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The pressure of public scrutiny is increasing on senior, well-paid individuals in all areas of work after a Freedom of Information request. Concerns have arisen that senior public servants have been abusing their position by working in ways that are “tax efficient” and thereby inappropriate.

At a time when high pay in the private sector has been a matter of concern, it was pretty obvious that arrangements for senior positions in the public sector would soon come under increased scrutiny and calls for transparency.

With news emerging the Student Loan Company’s chief executive, Ed Lester had his salary paid through a personal service company (a legal framework with no direct employment relationship and tax advantages), the Coalition Government’s focus on reducing tax avoidance has been called into question.

Personal service companies are generally accepted as perfectly legal and legitimate mechanisms for many independent contractors to work with client organisations. This arrangement can be entirely legitimate and suit both parties, particularly where the contractor works independently with multiple clients and where permanent or direct employment is not appropriate. Such companies can be an effective way for contractors to work and have certain tax advantages.

Tax legislation generally prevents such arrangements being abused as, where HMRC takes the view the working relationship is one where direct employment is the “real” situation, the contractor would normally be liable for PAYE and National Insurance in the normal way.

This is managed through the application of IR35, introduced in 2000 with the aim of eliminating inappropriate tax avoidance behaviour and generate tax revenue.

Since the introduction of IR35, tax lawyers have expressed concern that HMRC have been “bashing” truly independent contractors and entrepreneurs with this legislation to raise revenue rather than tackling real tax evaders.

Initially at least, there has been no suggestion the particular case in question has been put in place illegally and no details about the tax treatment of the arrangement have been disclosed, though it has been suggested “tax authorities” had approved it. The SLC has apparently defended the arrangement, producing figures suggesting it was saving the organisation around £88k over two years by avoiding head hunters fees, and tax and national insurance contributions. Commentator have highlighted potential financial benefits of between £25k and £40k for Mr Lester.

Across the public sector, Attractor is aware there is, generally, a strong focus on ensuring appropriate treatment of employment and contractor relationships. Perhaps this is why the judgements made in this case have been called into question. From the details published, it seems the arrangement had been approved at a pretty high level and there may be some suspicion that pressure from politicians had swayed the decision.

With increased focus on the issue, Danny Alexander, the Chief Secretary to the Treasury has ordered an investigation to see if the practice is widespread across government. It will be interesting to see the results of the investigation and it’s certain there will be increased effort to ensure the tax treatment for all senior appointments has been as “clean” as possible.

This might require a change to payment mechanisms and employment relationships or, more simply, a quiet word in the ear of the taxman.

The House of Commons Fees Office has been drawn into another expenses news item, though this one relates to the fraudulent actions of an official in the payment office. Andrew Gibson, a Resources Budget Officer created fake expense claims to pay off gambling debts.

The crooked official submitted false invoices for secretarial services against the names of Tam Dalyell, Linda Perham and Matthew Green, MPs who were retiring or otherwise leaving their constituencies following the General Election of 2005.

During that year, Gibson made three payments totalling £5,875 into the bank account of his friend Toni Pomfret, both of whom had worked with the post office.

The discrepancies with the payments came to light as a result of the general investigation into MP’s expenses. Mr Dalyell alerted the police when a claim he did not recall submitting was examined . Gibson and Pomfret’s fingerprints were detected on the claim forms.

Having both pleaded guilty, Gibson was jailed for nine months and Pomfret for six months.

A payroll administrator working for government departments was recently sentenced to two years in prison after defrauding the taxpayer of over £137k. The fraud had commenced in July 2005 with the Department of Health, on the payroll of the Mental Health Review Tribunals and continued until March 2008 after payroll had transferred to the Ministry of Justice, with the administrator keeping his job.

Based on the amount of money taken over the period, and the fact that expense payments would have been tax free the crooked scheme was providing the fraudster with the equivalent of income of around £74k per year.

The fraud involved a range of techniques including the creation of false receipts, payment to bank accounts the administrator had set up using false documents, alterations to the computer records for genuine recipients’ bank details and claims attributed to an employee who had died several years earlier.

The case was handled by the NHS Counter Fraud Service – which covers all kinds of fraud against the Department of Health and NHS.

