[Mr George Howarth in the Chair] — Pay and Consultants (Public Sector)

– in Westminster Hall at 12:00 am on 13th March 2012.

Alert me about debates like this

Motion made, and Question proposed, That the sitting be now adjourned.—(Mr Newmark.)

Photo of Andrew Slaughter Andrew Slaughter Shadow Minister (Justice) 9:30 am, 13th March 2012

It is a great pleasure to be here, Mr Howarth, with so many hon. Friends and hon. Members, for what I hope will be an interesting, if somewhat controversial, debate. It is a pleasure to serve under your chairmanship. I look forward to the Minister’s response to some of my specific points, and to the comments of my hon. Friend Cathy Jamieson.

To be clear about the topic, I intend to cover three closely related issues, which I believe raise the question of financial, moral and, in some cases, legal abuses in the employment practices of public sector organisations. Those issues are absolute levels of remuneration; the use of consultants—sometimes called interims—and agency and other alternatives to employed staff; and the avoidance and sometimes evasion of tax by the improper classification of employees as consultants. All three often occur together, although not always, and there are often other related abuses. I shall give examples of how that works and use one egregious example from my local authority that has wider implications.

Such practices would be offensive at any time, but when the country is in recession, when many, if not all, workers in the public sector at a lower level are facing pay freezes and when there are hundreds of thousands of redundancies, it is particularly offensive that what I can only describe as a new elite in the public sector appears to be immune to the worries, fears and constraints of ordinary working life and, in some respects, seems to be more comparable with those at the top of the banking or other private sector industries. The difference is, of course, that everyone thinks of bankers—outside the Royal Bank of Scotland, perhaps—as being in the private sector and responsible to shareholders. The people whom I am concerned about are responsible to us, the taxpayers or council tax payers.

The issue is not only controversial, but very topical. The Daily Telegraph has an article today headed “Council chief executives enjoy pay rises as services are cut”. It reports:

“Town hall chief executives have seen their pay packets rise by as much as £17,000 while cutting front-line services, including libraries, care for the elderly and bin collections.”

It goes on to point out that the average council chief executive is still paid more than the Prime Minister, with one in 20 earning more than £200,000 last year. At a time of pay freezes in the public sector, the average relevant salaries in local authorities were £143,995 last year, with total pay packages averaging £146,957.

Photo of Stephen Hammond Stephen Hammond Conservative, Wimbledon

The hon. Gentleman may be right to point out that the average salary in that category last year was £143,000 and that the average remuneration was £146,000; but does he accept that before 2010, or before the Government took action in 2011, the average was something like £221,000? There has been a significant drop under the Government’s procurement rules.

Photo of Andrew Slaughter Andrew Slaughter Shadow Minister (Justice)

I cannot say that I will keep away entirely from party politics in what will be quite a long speech, but I will try to make a point with which I hope all hon. Members agree. The hon. Members whom I shall refer to come from both sides of the House. I take the hon. Gentleman’s point but would rather that he addressed his comments, and that the Cabinet and other Ministers would address themselves, to the current abuses, rather than playing some sort of tit-for-tat game.

Photo of Daniel Kawczynski Daniel Kawczynski Conservative, Shrewsbury and Atcham

On the point made by my hon. Friend Stephen Hammond, will the hon. Gentleman at least acknowledge that rocketing salaries in some public sector jobs are not a recent phenomenon? That is something that mushroomed in the previous 13 years, under Labour.

Photo of Andrew Slaughter Andrew Slaughter Shadow Minister (Justice)

I suspect that it goes back even beyond then and that the tradition of public service and people doing jobs not primarily for the remuneration changed in the 1980s, when a lot of moral values went out of the window in the era of Gordon Gekko and Margaret Thatcher. We could talk about that all night if we wanted to, but I would rather talk about the current situation—and the issue is very contemporary. At 8 pm this evening on Radio 4, “File on 4” will cover tax avoidance through personal service companies. I think—I am never quite sure, with the BBC—that it will cover some of the same examples that I will give today. The brief for that programme begins:

“How strong is the government’s commitment to ending schemes set up to minimise tax? A number of schemes have proved popular in the private sector, including Employee Benefit Trusts. These have been used by football clubs for tax planning purposes, but are now in the sights of HMRC as it attempts to recoup what it sees as unpaid tax. But how widespread are these trust schemes and why are they so popular with companies that have large government contracts?

As the Treasury reviews tax avoidance by senior government employees, it has emerged that employees in other parts of the public sector are using payment schemes that keep them off the payroll. There is growing concern that paying public servants through personal service companies may be inappropriate.”

I have received briefings in advance of the debate from the TaxPayers Alliance and the Public and Commercial Services Union. The concern that these issues cause across the political spectrum is such that I could read a paragraph from each briefing, seamlessly, without affecting the flow of my argument. That is not something that can be said about every topic.

The Treasury review, to which the “File on 4” blurb refers, is the one announced in the main Chamber on 2 February by the Chief Secretary to the Treasury, in response to an urgent question from my right hon. Friend Mr Brown. That, in turn, was a response to the exposé of the funding of the head of the Student Loans Company. The investigation at the time was, I think, by “Newsnight”, but I am now referring to a report in The Daily Telegraph. The investigation showed that the

“chief executive of the Student Loans Company, was paid through a private firm he had established rather than being paid direct—a tax avoidance mechanism which could reduce his income tax liability by £40,000 a year.

The disclosure threatens to undermine Coalition pledges to crack down on tax avoidance in the private sector and opens ministers up to accusations of double standards.”

Heaven forbid!

“Documents show the deal was signed off by David Willetts, the Universities minister, who said in a letter that it had been ‘agreed by the Chief Secretary to the Treasury’ Danny Alexander.

Mr Alexander insisted he did not know that the arrangement allowed him to avoid tax, and has ordered an urgent investigation across Whitehall to see if the practice is widespread.”

I am sure that many hon. Members remember that urgent question and that many took part in the debate. I could not be there, but I have of course looked at the Hansard and will outline what the review was said to entail. After, rightly, quoting the Treasury’s “Managing Public Money” guidance, which states that

“public sector organisations should avoid using tax advisers or tax avoidance schemes as any apparent savings can only be made at the expense of other taxpayers or other parts of the public sector” and making the bold assertion that

“There is no place for tax avoidance in Government”,

the Chief Secretary said in relation to his review:

“I have asked the Treasury urgently to review the appropriateness of allowing public sector appointees to be paid through that mechanism”— the one used by the chief executive of the Student Loans Company. After being interrupted, the Chief Secretary continued:

“I have also asked the Treasury officer of accounts to write to all accounting officers across Whitehall to remind them that all appointments should, in line with existing guidance, consider the wider cost of lost revenue to the Exchequer when considering value for money.”—[Hansard, 2 February 2012; Vol. 539, c. 1001.]

Photo of Jeremy Corbyn Jeremy Corbyn Labour, Islington North

Will my hon. Friend not go further and say that anyone working directly for the public sector in any capacity should be employed by, and accountable to, the public sector? There should be utter transparency about their employment, and we should not have these ludicrous schemes that are probably to do with tax avoidance and lack of accountability.

Photo of Andrew Slaughter Andrew Slaughter Shadow Minister (Justice)

As always, my hon. Friend has summed up my 40-minute speech in about 40 words. I agree with him, but I will not sit down.

