxpayer funded and doesn't pay any of its senior staff this way.

Oh, no, wait .....

Anonymous said...

But Lou

What about employees

of The Sun?

Anonymous said...

It is not against the law. It is a perfectly legal scheme. If it reducing the overall cost of employment to the employer - and that employment is the Council who we pay - then it should be welcomed.

In fact, the only question to be asked is - why isn't the Council using the scheme more and saving us more money?

If Mrs Hodges thinks it is wrong, then the law needs to be changed. And that is up to her. She is the MP.

Tamsin said...

Just caught up with this thread - like "singalong" systems. Karaoke on the tube to while away the time stuck in tunnels because the super-senstive doors have stopped a train three miles away. (Really good documentary that - hope they repeat it soon.)

I think what earlier posters have mentioned is right - it depends on the purpose of the set up whether it is simply incidental to a genuine short-term consultancy, tax avoidance (and legit.) or tax evasion.

Way back in the thirties there was a House of Lords case about the Duke of (?)Grosvenor who set up a deed of covenant to pay his gardener - thereby avoiding tax and the upshot was in his favour, that a man was entitled to arrange his affairs how he wished to minimise his obligations to pay tax. Then in the 80s, another case in the Lords reversed this to the effect that if the sole purpose of any scheme or commercial structure was to avoid payment of tax it was invalid, evasion and illegal.

I am surprised, though, that people have been able to work for years in this way for a single organisation. When I was free-lance proof-reading and copy-editing almost exclusively for one publisher they were very twitchy about being seen as employing me and so liable for PAYE.

Fiscal Frank said...

Save us money? It reduces the tax take, it means that everyone else pays extra to pay for the services the state provides to us. We pay extra to compensate for the tax that person has avoided. Unless you think the utopian dream is a zero tax society where there is no state provision for anything. You obviously do, I don't.

Anonymous said...

At the last full council meeting in answer to questions from Cllr Feakes & Maines it was stated....

The council does not engage any permanently employed staff through the use of Personal Service Companies.

From the data currently available, of the 30 senior interims managers and consultants (those earning £50k + per year) presently engaged by the council, there are an estimated 10 individuals who are engaged through the use of Personal Service Companies.

Anonymous said...

Is it tax avoidance or merely paying less tax?

Pension contributions in affect 'avoid tax' as do ISA savings plans.

Anonymous said...

ISA's and tax relief on pension contributions are there specifically to encourage saving, it's not an abuse of the system. The Ltd company thing is abuse, or at the very least misused, to avoid paying income tax that would be the case if they were employed PAYE. It's often ilegal but perhaps difficult to demonstrate.

Anonymous said...

Champagne socialists.

Anonymous said...

Check for IR35 rules, clearly the employees of the Council working at their premises on an exclusive basis do not qualify for IR35. Hence thye should be PAYE. This is not a gray area, it is just a breach on the part of the Council and its workers.

max said...

Anon 7:32, a very big thanks especially since the Council has (raher shockingly) stopped publishing online the Questions at Council meetings, from both members and public.

Locum Labours Lost said...

My girlfriend was employed by social services as a locum occupational therapist) via one of these company setups. she earn't a bit more but was only ever on short contracts without sick pay or annual leave. She is now employed by the council directly albeit still on a contract but earning less and now with holiday and sick pay.

Like others have said - ok for short term contracts with mutually beneficial terms but not ok for long term employment on the same terms as perm staff.

Shame said...

Its not ok either way - short or long term. This set up was not put in place to avoid paying full tax on your income - only to avoid paying income tax on company expenditure. The investment banks (suprise suprise) used this with their IT staff (used to insist on it) back in the 90s to avoid paying their obligations.

Anonymous said...

There is usually some sort of agency sitting between the personal service company of the individual and the large organisation.

A lot of organisations require people on a temporary basis for work on a particular project.

Fair enough, you don't need all the bricklayers still on your payroll after a building project has finished.

But where do you draw the dividing line? Anything can be a project in a company and a project can go on for years. Some supposedly full time jobs also don't last very long in areas like Finance, which require a lot of flexibility. They are hire/fire companies.

