Discriminating against the State

One of the odder measures in today’s Budget is this (from George Osborne’s speech)


In principle, it is welcome.

I explained here that self-employed workers are favourably treated for tax purposes, that a worker’s status as self-employment delivers very valuable benefits to her engager, and that personal service companies are abused to denude the Government of much needed tax revenues and workers of valuable employment law rights.

This measure carries a predicted yield of £555m over the life of the Parliament and appears to be exactly the measure I argued for here.

The curiosity is why it is confined to public sector employers?

George Osborne gives us no clue. Nor does the Office for Budget Responsibility’s Economic and fiscal outlook. The closest we get is in the Red Book:


But this reasoning is not particular to the public sector. Everyone, surely, has a responsibility to ensure that the people working for them are paying the right tax?

The abuse is far from public-sector specific. Indeed I argued here that the private sector is the environment in which the behaviour has its most destructive impacts – of distorting competition and destroying ‘good’ businesses. And the types of environment in which it is most likely to be seen are in the private sector:


This Select Committee report, too, suggests that personal service companies are most often used in the private sector. And Government has already tackled public sector abuse through this Procurement Policy Note.

But of course, everything has a reason.

What we do know is that it will put the public sector at a competitive disadvantage compared with the private sector. It will be difficult for public sector organisations to engage workers on a self-employed basis: they will bear the risk of getting wrong the assessment that a worker is self-employed. They will be driven to engage workers on an employed basis to avoid that risk – and this will increase their wage bill by up to 13.8%. The private sector will continue to be able to transfer that risk to the worker – or his personal service company. The private sector will, in effect, be able to buy the same worker for 13.8% less.

Why might this result be desired?

I can think of only one explanation.

Were you wanting to shrink the State; to force more outsourcing; to pass public money to big outsourcing companies… you might tilt the playing field. You might do this.




3 thoughts on “Discriminating against the State

  1. A number of points here:
    (1) The proposals are subject to consultation, so the guidance in particular may change. But the initial feel is this is trying to make the IR35 rules apply more effectively, and the criteria for inclusion will be much the same (although without ’employer’s knowledge of the ‘worker’s wider circumstances). If so this is not primarily intended to be an extention in scope of IR35.
    (2) The new measure therefore implies that IR35 isn’t working. Given the penalties for non-compliance, is this really the case? Where does the figure for tax/NI lost come from? How reliable is it? Why so high? So is the forecast tax take increase in any way achievable?
    (3) Without going into detail on “badges of trade” and their relative importance, PSCs will inevitably have to carry PI and other insurances, pay for the worker’s training, pay for travel and overnight stays (taking on work beyond normal commuting), etc. There is also the risk of not getting paid, at all or for any rectification time. One way or another the ‘worker’ can genuinely be regarded as self-employed even if doing a job normally done by someone on the payroll. Not always, but often. 
    (4) These extra costs need to be covered by the pay rate. This would be expected to close the gap in total cost between a salaried employee and a contracted ‘worker’.
    (5) If the worker wants full unemployment and other benefits of Class 1 NICs they will have to pay themselves at least a minimum amount through PAYE. This reduces the disparity with employees.
    (6) Furthermore such contracts are effectively a form of Zero Hours Contract. They usually only involve payment for days or hours worked. No pay if sick, attending training, or any holidays taken.  The worker’s extra risk should be reflected in the pay rate, which may well be above the total cost of an employee, subject to market forces.
    (7) Then there’s the fact that a substantial proportion of such workers will be paid through an agency (anyone have the percentage?).  The force of the new measure will fall on those agencies to comply.  If they are more likely to comply than individual PSCs, then the primary purpose of the new rules is as an aid to IR35 compliance.
    (8) Why not applied to private sector? There were lots of complaints from businesses when proposals were first mooted. Launching to the public sector only is effectively a pilot exercise.
    (9) Does it make it any easier to outsource services and shrink the State? As outsourcers have a large number of people as employees (eg TUPE’d), the public vs private affect is not that significant.  
    Overall this looks to be a compliance measure, passing IR35 compliance from PSC to agency (or otherwise to ’employer’). But let’s see as the detail and consultation unfolds.

  2. You also have the increased pension contributions required by public sector bodies, and abolition of business rates for majority of businesses (which funds local government). Perfect storm for the public sector (albeit welcome for small businesses)

  3. You are on the right track with your conclusion. The aim as we understand is effectively to kill contracting by making it uneconomical / too uncertain for those who prefer to work that way.
    The net result will be to transfer the business to “consultancies”, or rather select body-shopping organizations. It is, very simply, oligarchy-building at work.

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