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Off-payroll rules backfire: UK contractors replaced by non-EU workers paying less tax

A year after the off-payroll rules were introduced, ContractorCalculator has obtained evidence to show that the result has been to force contractors out of contract only to be replaced by non-EU workers on intercompany transfers (ICT) paying less tax.

Damning evidence obtained from contractors formerly working at the Student Loans Company (SLC), an agency of the Department for Business, Innovation and Skills (BIS), and freedom of information requests, shows the agency overreacted by letting contractors go and replacing them with ICT workers in what may be a breach of UK Borders Agency policy guidance.

“The objective of the rules imposed following the Ed Lester affair and the Public Accounts Committee’s (PAC) condemnation of off-payroll workers in the public sector was to raise more tax,” notes ContractorCalculator CEO Dave Chaplin.

“We warned in February 2012 that any legislation enacted to tackle public sector off-payroll arrangements would be inappropriate, poorly considered, rushed and unjustified. Not only has this turned out to be the case, but the botched rules have resulted in contractors losing work. Not only that, but the government is also receiving less tax, when the whole point of the rule changes were to increase tax take.”

Did the Students Loans Company force out its contractors?

Overall, contractor numbers in 16 of the central government departments have fallen by 12% since the rules were introduced. Departmental annual reports show that since August 2012, there have been 86 new contractors hired by the Student Loans Company.

Of these new starts, only 31 were able to provide assurances that satisfied the agency’s interpretation of the off-payroll rules. The remaining 55 that were engaged left for unspecified reasons.

We've been told by contractors formerly working at the Student Loans Company that many of those who left for 'unspecified reasons' opted to leave the public sector entirely, rather than have to go through all the off-payroll assurances processes at their own cost

Dave Chaplin, ContractorCalculator

“We’ve been told by contractors formerly working at the Student Loans Company that many of those who left for ‘unspecified reasons’ opted to leave the public sector entirely, rather than have to go through all the off-payroll assurances processes at their own cost,” continues Chaplain.

The Students Loan Company replaced contractors with tier 2 ICTs

The story gets worse. Chaplin explains: “Instead of dealing with the problem posed by off-payroll rules, the agency opted to engage an IT managed services company, Syntel Europe Ltd. Of course, a public sector organisation hiring a managed IT services provider is nothing out of the ordinary, that’s just business.”

But Chaplin explains a freedom of information request response from the Student Loans Company confirms that not only was Syntel hired to provide services the Students Loan Company would have sourced from contractors, but the firm also used workers from outside of the European Union on tier 2 visas brought in on intercompany transfers (ICTs).

In emails obtained by ContractorCalculator, the Student Loans Company freedom of information officer Louise Chapman confirmed that:

“The work undertaken by Syntel is to meet temporary requirements. Previously SLC would have sourced these requirements from the contractor market through recruitment agencies, which would be classed as 'off-payroll workers'.”

Replacing contractors with a managed IT services supplier is no more than healthy competition, and small businesses like contractor limited companies have to take it on the chin.

But a subsequent email from Chapman confirms that, as a result of its choice to ditch contractors in favour of a manager services provider, UK workers have been replaced by non-EU workers on ICTs: “Syntel have Tier 2 ICT workers currently on site at SLC”.

“Using ICTs to replace UK workers was certainly not the intended purpose of the off-payroll rules,” asserts Chaplin. “It is also a breach of UK Borders Agency policy guidance on ICTs and there should be an investigation into the use such of such workers by the Student Loans Company.”

The guidance says that a “skilled worker in any Tier 2 category must not displace a suitable settled worker”. The Student Loans Company has admitted that the work done by tier 2 intercompany transfer workers would have been done by contractors. A contractor is a settled UK worker, so displacement has occurred.

Intercompany transfer workers from outside the EU pay less UK tax

The tax situation for ICTs can be complex, and for non-EU workers from some countries, their pay can consist almost entirely of expenses and allowances. Chaplin estimates that an average ICT worker on a nominal salary of £46,000 including allowances will cost its employer £7,648.06 less than an equivalent UK worker.

Furthermore, the ICT worker will take home extra pay of £6,646.04, although much of this will be in the form of benefits such as accommodation. This leaves the UK government £14,294.10 worse off from lost tax revenue.

Chaplin explains: “The key thing is that ICT worker allowances attract no tax in the first two years. And although every ICT worker must earn a minimum salary depending on what they do, the salary can include the tax free allowance. This means the taxable portion of the salary is likely to be very small.

“Irrespective of whether the government was justified in its position on taxing workers supplying services to the public sector, the entire point of the off-payroll rules was for each public sector worker to be contributing more tax.

“That is clearly not what is happening at the Student Loans Company. Is this what PAC chairman Margaret Hodge had in mind when she branded the use of limited companies in the public sector as ‘staggeringly inappropriate’?” asks Chaplin. “Did she intend for the Student Loans Company’s use of non-EU ICTs to replace UK contractors?”

Chaplin says: “Contractors and taxpayers have got a bum deal out of what has evolved into yet another poorly thought through and implemented coalition exercise, designed mainly to satisfy very short term media and political objectives.

“And the result,” he concludes, “fails everyone: highly skilled UK contractors lose work; the public sector loses its access to those contractors’ skills and decades of experience; and the UK taxpayer loses all round.”

Published: 18 September 2013

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