Photo of Daniel Kawczynski Daniel Kawczynski Conservative, Shrewsbury and Atcham

I am pleased that the hon. Gentleman is making this point about tax avoidance. How does he regard the Labour mayoral candidate, Ken Livingstone, and the panoply of mechanisms that he set up to avoid taxation?

Photo of Andrew Slaughter Andrew Slaughter Shadow Minister (Justice)

My earlier imprecations clearly fell on deaf ears. If the hon. Gentleman wants to have a debate on that subject, he is entitled to request one. This debate is not on that subject. It is about people who are employed by the public sector—they are actually employees—who are receiving, in many cases, high remuneration, but who are falsifying their employment status not only to make more money for themselves and possibly for the organisation for which they work, but effectively to defraud the taxman. None of those points applies in the hon. Gentleman’s case, and if we go down those avenues, we will not get far with this debate. I hope that he has not come here today to score points—or to fail to score points.

Let me return to the urgent question on 2 February. I think that it is fair to say that the Chief Secretary was struggling that day. I think that he was trying to come to terms with what had effectively been exposed in the media a couple of days before. Hon. Members from all parts of the House raised other examples. Mr Bacon raised the case of the chief operating officer of rural payments. The innovation director of the Technology Strategy Board has been referred to subsequently, as have at least 25 senior officials at the Department of Health and employees of health trusts.

Photo of Stephen Gilbert Stephen Gilbert Liberal Democrat, St Austell and Newquay

I am sure that the hon. Gentleman welcomes the review that my right hon. Friend the Chief Secretary announced. Is it not quite extensive in its scope, taking on board more than 4,000 contracts across Whitehall? Moreover, it is already having the effect of terminating some of the arrangements that the hon. Gentleman is talking about. It is, therefore, a review that he should welcome.

Photo of Andrew Slaughter Andrew Slaughter Shadow Minister (Justice)

Oh, I do welcome the review. I think that the hon. Gentleman may be quoting from The Guardian article in the debate pack. It said:

“Treasury review of the extent to which civil servants channel salaries into tax-efficient private firms is to look at more than 4,000 postings across Whitehall and its quangos—and is expected to conclude that such schemes must end for full-time permanent staff, even if the arrangement led to a net financial gain for government departments.

The Department of Health is deciding whether to cancel contracts paid to at least 25 staff via private firms worth over £4m… The Guardian has been alerted to similar schemes operating in NHS trusts and primary care trusts. In one recent case, the Milton Keynes Hospital paid its acting chief executive Mark Millar via a partnership called Millar Management Associates. There is nothing illegal in staff being employed as consultants, especially if they are temporary.”

Photo of Karen Buck Karen Buck Shadow Minister (Education)

While my hon. Friend is on the subject of acting consultancies in the national health service, does he share my concern about the signal that was sent out by the Imperial College Healthcare NHS Trust last year when it appointed an interim chief executive allegedly on an arrangement of £2,000 a day for up to 200 days. Does he accept that, with a £35 million deficit, that sends out a very worrying message to the public? Moreover, does he not think that the fact that the chief executive has now been appointed the permanent managing director—I welcome that move and do not throw any doubts on his competence to do the job—implies that that consultancy arrangement was wrong?

Photo of Andrew Slaughter Andrew Slaughter Shadow Minister (Justice)

My hon. Friend is absolutely right. Our constituencies share the world-renowned Imperial health care trust. When I was first introduced to the new chief executive, I assumed that he was just that—a paid chief executive. It was only when I read the articles in The Sunday Times that I understood that he was being paid £2,000 a day as a consultant. I do not know whether it was always the intention to regularise his position or whether it was The Sunday Times and perhaps my hon. Friend who acted as a prompt. I am, however, pleased that the chief executive, Mark Davies, applied for the job and has now been appointed to the full-time position. If that is a precedent in removing such anomalies and abuses, I hope that it will be followed.

Going back to the point made by Stephen Gilbert, I do not object at all to the review. However, as he will have seen, the issue goes wider than Departments and non-departmental public bodies. It is my understanding—the Minister may want to correct me when she responds or even now—that that is the limit of the review at the moment. Even in the statement on 2 February, my hon. Friend Mr Campbell asked about local government—a topic to which I will return—and David Mowat asked about the BBC. Will the Minister update us on whether the terms of reference of the review have been extended to cover those areas, what progress has been made so far and when will we see a report?

Photo of Chloe Smith Chloe Smith The Economic Secretary to the Treasury

To assist the debate in its early stage, I am happy to confirm that the review extends to all bodies that are covered by Her Majesty’s Treasury’s guidance on managing public money, with which Members will be familiar. That includes all central Government bodies, such as Departments and their arm’s length bodies. On the subject of the BBC, I can confirm that the review will not cover arrangements in public corporations, public broadcasting authorities or the publicly owned banks. I hope that that information is of assistance.

Photo of Andrew Slaughter Andrew Slaughter Shadow Minister (Justice)

That is disappointing. I wish that both local government and councillors were covered. The leader of Kensington and Chelsea is paid a six-figure salary. The days of councillors being volunteers or being paid small amounts have gone. The review should also cover health trusts, non-executive directors of health trusts, the whole panoply of organisations that surround the public sector bodies, the Local Government Association and the Local Government Improvement and Development board, because those are the organisations in which abuses are likely to take place. We are talking about bodies that recruit people who have retired from the public sector and who, because of restrictions on their earnings thereafter—such earnings affect pension rights—will be prone to adopt these devices to avoid being classed as employees.

The figures for high pay in the public sector speak for themselves. The Chief Secretary conceded that he had cognisance of more than 180 civil servants on packages in excess of £142,500. I commend the work of the TaxPayers Alliance—I have been doing that quite often recently—in publishing the “Town Hall Rich List”, which shows that the highest paid chief executives, who are, I think, in Wandsworth, are on around £350,000 a year. That list of shame, which is regularly updated and published, is a great public service.

Let me just say, though, that as someone who has spent 20 years in local government, I have worked with some very fine public servants who did not do the job primarily for money. I even had a chief executive who capped his own salary, which is not something that we see much of at the moment. However, I have also had the unedifying experience of seeing the last chief executive of Hammersmith and Fulham, which is one of the smallest unitary local authorities in the country, retire on a salary of £281,000 a year. That salary had been increased by £11,000 in the last year of service—the salaries of everyone else in the organisation had been frozen—in order, I suspect, to enable him to retire on the maximum pension. The authority would not divulge the details of that pension but the House of Commons Library calculated that it would be substantially in excess of £100,000 a year. In addition, he received a lump sum payment of a sum much larger than £250,000 a year. To my mind, that is not where local government should be.

I will return to the issue of consultants. I say again that I am grateful to a number of organisations for their help, particularly the PCS union, which takes an interest in this subject.

Photo of Jim Sheridan Jim Sheridan Labour, Paisley and Renfrewshire North

I want to make a point before my hon. Friend moves on from consultants. Before I do so, Mr Howarth, I give early apologies that I have to leave Westminster Hall early as I am on Select Committee business with the Culture, Media and Sport Committee this morning. Coincidentally, the Committee will be taking evidence from the Under-Secretary of State for Culture, Olympics, Media and Sport, Mr Vaizey, who is the Minister at the Department for Culture, Media and Sport who is closing libraries up and down the country. Can my hon. Friend just clarify his earlier comments about chief executives being awarded something like a 17% pay increase? Is that accurate?

Photo of Andrew Slaughter Andrew Slaughter Shadow Minister (Justice)

It must be accurate—it is in The Daily Telegraph.

