Of all the sectors which employ freelancers, the public sector accounts for one of the largest slices of the pie. You can scarcely turn around in Whitehall without bumping into an IT Contractor or consultant of some kind, so there was understandable concern last year when a Government witch hunt was launched against those using Personal Service Companies in the public sector. The campaign was prompted by an Exaro investigation which revealed that one of the highest-paid civil servants in the country (Ed Lester, then head of the Student Loans Company) was channelling his six-figure salary through a limited company, thereby avoiding a chunk of Income Tax and National Insurance Contributions.

The investigation into Personal Service Company abuse soon widened, and culminated with a Treasury review that identified 2,400 senior civil servants avoiding tax this way. New rules were put in place for senior public sector employees to curb this behaviour – rules which public sector contractors have been dealing with for the past year.

The new “off-payroll rules” state that all department heads must automatically be put on departmental payroll, and any contractor on a day rate of £220 or more, contracted for a period of six month or more, must provide formal assurance that all their tax obligations are being met.

These civil service-specific rules are in addition to HMRC’s Business Entity Tests – the method that freelancers and contractors can use to self-certify their IR35 status – although the BETs cannot be used to give the aforementioned assurance required from long-serving public sector contractors.

This already-complicated situation has now become yet more baffling as the BBC, following an internal review conducted with Deloitte, is in the process of implementing its own totally separate employment tests to determine which of their freelance staff must move onto Corporation payroll. This review was initiated in the wake of the Lester scandal, as a response to growing pressure to curb usage of limited company contracts by public bodies.

 

Details on the BBC’s employment test have not been made public, although the two published review documents (Deloitte review here, BBC version here) make clear the challenges posed by such a process:

“It is difficult to definitively determine an individual’s employment status. The self employment /employment test questions do cover the key aspects which need to be considered however it is important to consider how the responses to these questions are interpreted.”

The BBC also appears to have created a truly gargantuan task for itself; according to its own figures no less than 64,447 freelancers worked for the Corporation in 2011-12. HMRC averaged just 64 employment status investigations per year between 2006 and 2011, but even Deloitte’s initial sample of 804 BBC contracts highlighted 129 cases which they believe would be suitable for a full review – that would equate to two years of work for HMRC’s dedicated IR35 teams!

Logistics aside, the creation of yet another employment status test muddies the compliance waters further still for freelancers and contractors. Public sector contractors are already subject to different employment tests from their private sector comrades; now that group will be sub-divided again, with different tests applied to BBC and Whitehall workers.

The situation also does nothing to help the perception of the leagues of freelancers and contractors plying their trade completely legitimately through limited companies. The PCG told us:

“Comments in the media inferring that limited companies are being used purely as a measure to reduce the tax bills of individuals are entirely misleading.  The use of limited companies by individuals is wholly legitimate and indeed is very often a commercial requirement: clients and agencies insist on the presence of a corporate structure for certain types of engagement.

“PCG passionately believes in the legitimate use of companies by freelancers: it is in many instances the most appropriate form through which to run their business, engage with their clients and comply with tax and reporting obligations.”

The BBC will clearly be unhappy with having this additional compliance burden forced upon them – bringing highly-paid workers onto internal payroll will incur significant extra cost, and all this in the week when the Corporation launched an expensive new payment portal for their legions of freelancers.

The awkwardly ironic sting in this story’s tail, meanwhile, is that the initial Exaro investigation into the tax affairs of Ed Lester was conducted in collaboration with BBC Newsnight – so what began as a headline-grabbing exposé of a greedy public official will now likely cost the BBC millions in administration and tax.

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Photo by Tim Fields