That these sort of arrangements are now used by local councils seems to be part of a trend of introducing change into public services by flexibly hiring managers from outside in the hope that they will get someone who is useful competencies.

Great theory, but I expect it simply becomes a vehicle for London councillors and council officers to award themselves fat pay checks.

Is it not the case the a councilor in one borough can be an employee in another borough? A geographical peculiarity that encourages a cross borough political and employment network that is responsible for much poor governance and poor quality administration.

I have seen political ructions in many organisations between full time employees and interim managers on contracts. Often it six of one and half a dozen of the other.

This one seems to have broken to the surface.

Shame said...

I dont mind that some firms use this for projects - it is a leagla requirement for the contractor to declare all income as such and pay full tax. They (and their accountants) don't. It's evasion as they will be paying partners who do ot actually work in the company, or 'pretending' that the money is for business expenses. It's another cas eof something being so widespread that the Revenus do not persue it. I am glad that the media is starting to raise this. Hmm maybe they should start looking at MPs....

mb said...

lt'd be an interesting question to ask if the rates paid to the 'consultants' has been frozen for two years in the same way that anyone earning over £21k PAYE has seen their pay frozen.

It's a bit weak to say that it's solely the consultants responsibility to pay the correct rate, especially as it's public money and a public entity. They should have a higher level integrity in employing folk. Often centrally dictated limits on pay and recruiting leads some crafty managers to employ who they want through the 'consultant' route which does not apear on headcount figures. Again seen that in both public and private entities.

Anonymous said...

Far more important issue to tackle for the BBC would be the kickbacks paid to officials related to procurement, planning etc...

Economically much more relevant than 6 people incorrectly expensing their car maintenance.

max said...

I don't see why they should do that instead of this.

Anonymous said...

Full time employee T&Cs versus Consultants on private contracts.

That row will go on an on, after all it is public money.

I guess it draws fire from the huge Public Service contracts awarded to dodgy US companies for half baked IT systems. These amount to billions of public expenditure.

I sometimes think these little storms are created so that people are distracted from the bigger picture of where the largest volume money actually goes and what we get for it.

JPM said...

Well, I'm pleased at last this large bubble has been pricked.

Macolm Smith, the former head of regeneration, it was pointed out here some time back - and to no avail - has received in excess of £1.2 million in this one role alone, and using a company in tandem with his wife! (She's actually a librarian.) This was done under the heading 'interim' head of regeneration. Though how a four year run can be interim god alone knows.

Smith was also given another role in tandem with the above from the council by the way, and may still be in it - even though he now lives in Dorset. (If you doubt it just do a director search, which is easy and cheap. Or ignore it, which is only costly to the many.)

Meanwhile, libraries close, housing falls into disrepair, and the money-making trough-sloughers make hay.

Anonymous said...

anon@9.31 is right. It sounds like a simple breach of the rules around PAYE.

It's not uncommon for people to start off as consultants and (if their work is useful) gradually become permanent fixtures - but they should then become employees and get all the benefits that accrue, as well as the disadvantages, such as higher tax.

There are tax advantages to being self-employed (at far below the £85k cited by one person, because you pay yourself dividends and tax on those is less than the basic rate of income tax) but significant drawbacks and personal financial risk. If these six people are getting the advantages without the disadvantages, then that is clearly wrong.

JPM said...

Lewisham Council is in this up to its neck. This is one of many emails I sent on this subject, and which is now part of further journalistic investigation. It is though worth stating that there is no suggestion of any criminal wrongdoing:

Sent: Wednesday, 28 September 2011, 11:04
Subject: Re: Freedom of Information Request No 155161 - response


Dear Mr Knight

Thank you kindly for the information supplied, some of which though appears contradictory.

How can Mr Smith be both a 'local govenment officer' and a director of a 'consultancy' and be paid ( in your words) for 'his services'? Payments made to the consultancy are therefor payments to Mr Smith, and the response appears vague, and unhelpful.