The PCS union quantifies the amount spent by Government on consultants at more than £1 billion; I think that that amount is based on figures from the National Audit Office. Before Government Members jump up and down, I accept that the figure paid to consultants has been too high for too long, but that is not any reason for not addressing the issue.

The PCS union says that, when hundreds of thousands of jobs are being cut in the public sector and its members on low pay are being forced to take pay cuts, it is not right that, for example, the Ministry of Justice—an organisation with which I am reasonably familiar—spent £43 million on consultants between May and November 2011. The Legal Aid, Sentencing and Punishment of Offenders Bill, or LASPO, is currently being mauled in the House of Lords, particularly about the issue of social welfare legal aid. If that figure of £43 million were annualised, the cost of consultants to the MOJ would effectively pay for the entire cuts in social welfare legal aid. So, all the agonising about cuts to citizens advice bureaux, law centres and to the funding for disabled people seeking advice on welfare benefits, housing or whatever would be unnecessary, if only the Lord Chancellor and Secretary of State for Justice could address his habit for consultants.

Photo of Glyn Davies Glyn Davies Conservative, Montgomeryshire

I thank the hon. Gentleman for allowing me to intervene, and I must say that I have a lot of sympathy with the general principle of some of the things that he has said this morning, but not with everything he has said. Is his opposition to the public sector’s use of consultants completely based on principle, even if such use of consultants adds to efficiency and does not cost any more money? Even if those situations existed, which in some cases I believe they do, would the hon. Gentleman still oppose the use of consultants just on principle?

Photo of Andrew Slaughter Andrew Slaughter Shadow Minister (Justice)

There is a definition of consultants that I will give—it is not the PCS definition, which I think is plagiarised anyway:

“People who borrow your watch, tell you what time it is and then walk off with it.”

The definition that I will use is:

“People who do a specific task, which is needed, usually for a short period of time, and which is a particular piece of expertise that is being bought in.”

What we are talking about this morning is—in very many cases—absolutely not that, and I will now give the hon. Gentleman an example. I hope that it is not a typical example, but it is certainly a very shocking example.

I will give way once more.

Photo of Stephen Hammond Stephen Hammond Conservative, Wimbledon

The hon. Gentleman is being very kind in giving way. Just before he moves on from this issue, I want to ask him a question. He has talked about the £43 million spent by the MOJ on consultants. Can he tell the House exactly what that £43 million was for, and can he say whether there was a public sector evaluation of the cost if the work for which that money was paid had been carried out in-house? I think an answer to that question would aid the debate.

Photo of Andrew Slaughter Andrew Slaughter Shadow Minister (Justice)

I think answering that question would take us off on a siding, albeit an interesting siding, and I am not sure that the hon. Gentleman really wanted to come to Westminster Hall today to defend that spending by the MOJ. If he does, he is very brave, but there it is.

Photo of Stephen Hammond Stephen Hammond Conservative, Wimbledon

I just want to know what it is.

Photo of Andrew Slaughter Andrew Slaughter Shadow Minister (Justice)

Of course, the MOJ pales into insignificance beside the Ministry of Defence and what are euphemistically—well, perhaps appropriately—known as FATS, which are framework agreements for technical support, and beside the hundreds of millions of pounds that have been spent through that route. The Department for Work and Pensions is another major offender. According to the PCS, “business consultancy services” cost the DWP £18.2 million in 2010-11. At a time when the Government could not find the money for the future jobs fund, that seems to be wrong. I could give a lot more examples in relation to Government Departments.

Photo of Andrew Slaughter Andrew Slaughter Shadow Minister (Justice)

I will not give way, if the hon. Gentleman does not mind, because I want to press on and hopefully finish by ten minutes past 10.

As I was saying, I could give a lot more examples about Government Departments, but I think that the point is made and I hope that it is a point that the

Minister, when she responds to the debate, will say the Government are taking very seriously. I hope that takes seriously not only the issues about the levels of remuneration and taxation problems but whether the public sector is getting good value for money for the number and type of consultants that are hired.

I will give just one other little anecdote about consultants and again it is an anecdote from my own backyard. My local authority has got rid of 1,800 staff in the last five years—I think that is the figure—and that is a substantial proportion of its work force. A lot of that is related to cuts and a lot of it has proved unwise. However, the local authority has now cut so many staff that it is now “taking on”—to use the authority’s own words, which it uses to defend the number of consultants that it employs—agency staff and consultants, simply because it has got rid of so many PAYE staff. That cannot be the right way to run a public sector organisation.

Let me give another example of what I think we all know as IR35. Let me talk about a particular case in Hammersmith and Fulham. It has received some media attention, but I am not sure that the full horror of it has been expounded. It relates to a particular gentleman. I am sorry to have to talk about individuals, but obviously this issue is about individuals who have these consultancy contracts. That gentleman is called Nick Johnson. He used to be the chief executive of the London borough of Bexley, on a salary in excess of £200,000. His partner—his common-law wife, if that phrase is still in use—is a woman called Kate Davies, who is the chief executive of Notting Hill housing trust, and she is also on a salary of about £200,000. They jointly set up a personal service company, or PSC, called DaviesJohnson, to tender for work. I should point out that Ms Davies is still the chief executive of the Notting Hill housing trust, but Mr Johnson is no longer the chief executive of Bexley.

Rather than explaining their situation in my words, I will quote from a letter; although it is quite long, reading from it will save time. It was written by Councillor Stephen Cowan, who is the leader of the opposition in the London borough of Hammersmith and Fulham, to the Secretary of State for Communities and Local Government on 16 December 2010, which is some time ago. As far as I am aware, Mr Cowan is still awaiting a response to that letter. Mr Cowan wrote:

“I was interested to read your view that “Councils could cut chief executive’s pay” as a means of saving money in these difficult times. You will no doubt have seen this article in the Mail on Sunday when it appeared on the 31st October 2010.”

The letter goes on to talk about the contents of that article. It continues:

“I believe that the issue it raises warrants investigation by your Department and the loopholes that have allowed this to occur need to be tightened. Such measures are likely to result in significant savings to the public purse. The Mail on Sundayreveals how Nick Johnson ‘receives a total of £310,000 a year, making him what is believed to be the highest paid council-funded official in Britain.’ However, this money is a combination of Dr Johnson’s ability to draw an alleged £50,000 local government pension as well as invoicing H&F Homes”— that is, Hammersmith and Fulham Homes, which is the council’s ALMO, or arm’s length management organisation—

“over £260,000 a year. He is able to claim both these amounts because the ALMO’s money is paid to his private limited company (Davies Johnson Ltd) rather than directly to him. On the 24th of

June 2010, Nick Johnson gave evidence to the Borough’s Housing Health and Audit Social Care Select Committee to say that he worked ‘full time’ for H&F Homes and now also LBHF”— that is, the London borough of Hammersmith and Fulham. Mr Cowan went on:

“Nick Johnson worked as Bexley council’s chief executive. But he retired earlier than normal pensionable age on 4th November 2007. This happened after he was deemed to be ‘permanently unfit to discharge his duties or any comparable duties as defined by the Local Government Pension Scheme regulations.’ In a note to Bexley Councillors, the current Chief Executive of that authority explained that an ‘Independent Occupational Health Consultant’ reached the conclusion about Dr. Johnson’s health and the decision to retire him was made by ‘the Acting Chief Executive’…However, Dr. Johnson started work in Hammersmith and Fulham on 11th February 2008—fourteen weeks and one day after he retired. Since then he has billed Hammersmith and Fulham around £700,000…Bexley councillors have questioned why they are paying a pension to an individual who appears to still be working full time… Many people have raised concerns about this.”

