What next for PSC Contractors in the public sector?

Watching the BBC be taken through its paces on 16th July 2012 by the Public Administration Select Committee (PASC) on the topical issue of off-payroll contractual arrangements within the public sector, was uncomfortable and left an uneasy feeling about the outcome of this review.  This review followed PASC’s announcement on 23rd May 2012 that it would undertake a review of the BBC arrangements in response to Danny Alexander’s findings from the HM Treasury’s review of tax arrangements for workers in the public sector.

BBC PSC Facts

BBC engage in total around 25,000 workers on off payroll arrangements each year

1/3 of all BBC staff “off the books”, of which 148 were presenters (some of which are considered the face of the BBC) are engaged on this basis.  Typically, television and radio presenters engaged on this basis are engaged through personal service companies (PSCs).

Direct and to the point

Bottom line, the PASC view was that the BBC arrangements with respect to its engagement of its presenters who were PSC contractors were only set up to reduce BBC’s tax liability and or the individual’s tax liability.    These arrangements were not considered to be genuinely outside of IR35.

The nature of the presenter’s role and the length of such engagements on the face of it suggested an employment relationship (irrespective of the type of contractual terms they are engaged on) and a BBC example contract for PSCs provided to PASC appeared to have restrictions on the presenter being able to undertake other work of a similar nature in the UK, did not appear to have a right of substitution, and was silent on control, all of which leant itself to the contract being inside of IR35.

Compounded further, the BBC was also accused of forcing existing presenters who were originally employees of the BBC into working through a PSC, with one whistleblowing presenter stating that he was advised that he would not continue to be employed unless he moved to a PSC.

If presenters through their personal service companies did not meet the test for being outside of IR35, who was ensuring that BBC presenters were paying the correct tax and NI contributions?  The underlying presumption was that this was (or should be) the role of the BBC.

BBC’s Response

David Smith, Head of Employment Tax tried to explain that every case was different for PSCs, and that the facts of the case together with the contract would need to be reviewed in accordance with IR35 tests to determine the status of that PSC.  Like most companies (whether in private or public sector) the BBC does not undertake this review of the tax arrangements of PSC contractors themselves.

Zarin Patel, Chief Financial Officer of the BBC felt that BBC complied with its statutory obligations through regularly submitted information to the HMRC with respect to third party suppliers in order that HMRC can monitor third party tax arrangements.

It was also suggested that PSCs would still be paying the same or similar amounts of tax and NI as if they were employed; making an assumption that all those within IR35 would have paid their tax and NI in any event and therefore the BBC was not attempting to avoid tax.

Zarin Patel’s rationale for the use of PSCs was twofold;

Custom and Practice – the industry works very much on this basis and therefore the BBC has to follow suit to remain competitive with the likes of ITV and Channel 4.

Flexible Workforce needs – Given the project nature of programme production, the BBC require flexibility to ramp up and ramp down workforce levels quickly rather than retain a large workforce on the bench.  It therefore makes sense to engage workers as and when they are required for individual programmes.

PASC Response

Irrespective of any argument that the need for PSC contractors was genuine or that these arrangements were outside of IR35 or not, the distinct message was that these arrangements shouldn’t be in place for the type of individuals who were being scrutinised, in fact there was a sense of immorality exuding from PASC about these arrangements.  The underlying message from PASC was that the BBC should simply employ the presenters.

PASC was clear and unequivocal that the public sector had a greater burden of responsibility to not avoid tax than the private sector and that this included the BBC.  There was suspicion that many presenters had been engaged for long periods of time and it was apparent that engagements lasting more than 2 years were considered by PASC members to be at the fringes of acceptability given later discussions on length of engagements of workers off payroll with BIS and the Treasury.

Actions

PASC demanded a full review of PSC contractors at the BBC.  Their concern was when and how these cases were going to be investigated particularly given that during discussions with Lin Homer, the HMRC chief, HRMC’s level of investigations in prior years was extremely poor; 25 during the tax period 08/09, 12 during the tax period 09/10 and 23 during the tax period 10/11.  Lin Homer agreed that resources needed to be increased this year to increase the number of reviews and investigations.  With respect to the BBC, Lin Homer confirmed that she would have a different resource review those specific cases.

The clear expectation of PASC is that all government and public sector organisations should have processes in place that regularly review and challenge the engagement of workers on this basis.  PASC required the BBC to undertake a full review on how it engages presenters in particular but more generally workers off payroll and to submit their findings to PASC.

http://www.publications.parliament.uk/pa/cm201213/cmselect/cmpubacc/uc532-i/uc53201.htm?goback=%2Egde_4065302_member_143616455

Comment

Having spoken to a number of clients and accountancy providers there are already a marked increase in the number of reviews by HMRC of PSCs who have operated in the public sector, usually under the auspice of compliance checks.

In addition, there is rumour that some government departments may already be taking a proactive stance and are approaching their PSCs to seek clarification of their status.  What stance will those departments be taking?   If one example that we have seen is true, government departments may seek to assume all their PSCs are within IR35 as the starting point and the PSC is left to prove otherwise.

One can only hope that common sense will prevail and that we do not find ourselves in a position where the mere fact of being a PSC contractor in the public sector means they are automatically within IR35.  Many businesses and consultancies are legitimately operating outside of IR35 and to effectively force those businesses into having to spend immeasurable time either defending their position and or having to accept a position which means they must pay greater levels of taxes which would not otherwise be due under existing tax legislation makes no sense and may create a negative effect on the ability to attract PSC contractors into providing services in the public sector.

The concern as always is that the easy way out will be sought; why spend time attempting to classify your PSCs for tax purposes, when you can make it easy for yourself by simply requiring them all to accept they are within IR35.

With the impending “controlling persons” legislation, it is inevitable that end users of PSCs will be forced to become much more aware of their PSC usage and how they use PSCs in their organisation, so arguably it is only a matter of time before end users, including the public sector, have to review their existing policies (where they exist) and become more stringent as to how and why they engage PSCs (whether directly or through staffing companies).

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