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Department of Health pay deals reignite tax avoidance debate

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The government should stop pay arrangements that could allow senior officials to avoid thousands of pounds in tax, the head of the senior civil servants’ union said today after it emerged that the Department of Health pays the salaries of 25 senior staff to limited companies.

A group representing freelancers warned that it would be wrong ‘to brand all one-person limited companies as employees attempting to avoid tax’.

But Alastair Kendrick, Employment Tax Director at MHA MacIntyre Hudson, told Tax Journal that he was surprised that the civil service was using such arrangements. ‘HMRC has challenged the use of personal service companies in the private sector, and the fact that it is being permitted in the public sector would suggest double standards,’ he said.

The Guardian reported that the Department of Health apologised after documents sent to the paper showed that ‘contrary to assurances given to Parliament, more than 25 senior staff employed by the department are paid salaries direct to limited companies, with the likely effect of reducing their tax bills’.

The paper quoted a Whitehall source as saying: ‘We cannot defend these arrangements, but it may be it is very common in Whitehall and this is just the tip of an iceberg.’ The arrangements would be subject to a review by HM Treasury.


The BBC quoted Jonathan Baume, General Secretary of the First Division Association – which represents senior public servants – as saying that while the practice was legal, there was an ‘issue of morality’. The last Labour government had begun the practice when it started hiring civil servants from the private sector, he said. ‘We need to be very transparent, and very clear that this cannot continue, but at the same time grasp a very difficult political nettle, which is to address the problem of pay at the senior levels of the Civil Service.’

According to The Guardian, leaked internal emails show senior civil servants at the Department of Health ‘discussing the possible reputational damage to the department’.

One email said: ‘The department would probably want to avoid anything that implies its NPWs [non-payroll workers] are disguised employees reputationally, to avoid unnecessary employers' national insurance and because HMRC may use this to take forward IR35 cases with those NPWs.’

PCG, an organisation representing freelancers, today called on government, civil servants and the media to ‘avoid hysteria being introduced into the debate surrounding the role of limited companies in the UK economy’. PCG Chairman Chris Bryce said: ‘The government is right to look closely at how public servants are being remunerated and where there is disguised employment or tax evasion it should be stopped and fully investigated by HMRC.

‘However, it is fundamentally inaccurate to brand all one-person limited companies as employees attempting to avoid tax. The Prime Minister himself has praised freelance workers and said they make a valuable contribution to the nation’s economy.’

Mark Serwotka, General Secretary of the Public and Commercial Services union, said that while pension reforms amounted to a ‘huge’ pay cut, ‘some fat cats are trousering a fortune and being helped by the government to avoid paying the taxes that are needed to pay for public services’.

Student Loans Company

Earlier this month Danny Alexander, the Chief Secretary to the Treasury, announced that tax and NICs would now be deducted under PAYE from the salary of Ed Lester, Chief Executive of the Student Loans Company. Lester’s remuneration had been paid gross to a personal service company – via a recruitment agency – for Lester’s duties as interim CEO, and the arrangement was renewed when Lester was re-appointed for a two-year term beginning in February 2011.

Alexander also announced a review of top civil servants’ tax affairs and proclaimed that there was ‘no place for tax avoidance in government’.

As Tax Journal reported last week, documents released in response to a freedom of information request show that Lester was advised to account for tax and NICs under the IR35 rules, introduced in 2000 to counter tax avoidance via personal service companies.

‘Value for money’

Lester’s pay arrangements were approved by ministers in December 2010. Correspondence released by the Student Loans Company, and published on its website, indicates that the SLC told David Willetts, the Universities Minister, that the arrangement was ‘subject to ratification with HMRC on the extension of their current concession’. Willetts replied, telling the SLC that ‘terms of the appointment’ had been agreed ‘by the Chief Secretary to the Treasury’.

That correspondence also indicates that Gus O’Donnell, then the Cabinet Secretary, asked the SLC why it was not proposing to put Lester on its payroll and what difference it would make, in terms of the cost to the Exchequer, if PAYE was operated.

Calculations released in response to a freedom of information request indicated that total cost to the Department for Business, Innovation and Skills for two years, using an ‘agency’ route, would be £501,000. The total ‘payroll cost’ for two years would be £588,900. An internal email noted: ‘I have spoken with the Cabinet office this morning who have confirmed that Gus O'Donnell is now content and that this is being sent to the [Chief Secretary to the Treasury] this morning.’

Vince Cable, the Business Secretary, said the arrangements involved ‘substantial value for money for the taxpayer [and] a tax cut by the individual’, according to The Times (2 February).