Mr Cowan goes on to quote newspaper articles and adds that Conservative colleagues argue that Nick Johnson is good value for money. I think that £260,000-plus is a lot of money to pay a local government official. I question whether such payments have been correctly monitored. Only recently, the chief executive officer wrote to inform me that Mr Johnson’s company is paid £950 a day, which equates to an annual salary of approximately £160,000.

Mr Cowan then goes on to request action by the Department for Communities and Local Government, which has not been forthcoming.

Photo of Kerry McCarthy Kerry McCarthy Shadow Minister (Foreign and Commonwealth Affairs)

Does my hon. Friend agree that what people find so shocking is not just the huge sums that are being paid out to these individuals, but the fact that many of the organisations in question do not even pay their lowest paid employees the London living wage, and the discrepancy between the pay at the bottom and the pay at the top is absolutely huge these days?

Photo of Andrew Slaughter Andrew Slaughter Shadow Minister (Justice)

My hon. Friend is right. If I have time, I will comment on the wider trend towards the involvement of such private sector companies in the public sector, which seems to be something that the Government intend to encourage.

I have calculated, from documents supplied to me, the sum that Mr Johnson has been paid so far since 2007. As a consultant—as a PSC—to the London borough of Hammersmith and Fulham and its daughter organisations, he has been paid £957,481, just shy of £1 million. That was for a series of contracts, but principally for being chief executive of the arm’s length management organisation running the council’s public housing in the borough, and subsequently as the council’s director of housing and regeneration. To my mind, that is a post of employment, not a post as a consultant.

Following that letter 15 months ago in December 2010, the matter was not allowed to rest there, despite the fact that the local authority wished that it would. Eventually, audit reports were commissioned to look not only at Mr Johnson and DaviesJohnson, but at the wider trend for Hammersmith and Fulham council to employ consultants. I want to put on record the shocking findings about how that local authority conducted itself.

If this practice is common in other local authorities, I urge the Minister to consider that this needs to be looked at as surely as Government Departments are.

Following the complaints made by the leader of the opposition, a report from Deloitte was commissioned to undertake an internal audit of the use of personal service companies across the council and in Hammersmith and Fulham Homes, and in particular the contracts between DaviesJohnson and Hammersmith and Fulham Homes and the council. In summary, the findings were:

“There is currently no corporate policy covering the use of consultants appointed to interim positions or as temporary staff, regardless if they are self employed consultants or operating as Personal Service Companies (PSCs);

We were unable to obtain evidence of any formal, documented selection and recruitment process being followed for the appointment of any of the PSCs within our sample;

For the seven appointments examined that were procured by the Council, we were only able to obtain one agreement;

For the four PSC appointments within H&F Homes we identified a number of issues including agreements not being available for the entire period of engagement; the absence of signed original agreements; an agreement with a dissolved company and an agreement between the ALMO and the individual rather than the company;

PSC invoices tested were found to be authorised in all instances tested;

Departments are required to submit returns detailing all consultancies appointed; however this does not include individuals covering posts as interims. Therefore there is no complete, centralised listing of all PSCs currently in use by the Council; and

We were unable to obtain evidence of formal performance monitoring of PSCs.

2.2 These findings have led to a ‘nil assurance’ in this area and seven recommendations have been made that are currently being implemented. All the recommendations have been accepted by the council. Timeframes for implementation are given in the report and range through to September 2011 for all recommendations to have been implemented.

2.3 The internal audit identified three individuals in particular where the auditors thought that professional advice on tax status should be sought, including the contracts in relation to Davies Johnson Ltd that the Audit and Pensions Committee had asked to be reviewed.”

It separately looked at the issue of DaviesJohnson. Although the view of Deloitte is not necessarily that Mr Johnson was an employee, in words that may come back to haunt the local authority, it states:

“the application of the tax and NIC regulations in such situations is not clear cut and HMRC may form a different view. Therefore, to this end, we would strongly recommend that, if not done so already, H&F Homes Ltd documents the services provided by Davies Johnson Ltd during this period, which will support the tax/NIC application by H&F Homes Ltd and help counter any potential challenge from HMRC should it consider there might be a case to form a view that NJ was an officer holder and an element of the payments made were solely linked to that of NJ holding the office of Chief Executive.”

He held that post for more than three years on a remuneration of approximately £1,000 a day.

My next point deals with where the investigations are going now. I urge the Minister to consider how unlikely it is that organisations such as Hammersmith and Fulham will put their house in order. I am sorry to single out Hammersmith and Fulham, because it is my local authority. I am sure that the same malpractices occur elsewhere. I pay tribute to local media—the Hammersmith & Fulham Chronicle, the Shepherd’s Bush blog and the Hammersmith Today website—which have highlighted these issues constantly and have been the driving force, along with the opposition on the council, in getting any movement on the issues. The council remains stubbornly of the view that it will not investigate these matters. It has now instructed PricewaterhouseCoopers, following the Deloitte report, to look at whether it is or is not complying with the law—in other words, whether it has or has not broken tax law.

Deloitte has revealed that, on June 30 last year, there were 69 consultants working at Hammersmith and Fulham council, 17 of them working via personal service limited liability companies. It found that Hammersmith and Fulham council had broken all its own rules for hiring consultants. There was no evidence of a formal documented selection recruitment process and no evidence of formal performance monitoring. The council had potentially wasted up to £12 million in this way, potentially operating outside UK tax laws with a possible £15 million in back taxes, fines and other sanctions that could hit the borough’s finances. That was the reason for bringing in PricewaterhouseCoopers at the end of last year, but—this is an important “but”— PricewaterhouseCoopers’ remit is simply to look at the future. It is to look at whether— this is in the response from the director of finance to a member of the audit committee—contracts in Hammersmith and Fulham will comply with tax legislation in future. What it should be looking at is whether it has done that in the past. If it will not do that, HMRC should.

There was a council meeting on 29 February. The motion put by the opposition stated:

“This council is committed to full cost transparency wherever possible to enable tax payers to hold us to account. This council notes that it has employed 540 agency workers over the past year—20% of the directly employed workforce.

This council has also employed sixty-nine consultants, with almost twenty of those employees working via service limited companies. The Local Government Pension Scheme forbids retired local government employees from being re-employed in local government. However, a personal service limited company allows this rule to be side-stepped.

However, there are clear rules laid down by Her Majesty’s Revenue and Customs about what defines a consultant and there is a likelihood that the London Borough of Hammersmith and Fulham may have breached those rules in directly employing people to work in its management structure as “consultants” via personal service companies.

This Council therefore resolves:

1. To inform HMRC of all cases where it has employed individuals via personal service companies and ensure its tax obligations are met and up to date

2. To report to Cabinet and the Audit and Pensions Committee full details of any back-taxes and fines issues by HMRC on IR35

3. To review its use of agency workers looking for more cost effective means of employing individuals and to publish all details of agency workers employed by LBHF and/or its subsidiaries and details the salaries of all of those over £100,000 per year.”

That was proposed by the opposition and voted down by the administration.

The final and perhaps the most shocking matter is this. I have dealt in some detail with the DaviesJohnson contract, as it is such a significant contract—more than £1 million was paid to a private company—and because it opened the door to the other abuses occurring in the authority. However, when an opposition member of the audit committee asked whether the council should report the DaviesJohnson contract to HMRC, the director of finance said that

“given the high profile of the situation in the media, HMRC would be aware of the situation, and had not approached the Council. If the Council approached them directly, a further inquiry would take place, with further impact on officer time and resources. Given the PWC findings, she did not propose to refer the matter to HMRC.”