Do the amounts paid to Interea include VAT and expenses? If not, please provide the total amounts of public funding paid to Interea, and any additional thus far unrecorded amounts to Mr Smith in what appears to be a dual role of officer and private consultant.

Similarly, you have indicated that the postion is to cease in October. For the avoidance of misreporting, please state the year.

Could you also please supply details on any amounts paid to Mr Smith in his role as Interim Head of Customer Services, when this commenced, if Mr Smith is paid directly or via Interea or any other company, and if this role offers any additional remuneration; such as pension, VAT, etc.

You have also stated that Mr Smith was appointed to this role by the Appointments Committee in 2006. Please could you provide any documentation which records the tender for the position, and the oversight shown by any elected Member, Body, or council official into the selection of of Mr Smith, and/or Interea.

Could you also please confim whem Mr Smith relocated to Cornwall, and if he is to continue in the new role of Head of Customer Services, and details of when this position was also tendered.

Thank you for your kind and speedy assistance.

[MY NOTE.. There was none.]

JPM said...

I see my qualification may have gone into quarantine. I await approval.

Blackheath Bugle said...

Any idea where the FOI link is on the http://www.whatdotheyknow.com/ website? I couldn't find it...

mb said...

Anon @13:31. That reflects what I've seen in the past. It's too easy to employ someone on that basis, if there is no direct or significant financial cost to the employer in employing someone in that way why should they bust a gut getting them on a permanent basis? in the meantime the tax take lost is borne by those doing the same job AS PAYE.

nutnut said...

@ JPM, sorry but can anyone say 'weirdo stalker witch-hunt'? You have obviously got a bee in your bonnet about this and about Malcolm Smith in particular, however I think you are verging on being obsessed with ONE thing and really don't understand the bigger picture. If Mr Smith had been employed by the council and they had paid his PAYE, how much would they have saved? He no longer works for Lewisham, maybe you should focus on something else? Lewisham employs approx 8000 people, of those 6 are paid in this way, is that so bad? Speaking of a waste of public money - do you understand how unecconomical pointless FOI requests are?

Anon@13.31 said...

Mb, I guess the answer to why they should bust a gut getting them onto a permanent basis is "to comply with the tax regime"! (And second, to avoid bad publicity...) If someone is a permanent employee in all but legal form, then the tax regime requires them to be taxed via PAYE.

mb said...

yes I agree, it was a rhetorical question.

JPM said...

@nutnut

"JPM, sorry but can anyone say 'weirdo stalker witch-hunt'?"

Only through a smokecreen.

"You have obviously got a bee in your bonnet about this and about Malcolm Smith in particular,"

Guilty.

"... however I think you are verging on being obsessed with ONE thing and really don't understand the bigger picture. If Mr Smith had been employed by the council and they had paid his PAYE, how much would they have saved?"

Please tell. Also, if you find the posting of one letter an obsession god help Rupert Murdoch.

"He no longer works for Lewisham, maybe you should focus on something else?"

In fact he switched over to another role after the above was questioned. And if you know he no longer works there I would ask how you know? Did you go to the leaving do? Could you tell me how much it cost? Who picked up the tab?

"Lewisham employs approx 8000 people, of those 6 are paid in this way, is that so bad?"

I would say that this is so bad - for the other 7994 tax-paying hardworking individuals below him.

Why, wouldn't you?

Unless you are one of the Lucky Six of course. (It's actually more than six. But more on that later.)

"Speaking of a waste of public money - do you understand how unecconomical pointless FOI requests are?"

Yes, absolutely, so why not get the council to answer questions outside the Act? Any costs attached to it can then be avoided. Or better still, don't pay over million of pounds of taxpayers' money to private companies run by council officers. Save the library.

Could work.

Anonymous said...

@13.31 - my statement was correct. In fact although dividents have a lower rate, you are forgetting that the business has to pay corporation tax. If you file the correct expenses (expenses are limited because you use the office and equispment of the council) you are better off only when you earn above £86k.

max said...

And how many of these would you expect to be below £86k?

Anonymous said...

I believe that's what TFL pays its toilet cleaners.

Mb said...

