Pay and Consultants (Public Sector)

Stephen Gilbert Excerpts

Tuesday 13th March 2012 Westminster Hall

[Mr Slaughter]

My earlier pleas 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. The hon. Member for South Norfolk (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.

[Stephen Gilbert (St Austell and Newquay) (LD)]

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.

[Mr Slaughter]

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.”

--- Later in debate ---

[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.”

[Stephen Gilbert]

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?

[Mr Slaughter]

I do not disagree with that point, but the hon. Gentleman seems to be somewhat in opposition to his colleague sitting next to him, the hon. Member for Shrewsbury and Atcham (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.