The opposition councillor

“then proposed that the decision to refer or not to refer the matter to HMRC be put to the vote. The vote having been tied 2-2, it was agreed, on the Chairman’s casting vote, that the committee should not refer the matter to HMRC.”

Photo of Stephen Gilbert Stephen Gilbert Liberal Democrat, St Austell and Newquay

The hon. Gentleman has rightly given many examples of indefensible salaries and egregious working arrangements, but does he accept that there are 1.6 million freelancers throughout the country who contribute £21 billion? Is there not a danger of tarring the entire sector with the same brush?

Photo of Andrew Slaughter Andrew Slaughter Shadow Minister (Justice)

I do not disagree with that point, but the hon. Gentleman seems to be somewhat in opposition to his colleague sitting next to him, Daniel Kawczynski, who was tut-tutting earlier about a small business run by the former Mayor of London. I hope that they get their ducks in a row.

However, I have moved on from that point; I will draw my remarks to a close in a moment. I am now dealing with a different point: public authorities had it drawn to their attention, if they did not know it at the time, that they might be in breach of UK tax law, and are covering it up, refusing to engage with HMRC and making every attempt to suppress that information. That must be wrong, and it must be a matter for the Government, and above all for the Treasury and HMRC.

I do not have time, although I wish I did, to discuss A4e and the role that it is playing in the public sector. That organisation has multi-million-pound contracts in the public sector. It is taking huge sums of money and paying its chief executive huge sums of money, and it is now under investigation on five separate counts of fraudulent activity. McKinsey, too, was exposed three or four weeks ago in The Mail on Sunday for the role that it is playing in promoting the private health care industry. Again, to use an example from my own backyard, the Association Of British Insurers and the insurance industry have been pushing their own agenda with the Ministry of Justice in the drafting of the legal aid Bill. Those are all more than warning signs; they are indications that something is seriously wrong in public procurement, and the Treasury above all must handle it.

The two most infamous names in local government in my lifetime were probably Poulson and Porter. What is happening in my local authority has overtones of both. First, it involves a cabal of people who seem intent on feathering their own nests and earning huge sums of money from the public sector. Secondly, the project in which Mr Johnson is engaged involves the sale of two council estates for £100 million to a private developer so that they can be demolished to make way for luxury homes. The project will benefit the developer and Mr Johnson, but not the thousands of my constituents, mainly low-income, who live on those estates. Whether or not it is legal is not the point, although I do hope that there will be a proper investigation into the issue of tax law by HMRC, to which I have written; it is clearly quite wrong.

I pay tribute to the media. For every issue that I have introduced in my speech, I have referred to a media article. The campaign has been driven by papers from The Guardian to local newspapers, by blogs and by the BBC. They have done the job that the Government should be doing. I thank all those in the media who have taken the trouble to investigate the matter, and I urge people to listen to “File on 4” this evening.

I also pay particular tribute to the councillors in my borough—I am pleased to see that one of them has attended this debate—including the leader of the opposition, Councillor Cowan, whom I have quoted extensively. However, we cannot rely on volunteers and newspapers alone to ensure probity, fairness and economy in the public sector. I hope that the examples that I have given today are sufficient to show that something is seriously wrong, not just in the one or two examples that have been debated previously in the House and not just in central Government Departments and quangos but throughout the public sector. I hope to hear from the Minister that she is serious about tackling it and will talk to the Chief Secretary to the Treasury about extending the remit of the review to cover the matters that I have mentioned.

Several hon. Members:

rose —

Photo of George Howarth George Howarth Labour, Knowsley

Order. Before I call the next speaker, it might be helpful if I make two comments. First, there are 44 minutes left, and quite a number of people wish to speak. If Members are disciplined about putting their arguments, we might be able to get everybody in, and I will certainly try to do so. Secondly, I should draw hon. Members’ attention to the title of this debate, which deals with excessive pay and the use of consultants in the public sector. Tempting though it might be to introduce topical examples of people’s income and tax arrangements, unless those people are already working in the public sector, it is not within the terms of the debate.

Photo of Daniel Kawczynski Daniel Kawczynski Conservative, Shrewsbury and Atcham 10:17 am, 13th March 2012

I congratulate Mr Slaughter on securing this important and timely debate. I speak as somebody who has worked in both the private and public sectors. I started my life after university in the private sector. I spent a great deal of time trying to secure as large a salary from my bosses as I could, always pushing for a better company car, health insurance, ever greater bonuses and shares in the company. I felt that that was fair and appropriate, as the company was making a great deal of money, I was contributing to that wealth and the shareholders were happy to pay that sort of remuneration.

Having come into the public sector, I think that those of us who work in it should not be thinking about trying to make a lot of money. It has a lot to do with mindset and with educating people about the different responsibilities involved in working in the public rather than the private sector. One must never forget in the public sector that one’s salary comes, in the main, not from wealthy people but from extraordinarily hard-pressed families who are struggling to pay their bills and, in certain cases, to keep a roof over their heads and those of their family. All of us who work in the public sector must bear that in mind.

I am participating in this debate because I want to raise something specifically with the Minister. I went to Pontesbury village hall in my constituency to meet first responders, people in remote rural Shropshire villages who respond to emergency cases before an ambulance arrives. In many cases, they save people’s lives. It is the big society in action. I found out on Saturday that there are 144 such responders in Shropshire, and I pay tribute to them. Someone said to me at that public meeting that the chief executive of the west midlands ambulance trust earns £180,000 a year. I was absolutely staggered by that, bearing in mind that a lot of the work carried out by the first responders—as I have said, they are all part of the big society in action—is charitable work. They are on a shoestring budget and yet provide a vital service.

I telephoned the chief executive of the West Midlands Ambulance Service NHS Trust following the meeting because of the concerns raised by that constituent at the public meeting in Pontesbury, who said to me, “We do the work primarily from charity. Did you know that the chief executive of the ambulance trust is on £180,000?” There was anger, frustration and bewilderment from my constituents, who were all there in a voluntary capacity, undertaking a vital role in teaching people how to be first responders. Even I was taught how to resuscitate someone while I was there—not that I want to put it into practice, of course, for fear of hurting someone. I was extremely impressed with what was going and worried about my constituents feeling upset about the high salary.

I telephoned Mr Marsh, the chief executive, to ask him how he could possibly justify earning £180,000 a year, which is a staggering amount. His response was, “I do a very important job.” Of course he does an important job—managing the West Midlands ambulance service is an extraordinarily important job. However, I tried to convey to him that it is no more important than the job of the Prime Minister, a point that the hon. Member for Hammersmith alluded to at the beginning of his speech. Why should any public sector employee be paid more than the Prime Minister of the country, who has a huge amount of responsibility on his plate?

Police and crime commissioners will be elected in November. My understanding is that the police and crime commissioner for our area in Shropshire will be remunerated somewhere along the lines of £100,000 per annum, which I am pleased about. That is a far more suitable salary for people in the public sector rather than sky-high, rocketing salaries.

The issue is not just about mega-high salaries for individuals, but about how even small organisations manage taxpayers’ money. One parish council in my constituency, Bayston Hill parish council, manages to spend £43,000 per annum on administration costs and the salary of a clerk—this is just one parish council. We all have a responsibility to acknowledge and accept that our wonderful country is on its knees financially, and we all have to take responsibility in ensuring that debts are paid off and that salaries are reasonable.