Can the trolls keep the noise down? My head hurts.

Anonymous said...

@JPM - I'm not the same person as posted before (nutnut) and I'm finding it hard to care about tax etc at this time in the morning but I do feel like I need to pull you up on a couple of points:
Lewisham Council now has 4 directorates with Regeneration having been merged with Resources. Malcolm Smith is no longer head of regeneration. I found this out by looking on the council website (Lewisham.gov.uk> Mayor and Council> About the Council> How the Council is run> Council structure and directorates> Our directorates). Hardly a secret.
I don't work for Lewisham but I do work for another local authority and your dig about "Did you go to the leaving do? Could you tell me how much it cost? Who picked up the tab?" is particularly obnoxious - EVERY SINGLE PENNY spent by LAs has to be accounted for. There is absolutely no way that leaving dos are subsidised, if we want a xmas lunch, we have to pay for it. If we have a meeting over coffee, we have to pay for it - and do you know what? that's fine, because we understand that council money is not our money...
FOI requests "so why not get the council to answer questions outside the Act?" How would that cost less money for the time spent on admin, research etc?

max said...

That's a bit simplistic, for example a couple of years ago for example 6 characters or Lewisham Council went to a Spa in Kent for a weekend in order to develop the Council's strategy at a cost of £12k. And that only came out because of a FoI request.

Anonymous said...

things are very different now than they were a couple of years ago... we can't even buy £50 worth of stationery without the money being approved in advance and without having proved that it is the best price available

Anonymous said...

I think the equalisation of corporation tax and basic rate income tax rates at 20% has lessened (eliminated?) the tax benefits of being self-employed. It certainly used to be the case that there were savings if you were self-employed, but these were eroded and eventually disappeared, the MORE that you earned. Which makes the £86k point sound wrong to me.

I believe there are still NI benefits to being paid through dividends rather than salary, but not sure how significant they are.

JPM said...

@Anon who is not nutnut.

Sorry for not responding sooner as I have only just seen your post.

"Lewisham Council now has 4 directorates with Regeneration having been merged with Resources. Malcolm Smith is no longer head of regeneration."

I know. I think I said he left, or was supposed to, shortly after my queries to the council.

Hardly a secret.

I never claimed it was. Though Interea being a Malcolm Smith company was only found by asking for sight of the officer register in interests.

The council found this most odd that it should be asked for. It was not like the councillor's register, online, but held in hard copy at the council. The usual - stalling - FOI Act request system made it costly. If it had been held online it would have been far less costly to the council - and more open.)

"I don't work for Lewisham but I do work for another local authority and your dig about "Did you go to the leaving do? Could you tell me how much it cost? Who picked up the tab?" is particularly obnoxious - EVERY SINGLE PENNY spent, etc."

Two of the previous councils I looked into DID spend public money on leaving do-s, so i do not understan your claim that it is somehow obnoxious to ask the question. Unless you have made the FOI act request that can answer this.

If your council is a paragon of virtue though please do reveal it as it is an important comparison.

JJ said...

Something is niggling me regarding this issue and it concerns vat.

We all know that consultants must charge vat where their annual charges exceed the vat registration limit. If a member of a public body charges that body a consultancy fee plus vat does the local authority claim it back from the exchequer? I suspect it does almost automatically as all local authorities are entitled to reclaim all vat incurred on their non-business activities (i.e. normal council business) pursuant to Section 33 VATA 1994. That is a concession provided to local authorities under the vat regime. My problem is that these consultancy fees are not being charged to the entire "public body" but are being charged to only a part of the body i.e. that part which excludes the consultant / council member.
Section 33 does not provide for anything less than the entire LA body to reclaim vat it incurs. Therefore are some LA's erroneously reclaimg vat on these consultancy fees and thus building up a VAT exposure that will eventually have to be paid for by the ratepayers. I wonder. Does anyone agree that this is a valid concern please?

Anonymous said...

Always thought that as a sole trader you were classed as self employed.
As these people only have one customer I.e. the council, this is not self employment?
They are employed by the council.
Just another way to rip us off

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