Pay and Consultants (Public Sector)

Kerry McCarthy Excerpts

Tuesday 13th March 2012 Westminster Hall

[Mr Slaughter]

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 Sunday reveals 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.

[Kerry McCarthy (Bristol East) (Lab)]

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?

[Mr Slaughter]

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.”