Time to take stock of One Barnet

Shannon Christine Mattern

Two people who don't have an axe to grind have indirectly cast doubt upon the One Barnet programme this last week.

The first was Sir Merrick Cockell who is the chairman of the LGA (Local Government Association) although he was speaking as a council leader who was interviewed by the FT. You can register free and read the whole article here although Mr Mustard has picked out the main points below:

Sir Merrick Cockell said there had been a period when “public bad, private good” had “almost been a mantra”, accompanied by a belief that “the right way for local authorities to do things was to outsource everything". Barnet Council still think that.

I hope we’ve moved beyond that, because there are very good cases for outsourcing. There are even stronger cases for testing a service properly to see whether it’s the right service to outsource, to see whether there’s a mature market out there that may be suitable to tender against it and then properly to reach a conclusion that there is, or there isn’t. All studies in Barnet somehow come to the conclusion to outsource.

Actually, I think we’ve also underestimated just how good some council services are that are done by local authorities very professionally with the tightest budgets [and] rigorous management. This would be a better approach in Barnet. Slash the management and control everything much more tightly.

Sir Merrick suggested that it was easier to adapt services to changing circumstances if they remained in-house. He added: “If you’ve got IT in-house, actually you can be very responsive to change. If you’ve got IT outsourced ... every time you want to change it, you have to renegotiate... and that takes time."  and it will take money. This is one of the biggest challenges in Barnet as 70% of everything will be out-sourced and the council just won't be able to think of everything.

and the second article is by Andy Williams who is the managing director of CPM Training and who wrote an article in Supply Management entitled back to reality and explained why "backsourcing" which is bringing work back in-house that was outsourced, is now the way to go. We are a bit behind in Barnet as we haven't actually managed yet to get most of our outsourcing done and yet we seem to be out-of-date before we have really got going. Oh well, only several £million wasted.

Here are some snippets from the whole article which you can read on this link.

It used to be that outsourcing was all the rage. ‘Do what you do best and outsource the rest,’ said one; we’ve been told to outsource everything, including ourselves,’ said another, but now backsourcing appears to be gaining ground.

The US government is actively pursuing a backsourcing policy after studies showed it was paying 1.83 times as much per contractor on average as it would for an employee. This was despite the fact that federal employees earn higher salaries. Town Hall Tax Dodgers don't look like good value then?

Savings consist of three elements:

● Reducing quality and/or resources. We’ve all been held on the phone at one time or another by the outsourced call centre that has reduced costs by cutting back on staff. Barnet is putting together a monster of a call centre. Mr Mustard has tested it recently and the two calls he made about blue badges were shockingly unhelpful.

● Transfer savings. One party makes money by taking it from another. A simple way to do this is to pay people less, which is fine if you’re comfortable with that and can still get the calibre of people you want for less. This is what is happening on the parking contract with new traffic wardens getting £8.20 against the original staff on £10.

● Efficiency savings. These come from economies of scale, a higher level of skills, better work processes or equipment. This is where the true cost savings in outsourcing lie, but how many managers asked themselves where this efficiency came from and how genuine it was? All of these savings could be kept in-house or by sharing with another local authority.

‘The Flexibility Issue’. 

A client of mine had outsourced much of its IT. Many of its previous employees, while working in the same location, were now suppliers, with a contract and KPIs and no incentive to do anything that wasn’t part of the specification. As one frustrated customer put it: “In the old days, I’d ask Eric (his former colleague) for help and he’d do what he could. Now all I get is a quote.” BT and Capita will not do anything for nothing, why would or should they?

Mr Cornelius / Mr Walkley. Time to stop and think, methinks.

Yours frugally

Mr Mustard

Design flaw

Tax is complicated and thus far people have been allowed to get away with saying that the tax take for the exchequer is not much different between employing someone directly on the payroll under PAYE and employing them through a personal service company. Mr Mustard is going to show how different the tax take can be.

You might like first to watch the Public Accounts Committee of 16 July 2012 (see video at the bottom of this post - well worth an afternoon's watching)

If you prefer you can look at the as yet uncorrected transcript here

To save your time Mr Mustard would just like to repeat two parts of the evidence:

By Carolyn Downs, Chief Executive of the Local Government Association

I have to say that we do not agree about the tax avoidance issue

and by Ms Zarin Patel, Chief Financial Officer of the BBC 

In my judgment, the IR35 anti-avoidance legislation is very strongly crafted, so that if you work through a service company, on an employment-type contract or quasi-employed, you will pay the same amount of tax

Mr Mustard has found a perfect (imperfect?) example in the shape of Mr Andrew Barrow who used to work at Barnet Council. What do we know about Mr Barrow? He worked at Barnet Council from October 2010 to June 11 as a "Finance Interim/Consultant". On 9 September 2009 he subscribed for the 1 share in the newly incorporated Cobalt PFM Ltd.

This incorporation coincides with the start of a 4 month stint working as Head of Finance & Commercial for Serco (Mr Mustard wonders if they suggested he form a personal service company?) from Sept to Dec 09.

It looks to Mr Mustard, from these invoice extracts obtained under Freedom of Information, that Mr Barrow was employed through Penna Plc (notwithstanding the redaction, as the dates agree):

Now we need to ask ourselves if Penna Plc were the employer of Mr Barrow, did he pay PAYE there? Well if he did, there would be nothing going through Cobalt PFM Ltd and there is.

What is interesting is that Cobalt PFM Ltd only had one issued £1 share when it was incorporated and that changed on 1 November 10 when a second £1 share was issued to Tracy Barrow. Mr Mustard doesn't think she has worked at Barnet Council and so anything paid to her out of Cobalt as a dividend, because it hasn't gone through the council payroll, leads to a tax advantage. What we don't know is whether Cobalt PFM are being treated within the IR35 legislation or not, and tax in this area is a bit complicated.

Here is the balance sheet of Cobalt PFM at 30 September 2011

and here is the note about the issue of the extra share. There must have been a good reason to do that paperwork (tax reduction?)

Now, we can't see any more financial information than that about Cobalt but what we can do is a comparison of tax paid under PAYE between all the income being earned by one person under PAYE and the same income spread across 2 people (they don't have to be husband and wife, they just happen to have equal shareholdings in a company) for a fictitious company/people. To make this simpler, National Insurance and Dividends have been been ignored although using dividends is likely to be even more advantageous. For this example, income has been assumed to be 200 working days in a year at £600 = £120,000

Tax year 2011/12			paid to 1		paid to 2 people		total for 2
	Band £	%	£		£	£
Income			120,000		60,000	60,000	120,000
Tax allowance			7,475		7,475	7,475	14,950
Taxable			112,525		52,525	52,525	105,050
Lower rate	2,560	20	512		512	512	1,024
Standard rate	32,440	20	6,488		6,488	6,488	12,976
Higher rate	balance	40	31,010		7,010	7,010	14,020
Total tax			38,010		14,010	14,010	28,020
Net income			81,990		45,990	45,990	91,980
Net income					91'980
Tax saving			9,990

Conclusion

Using a personal service company may not be designed to save tax but that could just be one of the pleasant side effects. Mr Mustard has to stop there and look to see how many of the other town hall tax dodging service companies happen to have a second shareholder.

Yours frugally

Mr Mustard