Every so often the British public gets a glimpse of the all-pervading malaise at the heart of Britain’s governing systems.

The Senior Civil Service avoiding paying tax

One of the consequences of Britain’s labyrinthine tax system is the widely held belief in the public sector that people who run businesses somehow get away with paying little or no tax on their incomes.  The country’s Customs and Revenue Service is spending another £1 billion this year on correcting both the image and reality of this view, but it hasn’t stopped highly paid people in the senior civil service from turning themselves into so-called service companies which are then contracted by the same Civil Service to provide their “services” at a price equal to their former salaries⁽¹⁾.

Substantial tax savings for highly paid employees in the public sector

The net effect is that the employer (the Civil Service) saves 13.8% of salary in social security tax (called national insurance) while the employee saves about 15-20% of his salary if his company pays him mainly with a dividend rather than with a salary.  This is a clear fiddle which the Revenue has countered with a note (IR35) warning people who do this that the Revenue has the power to disallow this arrangement and treat the employee and employer like any other.

Pusillanimous Management

Now comes  the terrible pusillanimity at the heart of official Britain.  The British Treasury has ordered these senior civil servants (i.e. its own employees) acting in this way, not simply to stop it, but to “show” that they are paying their “full share of tax”⁽²⁾.  Notwithstanding the friendly nature of the order (sent to 1,400 people on £58-£200,000 per annum!), it is reported (Daily Telegraph 3^rd August 2013) that 149 (including 4 in the Treasury itself) are refusing to do this.  But regardless of the blatant disregard of their employers’ entirely lawful orders, their service companies have been given new contracts to continue their employment.

Prime Minister Cameron, who is actually First Lord of the Treasury, full of empty words as usual, said it was “never acceptable” for civil servants to use such vehicles (i.e. service companies) to avoid paying tax.  Yet his Treasury has accepted this practice accompanied by an insolent refusal to obey orders.  Why doesn’t he just fire the wrongdoers by refusing to renew their contracts when they come up for renewal and instruct the Inland Revenue (Chief Executive Lin Homer – remember her from the chaos of her Border Agency days) to serve an IR35 notice on those with current contracts, and reassess them as paid employees.

With no public service ethic to speak of now left, managers in the public sector are faced with a new generation of well-paid subordinates in their 40s and 50s, big on their “rights”, whom they fail to manage properly.

ACTIONS

Redefine Unfair Dismissal

Britain will continue “to spin out of control” in the words of the introduction to this website above, until a government takes office determined to hold individuals in the public sector to account and to contract – no less and no more.  In order to do this thoroughly, it will probably have to tighten the definitions of “constructive” and “unfair” dismissal which have been widened so much by industrial tribunals that employers in both public and private sectors are terrified of firing anyone for even the grossest misconduct (unless it’s for allegedly upsetting a member of an ethnic minority⁽³⁾.

Compensation for unfair dismissal

This needs to be recalibrated to reflect an employee’s salary and length of service, rather than be left to a tribunal to judge.  The present maximum of £74,200 means that an employee on UK average earnings of £26,000 can get nearly three times their average salary from a soft-headed judge at a tribunal, often enough to bankrupt a small firm⁽⁴⁾.

A well-tried method for calculating compensation for loss of a job is the Belgian scale of one month’s pay for every year’s service up to a maximum of 30 years’ service (i.e. 2½ years’ salary).  The British state redundancy compensation is 30 weeks’ pay up to a maximum of £430 per week, i.e. £12,900 after 2 years’ service, so the principle of at least partly relating job loss compensation to service and pay is already established in British labour laws.

Endnotes

(1)  For the benefit of our non-British readers, the ostensible gain in being taxed as a company rather than as an employee is thought to be the avoidance of paying a social security tax (national insurance) which amounts to 12% of an employee’s income per annum between £7,605 and £42,475, and 2% above this, while the employer pays 13.8% on all their employees’ earnings above £7,488 per annum.  A company pays 9% of “profits”, i.e. of the salary contract (amount paid by the Civil Service in this case) as social security.

(2)  Most people would expect this to be the standard PAYE (Pay As You Earn) assessment applicable to every employee in the United Kingdom.

(3)  E.g. a Local Education Authority who sacked an English dinner-lady on the spot for serving a Muslim child with a pork cutlet which the child had asked for, after a complaint from the parents.

(4)  Such an extravagant award (for £40,000!) for “constructive” dismissal was made to a minority worker because they felt the company didn’t do enough to combat what they maintained was an offensive “atmosphere”.  The firm has now gone into administration.

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