8 October 2012

The British Civil Service code of conduct imposes similar obligations to those in the State Services code of conduct. The ‘integrity’ duty is to put the obligations of public service above personal interests. Civil servants of course must act lawfully.

In May the UK Treasury reported that more than 2000 senior civil servants were being permitted by their employing agency to avoid taxation. Staff working exclusively for agencies were being paid under contractor arrangements although the rule was that anyone “on the books” and working only for the agency for more than six months, must be taxed as if they were an employee.  The Government warned departments that flouting taxation rules would result in budget resources being reduced by up to five times the amount paid to the contractor.

In addition to 2000 senior civil servants, others identified breaching the remuneration rule included more than 150 BBC executives and 55 contract managers in the NHS, who have been providing their services under contracting arrangements which minimise their tax liability.

In the UK employees pay up to 50 per cent of their salaries in income tax and together with the employing agency make National Insurance contributions. By contrast, contractors paid through “personal service companies” 21 per cent corporation tax, and are exempt from NI contributions.

Since August agency contract arrangements have been required to include conditions authorising the agency to check workers’ tax status, in recognition that something more than the obligation for integrity was necessary . “The public sector needs to demonstrate the highest standards of integrity”, but additional controls have proven necessary “to provide an effective disincentive to avoiding tax”.

HMRC announced last week that there has been a fivefold increase in the number of investigations into tax underpayments by senior officials. HMRC has “… gone from almost ignoring … breaches to getting tough ..”  but more than 50 officials are still using company arrangements to avoid income tax and National Insurance payments.

HMRC believes that it could recover up to £50m in unpaid tax going back several years, as well as the same amount in interest and penalties, by ending these suspected abuses of the system.