ALL IN IT TOGETHER? - TAX AND THE PUBLIC SECTOR WORKER

Let's keep this at a minimum?

In recent weeks it has become more and more obvious that certain public sector employees are not being paid in the traditional PAYE manner when it comes to work they are performing. Certain employees are utilising devices that will minimise their tax bills like for example setting themselves up as limited companies -- the state then pays the limited company a fee and that company in turn pays the individual partially in terms of a salary and partially in terms of a dividend. This reduces the tax bill of the individual concerned. There is even another way to do this. Instead of paying the individual a dividend, it can make a loan to that person,providing that person is a director of the company. That person can, for a limited period, pay tax on the amount of the loan interest only, the loan eventually needs to be declared as a dividend within a given time period. Other individuals can form limited liability partnerships, where losses on some activities can be offset against gains on others.

Is this proper behaviour in an age of such austerity and hardship? Everyone would like to do it if they could, however strict rules should apply to public service figures who are remunerated in this way. If there has been a long term agreement to employ an individual to perform a service within a public sector organisation then that arrangement should be reviewed and certain tests need to be applied to it. Who bears the risk,if any from that relationship? Certain criteria could comprise the following:

• The length of time of the work service contract with the public sector body.
• The nature of the company\partnership contracting with the public sector -- e.g. size and number of directors etc.
• The length of time that the individual\company has actually worked for that public sector body ( especially if contracts kept having to be renewed)
• The proportion of weekly hours that person(s) devoted to the work for the public sector body during the total period of time that person and/or his company/partnership worked for the public sector body.
• The % of weekly time that the person(s) spent during that public sector contract doing work for other bodies.
• The contract covered the work of a certain named individual and\or his company\partnership or direct agent.
• The degree of freedom that the individual\company\partnership could exercise within the work contract i.e. were they directly instructed what to do by that public sector body?

A combination of the above factors could be used to determine whether there was a commercial relationship between the individual\company and public sector body or whether there was an employer\employee -- master\servant type relationship. These tests will need to be devised.

When employees within the public sector enter into an agreement with their employer where they foresake some of their security and increase their own group risk e.g by providing work to the employer and others for a fee and not a wage\salary -- Then they should be treated differently from normal employees in terms of taxation and HMRC should approve these type of relationships. 

Many of the agreements that have currently been identified have been master\servant type arrangements disguised as something else. This cannot go on as it will undermine public confidence in an already battered and bruised UK fiscal system.

The following weblink to the Guardian makes interesting reading

http://www.guardian.co.uk/politics/2012/may/02/2000-public-sector-officials-paid-private-companies