I am conscious of the time, so I will end by talking briefly about my concerns about the pay of certain BBC executives. My understanding is that Mark Thompson is on a salary of more than £600,000 per annum, which I find—I will go as far as to say this—nauseating, deeply distressing, worrying and troubling. At a time when BBC Radio Shropshire is facing cuts—not a single person in that entire organisation is paid more than £55,000 per annum, and it is a wonderful service that provides many people in our rural county with vital services—the director-general of the BBC is earning more than £600,000. I fundamentally object to that.

Photo of Steve Pound Steve Pound Shadow Minister (Northern Ireland)

We have just heard the exposition of Kawczynski’s law—that one squeezes as much from their employer as they possibly can, including company cars. Surely the director-general of the BBC is merely following the sound and good advice of the hon. Gentleman?

Photo of Daniel Kawczynski Daniel Kawczynski Conservative, Shrewsbury and Atcham

There is an important distinction. I was working in the private sector, with shareholders as private individuals. Mr Thompson works for the BBC, which, by the way, forces millions of people up and down this country to pay for TV licences. I have applied for a debate on the rationale and efficiency of the way in which that tax is collected. There is a fundamental difference.

I am grateful for being called, and I end my speech now so that other hon. Members may speak.

Photo of Clive Efford Clive Efford Shadow Minister (Culture, Media and Sport) 10:24 am, 13th March 2012

This is the first time that I have participated in a debate under your chairmanship, Mr Howarth, so I am pleased to be here today. I congratulate my hon. Friend Mr Slaughter on securing this important debate.

In response to concerns about the time, I will make just two quick points to add to the forensic examination by my hon. Friend regarding public sector pay and the use of consultants, and I would like the Minister to consider them.

When my hon. Friend opened the debate, he was intervened on several times, and Members pointed out that some of the problems had existed under the previous Government. I fully accept that. A lot was made of the issue around the time of the general election, and the then Opposition were right to do so. There were concerns in the public about the rates of pay that were paid through public funds—taxpayers’ money. That is a legitimate issue to raise. Having raised the issue, even going as far as to say in the coalition document that the Government would reduce public sector pay, that there would be a cap on pay and that a mechanism would be put in place for agreeing pay that is above the rate of the Prime Minister’s salary, it is legitimate to have a debate such as today’s to examine what progress is being made.

What we have seems to be an approval of a mechanism for avoiding tax and paying higher salaries for the performance of tasks and roles that are paid for out of the public purse. There is a certain irony in that some of the mechanisms seem to allow payments that end up reducing the amount of tax that is available to pay for the services in the first place. We are talking about people who are recognised to be on the payroll, but whose salaries are paid through private companies. An article in

The Guardian on 16 February states that many people who are being paid through private companies and who are avoiding paying tax at source

“are listed as full-time legal, IT or human resources consultants. The department said many of them had been employed for a long time, and appear on staff directories.”

Such people are, for all intents and purposes, full-time employees—of the national health service, in this particular case—and yet they are being paid through service companies that allow them to reduce their tax liabilities.

The article says that Departments are complicit in that. It states:

“The arrangement can be tax-efficient both for the individual and for the Whitehall department, including arm’s-length bodies, since the department may not need to pay national insurance in addition to fees.”

My concern here is that Departments, which are paid for by tax and whose revenues are collected by the Exchequer, seem to be colluding to reduce the amount of money paid to the Exchequer. Will the Minister respond to that, or at least look at the issue? When she conducts her review, will she specifically respond to that? Am I alone in thinking that there is something peculiar about a Whitehall Department seemingly colluding with the private sector to reduce the amount of tax payable? Is that practice acceptable? Should we be encouraging such practice?

Photo of Steve Pound Steve Pound Shadow Minister (Northern Ireland)

My hon. Friend came into the House the same time as I did. He will remember, as I do, the huge debate on IR35 at the time, which I thought had addressed the issue. Is he as shocked as I am to hear today, and to read in the sheets of that august organ, Private Eye, that a golden carousel fuelled by avarice is spinning chief executives from one fleshpot to another, letting them fill their boots on the public purse without even pausing for breath? Does he agree that that should have been sorted years ago? I thought that it had been by IR35.

Photo of Clive Efford Clive Efford Shadow Minister (Culture, Media and Sport)

My hon. Friend is tempting me along a path that I do not wish to go down because I have limited time. However, he has made his point and put it on the record.

I will quote from another article in The Guardian dated 15 February to illustrate my point further. What is disturbing about that article is that the officers within the Department—whether inadvertently or not—have failed to give the full facts in answer to a Member asking questions specifically about the use of such vehicles for paying permanent members of staff in the NHS. The confusion seems to rest around whether those people are classified as civil servants, or whether they are private sector consultants.

The series of e-mails that The Guardian quotes from in the article suggests that there are attempts within the Department to facilitate that sort of arrangement. I find that alarming. The answer provided failed to give the full facts to the House. The article states:

“The emails handed to the Guardian also show senior civil servants at the department discussing the possible reputational damage to the department and seeking to avoid ways of revealing the nature of the payments sought in a written question last December by Gareth Thomas, the shadow Cabinet Office minister”.

The Guardian goes on to say that the answer to the question from my hon. Friend Mr Thomas stated:

“It is not the department's policy to permit payments to civil servants by ways of limited companies.”

That led to the belief that no civil servant was being paid through such a mechanism. However, it transpires that there is an issue surrounding the definition of a civil servant. A civil servant is someone who is on pay-as-you-earn, rather than someone who is being paid through one of those mechanisms. Therefore, the answer was entirely misleading. Whether that was deliberate or not, we need to have some answers to that practice. Do the Government think that that is a satisfactory definition? Alternatively, does it need clarification so that when hon. Members seek answers in the future about how people are being paid, we get accurate answers? We can then be the scrutineers of what is going on with public sector pay and how much public sector money is being used. With that, I conclude my speech.

Several hon. Members:

rose —

Photo of George Howarth George Howarth Labour, Knowsley

Order. It might be helpful if I say that I intend to call the Opposition spokesperson at 10.40 am. I call Philip Hammond.

Photo of Stephen Hammond Stephen Hammond Conservative, Wimbledon 10:32 am, 13th March 2012

Thank you, Mr Howarth. For the record, I am Stephen Hammond—Philip is the tall, good-looking one. I listened carefully to your strictures and have therefore ditched my section on people seeking to re-enter public life and avoid tax. At the outset, I remind hon. Members of and guide them to my declared interest in the Register of Members’ Financial Interests.

I have listened carefully to the debate. I only wish that I had known my hon. Friend Daniel Kawczynski sooner, as I could have followed Kawczynski’s law when I was in the private sector, but I singly failed to do so. I also listened to the fascinating opening speech of Mr Slaughter. He chided us on party politics, but I say gently that it might have been helpful if some of the examples had not been exclusively from Hammersmith and Fulham. On that basis, we might take his comments as a party political contribution.

I shall raise three points in my remarks. First, I shall discuss the concept of value for money. I shall then talk briefly about excessive pay and contractors. Many of us feel that one of the big areas where problems arose with value for money in relation to outside firms being used in the provision of public services was with the private finance initiatives that were set up. The public sector should be the enabler. Sometimes, it will also be the facilitator, but it does not need to be so. The real scandal of excessive pay and excessive failure to manage arrangements was in the unitary payment scheme set up under PFI. That unitary payment allowed the capital and the current payment to be collided for the deliberate obfuscation of what was being paid in current payments. That was a real scandal, and value for money was impossible to assess.

