Why are senior government staff paid through limited companies?

The Guardian has discovered that 25 senior Department of Health staff are paid through limited companies, rather than as direct employees. Surprised? I’m not. These people are called interims and you will find them in most large organisations.

As I said when a similar row blew up over contractors at RBS, there is nothing unusual about this, especially when organisations have to change rapidly.

As public sector organisations, of which RBS is now one, rapidly restructure and cut costs, they will need to employ expensive contractors on a short-term basis. Doubtless there will be FoI requests which will uncover ‘scandalous’ payments similar to those made by RBS.

And so it has proved.

This all started with the row about the pay arrangements of Student Loans Company CEO Ed Lester, who was found to be receiving £182,000 per year via a limited company, rather than the payroll. According to the Guardian, assurances were given to parliament that this was a rare practice.

Whoever gave those assurances was either badly briefed or didn’t ask for advice. This quote, also from the Guardian piece, is probably nearer the mark:

One Whitehall source said: “We cannot defend these arrangements, but it may be it is very common in Whitehall and this is just the tip of an iceberg.”

Yep. I reckon if you did FoI requests you’d find similar people scattered across civil service departments, government agencies and the wider public sector.

There are a couple of reasons for this. Firstly, if public sector organisations want to buy in external expertise, which the government keeps urging them to do, the most likely recruits are people with experience in large companies who have retired early or taken redundancy. Pensions and other civil service benefits are often of little use to them so they prefer to work through their own limited companies. It’s quite normal for interims to do this. The arrangement has advantages for employers too. Someone charging for services can be dismissed on fairly short notice without compensation, so no ‘rewards for failure’ if they mess up.

Secondly, when the civil service hires consultants and contractors, in general, it isn’t very good at managing them. The line between consultants, contractors and interims is blurred in many organisations. In central government, as this NAO report pointed out, it is almost seamless. I’ve seen it happen often. You start off doing a specific piece of work, then the person you report to asks you to do some other related tasks, and, before you know what has happened, a permanent role has grown up around you and your client has become your boss. Consultants thus become contractors and eventually interims. Some of them end up in quite senior positions.

If the government wants to put a stop to this and put all those in senior roles onto the payroll, fine, but there will be consequences. Some people won’t want to do the jobs because that kind of financial arrangement won’t work for them. Adding these highly paid contractors to the payroll will also mess up the pay and grading hierarchy. The Guardian says that some of the DoH interims are paid more than £250,000 a year and one is on £273,375. That’s more then the Chief Executive earns. Again, this is not uncommon. The senior interim director will often receive more than the CEO. Having an interim in such a role maintains the distinction between the career civil servant and the hired gun brought in for specific expertise. It’s OK for an interim to be paid more than the boss. But if the interim comes onto the payroll on a higher grade than his boss, that’s going to cause problems, especially in a hierarchical organisation like the civil service.

Alternatively, public bodies could just go back to offering pay at the grade for the job but, if they did that, they would find it hard to recruit the external help they want. The very reason they pay senior interims in this way is because they couldn’t find the expertise at the civil service rates.

So, journalists and so-called tax campaigners, FoI away. You’ll find hundreds of £100k plus interims, and quite a few £200k ones, scattered across the public sector. All charging for their services through limited companies and many holding senior line jobs. Perhaps some of them could be replaced by permanent staff but a lot of them are there because their expertise is needed and it’s the only way of getting them in.

The 25 Department of Health staff may be the tip of a very big iceberg, but the iceberg is there for a good reason.

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8 Responses to Why are senior government staff paid through limited companies?

  1. Pingback: Why are senior government staff paid through limited companies? - Rick - Member Blogs - HR Blogs - HR Space from Personnel Today and Xpert HR

  2. Johnson says:

    Bottom line is we do it because we make more money from it because of the tax breaks it affords us. IR35 changed the position a little but at £500/day I pay about 20% tax because my salary is paid to a company incorporated in Jersey. And I am not executive management. This practice is a lot more commonplace than you’d think.

  3. anon says:

    Thanks Johnson, “so-called tax campaigners” would be right to have an issue with folks like you dodging their tax then, particularly if this is commonplace.

  4. I’d go so far as saying the “employee” (whether consultant, contractor or interim) has a public responsibility to pay as little tax as possible. Would you really want to employ a troubleshooter, hired gun, or whatever other militaristic metaphor is used to describe them (there’s a whole issue around the use of military language in civvie street to ponder – I find it very odd) to generate cost-savings and maximise your ROI, but find that in their dealings with the taxman they are not striving to maximise their income and get their best ROI?

    Another thought: say the DoH pays an interim manager £200k pa (£106.67/hr; £800/day; £4k/wk++). That’s all they pay, isn’t it? No pension contribution, no private health, no car, no holiday pay, no sick pay (so if the interim takes time off, it’s out of their pocket – or rather, their own company that is ultimately their employer – so they sort that out). The “wages” admin is significantly less and cheaper – you pay an invoice in the same way you pay all your other suppliers (so your procurement department just processes them through your purchase order system).

    How much would a regular staff manager’s wage have to be for the cost to be the same? Let’s make it interesting – say the interim works for the DoH for 4 years and is then let go at the end of their contract (the contract has been rolling forward on a 6-month assess/renewal cycle) at no cost – compared to what redundancy cost for a regular staff manager? I’d attempt to knock out an Excel model to work this out, but I suspect I’d be knee-deep in tortuous FoI requests to get to some pay tables and statistics to get to the bottom of it. Though my finger-in-air guesstimate would be in the £100k-£150k pa. range.

    ++ I’d take an annualised cost broken to a 37.5hr week, and 50x 5-day weeks worked per year (the two weeks/10 days missing account for the bank holidays).

  5. Vince Lammas says:

    It is right to highlight the extent to which the lines between interim, consultants and contractors can become blurred. However I can understand why the average punter would distinguish between a contractor carrying out a number of assignments for one or different clients or delivering a specific project from what is effectively a permanent appointment in a senior executive role. HMRC certainly wants to treat them differently – actually taking a similar line to the man in the street.

    We need to recognise the demand and supply for such work, employment security and relative risk are different in these cases. Similarly, the tax regimes which apply to employees and the self-employed are somewhat different.

    Nobody wants (or volunteers) to pay more tax to the government than they should. Employers, employees and the self-employed alike are responsible for complying with tax legislation and can use whatever funds they have left in whatever fashion they please.

    As a rule of thumb, you can add about 22% to the cost of an average salary to work out the total direct cost of employment for an individual. For more senior people, the cost of pensions etc is somewhat higher. There are situations when it is cost-effective and convenient for an organisation to use contractors … but the potential for reducing tax payments by a worker is not a reason many would find acceptable.

    More comment on the subject at http://www.attractorconsulting.com

  6. Simon Alford says:

    It’s not the senior contractors who determine how they are paid , it has to suit the organisations they are working for. The organisations don’t use interims for altruistic reasons. It tends to be because they don’t want to appoint permanently , there being some reorganisation pending. Or because internal authorisation procedures make it a lot easier to use contractors (easily terminated) rather than permanent staff. Occasionally it’s because the contractors have very scarce skills , but I suspect this is not often the case.

  7. Pingback: Interim Judgement « We Love Local Government

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