We revealed this morning in the FT that Treasury officials believe that as many as 100 civil servants may have been paid through private companies rather than individuals – far more than had previously been thought.
That marks a major widening from the 25 at the Department of Health exposed in the Guardian yesterday. The health department admitted that many of the staff paid in this way were full-time employees and had worked in the department for years.
Departments have sought to argue that nothing inappropriate has occurred and that it is legitimate to hire people who classify themselves as companies or partnerships.
You might wonder why this is allowed to happen and why there is no rule preventing it already.
The answer is that there is: It’s called IR35, which was introduced in 2000. It was set up to prevent people using such devices to avoid PAYE or National Insurance.
John Whiting, a leading tax expert, tells me that the HMRC should establish whether any of the individuals fell under IR35.
Mr Whiting, a director of the Chartered Institute of Taxation, said it was “terribly difficult” to establish if someone was using a company with the purpose of avoiding PAYE and National Insurance. But there are some clear guidelines.
“It doesn’t apply to someone doing a day here and a day there and working for several clients,” he said. “But where you have someone working half time for one orgniasation and for say six months, or a couple of years, they’re bang to rights.”
The Treasury only sent out its detailed guidance to departments last week and won’t produce a report until late March.
However, HM Revenue & Customs will be working closely with the Treasury on the issue, it told us.
“All sorts of people work through service companies for all sorts of reasons,” an HMRC spokesman said. “But where the arrangement is really only a way of avoiding PAYE tax and National Insurance, then the law says the service company must pay the PAYE and National Insurance to us on behalf of the individual at the end of the year. We police the application of that law and we are currently increasing the number of people focussed on compliance work making sure the tax rules apply as they should.”