Defence contractor’s payroll scheme that enables operatives to pay less tax and NI challenged by union.

Head of the construction section of the Transport and General Workers union, Bob Blackman, is to meet MPs this week to ask for an investigation into bogus self-employment schemes on government contracts.

The move follows the revelation that a Ministry of Defence construction contract has been won by a company that uses a payroll scheme under which operatives form limited companies to avoid paying PAYE income tax and class 1 National Insurance contributions.

Portsmouth-based Citec is carrying out a £1m maintenance contract for the MOD.

Under the scheme, a payroll firm called PML formed a shell company, known as a composite by the Inland Revenue, for Citec operatives and pays them a weekly minimum wage of about £100. The rest of their earnings are made up from a weekly “dividend” provided by the composite company.

Workers on the scheme pay less National Insurance and tax than directly employed workers and the company that engages them avoids paying employers’ National Insurance contributions.

A member of Citec’s staff confirmed that the company uses the scheme but declined to comment further. Another staff member said: “We are a satellite office; I cannot even phone head office myself.”

Blackman said: “This is a scandalous situation. The MOD is supposed to be leading the way in construction procurement reform yet it is handing out contracts to companies that are deliberately avoiding tax and NI contributions.”

He added: “The government keeps telling us it wants to stamp out tax avoidance in the industry but if it cannot put its own house in order, what chance is there for the rest of the industry? So much for prime contracting.”

A spokesman for the Revenue said the government was in the process of introducing legislation to outlaw the use of composite companies. He said: “These schemes are very cleverly set up and we are looking into them. Legislation should be in place by early 2000 ensuring they are outlawed.”

The MOD’s Defence Estates declined to comment.

Blackman added: “Bearing in mind the security implications, I am amazed a company engaged in MOD contracts operates through a satellite company that has no contact with its head office.”