On excessive public pay, the hon. Member for Hammersmith is absolutely right: payment should be in line with performance. As reflected by the view of the vast majority of the public, the scandal has been that, at the time of entering austerity, a number of people in the public sector were getting paid well beyond their perceived performance. Although I was chided for using this example, it is absolutely true that, since the Government have come to office, there has been downward pressure on the overall pay in local government. Again, I give the example that, before 2010, £221,000 was the average salary for chief executives. It is now £143,000, which may well still be too high in terms of what is being delivered. None the less, there has been downward pressure. The TaxPayers Alliance “Town Hall Rich List” is a good touchstone for us all, but one should not forget to put the matter into context. Under the previous Administration, we had to revise the definition of public sector productivity twice, because pay increased without a commensurate increase in performance.

I want to put some balance into the debate because if we are not careful, we will end up saying that all contractors and freelancers are bad value and try to evade tax. That is simply not true. The skills that some of those people provide contribute a huge amount to not only the economy, but the public sector. That is clear. The public sector needs all sorts of skills in addition to the work that dedicated, hard-working public servants and public sector workers provide. Some 1.6 million people in the UK work as freelancers. The idea that all those people are tax dodgers is simple nonsense. Oxford Economics has made the point that, in 2009, the overall benefit to the economy was around £21 billion.

I want to touch briefly on the review that the Chief Secretary to the Treasury has set up. That review started because of the Ed Lester case and the fact he was given special concessions. However, the idea that all those concessions apply to every individual who is a freelancer in the public sector is simply wrong. We should not forget—I say this to the Minister, as I hope she will address this point—that the reason why a number of freelancers put themselves into limited companies is that the Government procure through agencies rather than directly. Those agencies require that the contract goes to a limited company. The Government need to address that in their review.

I want to allow my hon. Friend Guy Opperman time to speak, but I should like to say that, although I support what the Chief Secretary is saying, I hope that the Treasury will ensure that the review focuses on value for money. That is the key. The danger is that contracts will be delayed and taken away and that it will become a witch hunt, rather than a proper review of value. I hope that the Minister can reassure us that that is what will finally happen.

I did not catch exactly what Stephen Pound said, but he mentioned IR35. The Government rightly set up a review of IR35, but I say to the Minister that there is real concern that HMRC’s fairly simple business tests, which would have allowed a relatively clear definition of someone who is a freelancer or someone who is working full time, are going astray. I therefore urge the Treasury to get back involved in that debate to ensure that the tests are clear, because IR35 could be a good way to ensure that people working in the public sector are true freelancers and contractors, not people who should be on the full-time books of the public sector.

Photo of Guy Opperman Guy Opperman Conservative, Hexham 10:39 am, 13th March 2012

I have 60 seconds to change the world. In my respectful submission, no one should earn more than the Prime Minister, the lead general in Afghanistan, the Lord Chief Justice or my local chief constable. The issue of excessive pay is raised on the doorstep in the north-east, and should, frankly, be addressed.

The Government are right to raise the tax threshold to £10,000, but I would like to go further. No one—at all—who earns the minimum wage and works a standard week should pay tax on their income. That would take it slightly beyond the £10,000 threshold. I support the work of the TaxPayers Alliance, the High Pay Centre, the High Pay Commission and the campaign against excessive executive pay—organisations that I work with regularly.

I finish my 60-second bid for glory on executive pay in the public sector by saying that, while I support a lot of what Mr Slaughter said, it must be acknowledged that we are clearing up the mess of a light-touch regulation regime and the problems relating to Mr Thompson’s £600,000-plus salary, which not a single member of the BBC whom I have ever met could possibly justify.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury) 10:40 am, 13th March 2012

It is a pleasure to serve under your chairmanship once again, Mr Howarth.

I congratulate my hon. Friend Mr Slaughter on securing the debate and on giving us an extensive and forensic tour around local and national concern. He said that his speech would be both interesting and controversial. Actually, it has been helpful that there have not been too many controversial issues. Perhaps there is more agreement than disagreement, notwithstanding some party political points. My hon. Friend talked about the financial, the moral and the legal practices in relation to some contracts in the public sector and to absolute levels of remuneration. They have been reflected in the contributions of various hon. Members. He was clear that he was most concerned to focus on deliberate avoidance and evasion and the improper use of the rules, or attempts to use the rules improperly, to benefit individuals.

I have worked in the public sector. It would never have occurred to me, when I worked in a senior post of a local authority social work department, to set myself up as a company and contract my services to that local authority. I was brought up—this was mentioned by a number of hon. Members—with a public sector ethos that recognised that working in the public sector made us accountable to the local taxpayers who paid our wages.

Daniel Kawczynski made a distinction between the private sector and the public sector. I hope that he feels that the private sector ought to have a set of business ethics. Everyone operating in the private sector ought to take account of that. It is not simply about squeezing as much as possible out of employees because they happen to be in the private sector.

We heard that people are angry about such arrangements. They are angry because they feel that low-paid workers, particularly in the public sector, are suffering the squeeze more than those at the top. The Minister will recall that I raised this issue last week at Treasury questions. I asked what the Government are doing to ensure that they deliver on their promise that the lowest paid public sector workers receive the £250 a year pay rise that they believed they were going to get. We also need to ensure that we do not have a further expansion of excessive pay at the opposite end.

Perception is an issue. The public understand that people whose primary job is with a local authority or public body—whether nationally or locally—and who are being remunerated by it, should pay their fair share and be involved in a proper, transparent arrangement. The public become concerned when it looks like individuals or companies have set themselves up in a particular way to benefit themselves financially, and are not paying their fair share.

In response to points made by the hon. Members for Shrewsbury and Atcham, for Wimbledon (Stephen Hammond) and, in his brief contribution, for Hexham (Guy Opperman), I do not think that anyone is suggesting for a moment that everyone who is self-employed, works as a consultant or in such organisations, is “at it”, to use a term used on the streets of my constituency. There are many people who add value, who can offer very specialist knowledge and expertise and who can be paid through appropriate contracts in the public sector. However, there is genuine concern about some of the arrangements, which we heard about in the forensic contribution by my hon. Friend the Member for Hammersmith, whereby it is clear that people are contracted to do a particular job and, in any reasonable definition, would be seen as employed by the public sector.

Some hon. Members mentioned IR35, which not only affects people in the public sector—I do not intend to deviate from the subject of the debate other than to mention the review of IR35—but many small businesses. There many situations where people, who are either self-employed or in small businesses, find themselves at odds with HMRC when dealing with definitions of how tax should be collected and paid. I hope that the Minister will say a bit more about the progress on IR35, and how it will be modernised and changed. A quick look at the Treasury website showed me that, far from the situation being simplified, there were about 40-plus—I lost count—different guidance notes on IR35 that would have to be interpreted to decide whether someone was an employee or not. That is not helpful and gives rise to speculation that such guidance is not necessarily there to help people, but to help people avoid the payment of taxes. Many small businesses feel that they are currently being pressed, unlike some of the arrangements we have heard about this morning.