In the video post at the Journal of Accountancy website, Joseph T Wells, a certified fraud examiner, has a clear and simple message

“People who beleive they will be caught commiting fraud are less likely to do it”

He highlights the key actions which organisations can take to deter and prevent fraud -

• clear communication to all employees about what constitutes fraud
• mechanisms for people to seek advice about possibly unethical practices
• access to a reporting hotline which allows anonymous reporting of concerns
• common sense internal controls (e.g. physical safeguards, separation of duties)
• an increased perception of detection through management and audit activity
• including regular fraud risk assessments

Louise Tomkins, a senior manager in the NHS, working at Hammersmith Hospital and then Ealing Hospital, siphoned off more than £200,000 from hospital budgets she controlled.

The fraud, lasting over a period of a year, was discovered by a successor at Imperial College Hospitals when irregularities with invoices for “medical photography services” became apparent.

The full facts were uncovered by the joint investigation involving the the NHS Counter-fraud Service and the Metropolitan Police.

In an unsophisticated fraud, which depended on being in a position of trust, invoices were altered to make them appear genuine and authorised for payment.

The money was actually being channelled to Tomkins’ business breeding competition horses, where it funded upkeep, supplies and transport operations.

Tomkins was suspended in September 2008 and dismissed for gross misconduct last in 2009 and has now sold 14 horses to repay money to the NHS. She will now serve a jail sentence of 2 years and 9 months.

Photo:Security, Anonymous, Flickr

In their Global Economic Survey 2009,  Price Waterhouse Coopers found fraud as one of the most problematic issues facing companies

Organisations commonly reported management attention being focused on business survival in the current recession.

PwC concluded this lack of focus, while understandable, could further increase fraud risk with cutbacks in resources being exploited by fraudsters.

Respondents to the PwC survey reported lower levels of resources were available for internal controls with limited investments meant internal audit doing more work with less staff. Read the rest of this entry →

"Security", Anonymous, Flickr

2009 saw an increase in white-collar fraud according to accountancy firm BDO. They report the steepest increase in seven years ago, much of this related to fraudulent borrowing.

Key findings in the report for 2009 compared to 2008 were -

• average value of fraud over £5m
• most fraudsters were aged 20-39
• management fraud up 48%
• losses to larger fraud up 76%
• financial sector fraud up 70%
• 90% of large frauds unreported
• most fraud took place in London and the South East

BDO anticipated further increases for a couple of years after businesses start to come out of the recession and organisations clamp down on costs. Read the rest of this entry →

Photo:srqpix, Flickr

It is reassuring to recognise the UK has no monopoly on financial irregularities within government.

A grand jury in Washington D.C. has indicted the former office manager of the late Senator Edward Kennedy.

39 year old Mr Ngozi Pole, is accused of a long lasting payroll fraud amounting to over $75,000. Read the rest of this entry →

It may be credible to suggest public sector organisations are carrying out unnecessary activities. We yearn for the past, when common-sense applied, government was smaller, law simpler and we spent less time suing each other.

When things go wrong however, people (corralled by politicians and the media) clamour for tighter controls. These demands create pressure for scapegoats and better standards. Heads roll, controls are introduced …. and new monitoring work commences.

We want to have our cake and eat it!

In an increasingly risk-averse society, this struggle between “common sense” and control impacts operations in the workplace too. Many corporate teams exist to facilitate business effectiveness and create effective frameworks for risk management. This applies to human resources and payroll, finance, health and safety, information governance and information technology functions. Read the rest of this entry →

With expenses in the news for months, MPs and Directors (both public and private sectors) have been in the firing line.

Policy compliance is the issue and employers’ experience suggests people tend (accidentally or deliberately) to inflate expense claims!

In the NHS, people report neither claiming, nor properly receiving, expenses they are entitled to … and Atractor’s experience suggests this is true.

Does the NHS environment reduce the need for an automated claims management process? Is there a risk that NHS Trusts will fall for suppliers’ hype about the benefits of automation?

More claims from better-informed employees may well offset savings from better compliance and more accurate calculations. This is really no defence for keeping employees in the dark about entitlements, or for retaining inefficient working methods. Read the rest of this entry →