I am conscious of the time, so I will not go through, point-by-point, everything that was raised. Clearly, there have been situations over a number of years—I do not think that anyone particularly wanted to make a party political point—and the general public, understandably, feel that they are taking the pressure to do their bit on deficit reduction. I do not always feel that we are all in it together. It is not fair that those on the lowest pay are set to lose some of their benefits. As was pointed out, those on the lowest pay are feeling the squeeze and do not have a living wage. We are not focusing on pay at the top or the ratio—the difference—between those on the lowest pay and those on the highest pay in the public sector. We should do everything possible to ensure that there is openness and transparency.

There is a place—perhaps not all my colleagues agree—for using specialist expertise and consultants on a short-term basis to add value to the public sector, but that must be done openly and transparently, with proper processes in place. We should never allow people to use the rules and regulations to avoid paying the appropriate tax or to benefit themselves—that is not what the public expect.

Finally, I have already mentioned IR35. Will the Minister say what action has been taken to ensure that, across local authorities, there will be no other examples of the type of practices that give rise to public concern? What will the Government do to monitor them in the future?

Photo of Chloe Smith Chloe Smith The Economic Secretary to the Treasury 10:49 am, 13th March 2012

It is a pleasure to serve under your chairmanship, Mr Howarth, in an important debate to which hon. Members have contributed with some thoughtfulness. I should like to mention my entry in the Register of Members’ Financial Interests for 2009.

Hon. Members are aware that we face a tough challenge to repair the damage to our economy resulting from the recent crisis. Restoring the economy to prosperity requires restraint in many sectors of society. It is right that public sector pay restraint plays a part in that fiscal consolidation. I shall start with general pay restraint and then refer to various areas mentioned by hon. Members.

I am confident that all hon. Members agree that public servants do a crucial job delivering the high-quality public services on which we all rely. It is right that we continue to offer rewards to those who have skills that would help and assist all our constituents who need those services. At the same time, however, given the pressures on public finances, public pay restraint can help to protect jobs and services in the public sector. That is why, in the June 2010 Budget, the Chancellor announced that there would be a two-year pay freeze for public sector workers earning more than £21,000. At the autumn statement, the Chancellor announced that, for the two years following the freeze, public sector pay awards would average 1%.

On senior pay restraint, it is particularly important, in a context of overall pay restraint, that senior managers show leadership on pay. That is why, at the first meeting of the coalition Cabinet, Ministers announced that they would take a 5% pay cut and that their pay would be frozen for the rest of the Parliament. In May 2010, it was announced that the number of senior civil servants receiving bonuses would be reduced by two thirds, which I am sure hon. Members welcome. At the same time, it was also announced that the Chief Secretary to the Treasury would sign off any appointments for those earning more than £142,500, in areas where Ministers control pay. Of course, much of what we are discussing today can only cover the areas where central Government have control over pay. There is a certain amount of complexity in that landscape to which I may not have time to do justice, but I hope that hon. Members will understand what the Treasury could comment on today.

The Government asked Will Hutton to review senior pay in the public sector. The Government accepted his recommendation that Departments publish a top-to-median pay multiple each year, and Departments will include that as part of their annual reports from this year.

Likewise, the Government are also clear that any consultancy arrangements in the public sector should provide good value for money. In May 2010, we announced that the Cabinet Office and the Treasury would join forces to drive out waste, through a new group called the Efficiency and Reform Group. One of that team’s first priorities, with immediate effect, was to freeze all new consultancy spend unless it was an operational necessity. Where such spending was proposed, ministerial sign-off was required for £20,000 or above. This spending control remains in place. Because of that decision, in the 10 months from May 2010 to March 2011, £870 million was saved through a reduction in consultancy spending by central Government. I am sure that hon. Members welcome that.

On tax avoidance by senior staff, which has been of interest to hon. Members throughout this debate, the Government have been clear that we are committed to tackling all forms of tax avoidance. We do not believe that tax avoidance is appropriate in the public sector. Indeed, it is expressly forgiven—[Interruption.] It is expressly forbidden—I hope Hansard can hear this—in a document entitled “Managing Public Money”, which I know hon. Members have as their bedside reading. Clive Efford asked whether an NHS trust would be covered by that guidance and I confirm that that would be so. All bodies covered by that guidance are covered by the Chief Secretary’s review, which has been mentioned in the debate.

The review occurred after it came to light that a senior public servant had been appointed in way that could be perceived as minimising his tax. The Chief Secretary therefore announced a review of the tax arrangements of senior public sector appointees. This review will consider the extent to which use is made of arrangements whereby the tax position of appointees can be perceived to be minimised, and will make appropriate recommendations. The review will include individuals being paid through PSCs, to use an abbreviation relevant to this debate.

Several hon. Members, including my hon. Friend Stephen Hammond, have mentioned that there is much complexity here that the review should reasonably take into account. The review is not intended to be a witch hunt.

Cathy Jamieson asked specifically about IR35. She will know that in the Budget last year, following a review by the independent Office of Tax Simplification, the Chancellor announced that IR35 would be maintained, but that Her Majesty’s Revenue and Customs will take forward options for improving its administration. That is a separate point, but I hope that that answers the hon. Lady’s question.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

I thank the Minister for that clarification, but I hope that she offers slightly more information in terms of how the administration will be improved and whether any of the guidance will be changed.

Photo of Chloe Smith Chloe Smith The Economic Secretary to the Treasury

I had better write to the hon. Lady, not being able to cover that matter under the terms of today’s debate.

The review is due to report to the Chief Secretary by the end of March, so hon. Members will understand that I cannot comment further at this time.

Local government is outside of the scope of the review, although I hear the points made by Mr Slaughter, including his wish for the review to go wider. He will know that the Secretary of State for Communities and Local Government has written to the Local Government Association to urge it to consider similar action.

It is right that light should be shone upon practices in the local government sector as well, albeit that central Government do not control pay in local government: it remains, rightly, a matter for local authorities. We have taken several steps to bring greater local accountability and transparency to pay in local government, which I think local taxpayers welcome strongly. They now have the tools and information needed to hold their councils and elected councillors to account, through the Localism Act 2011.

Photo of Andrew Slaughter Andrew Slaughter Shadow Minister (Justice)

I hear what the Minister is saying and I look forward to the review, but will she at least hold open the prospect of widening its ambit, because what she has just said is not correct? In my experience, in my local authority, the audit committee is not meeting—it is being made inquorate by the majority party—and documents are being refused, not only to me but to the leader of the opposition, who has particular rights in law to get such documentation. If councils are going to abuse the position of trust, surely the Government and HMRC must act in this matter.

Photo of Chloe Smith Chloe Smith The Economic Secretary to the Treasury

Perhaps the hon. Gentleman feels that the council was better off under his watch, when it was 363rd in respect of value for money out of 387 local authorities.

Let me provide one example of ways in which local authorities are now more transparent. I have no doubt that the good citizens of Hammersmith enjoy holding the pay practices of the council to account through measures under the 2011 Act. They can do that because local authorities are obliged to publish their pay policy statements by the end of March.

On the responsibilities that I am drawing attention to, the Government believe that there should be public accountability in this regard, not only for employees but for elected councillors. The responsibility for meeting the transparency that we all demand of the public sector rests not only with locally elected councillors through some of the measures in the 2011 Act, but with citizens who are now empowered to understand more about the choices that their councils take.

It is right that, as we call time on a decade of ever-increasing centralisation, targets, levers and poor value for money, greater localism must come with greater transparency and accountability. Opening up the pay deals of top town hall jobs to public scrutiny will mean that taxpayers know with certainty that their interests are being protected, complementing measures taken by central Government to control and cut consultancy spending under their areas of responsibility, while also freezing and tackling excessive pay elsewhere in the sector.