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Revealed: why O’Donnell approved tax arrangements

Plans to pay the Student Loans Company’s chief executive off the payroll were questioned by the UK’s then most senior civil servant.

Documents obtained by Exaro show that Sir Gus (now Lord) O’Donnell, as cabinet secretary and head of the civil service, was persuaded to accept another payment route.

Ed Lester was able to pay less tax as chief executive of the Student Loans Company (SLC) by not working as an employee. He had been “interim” chief executive since May 2010, and was negotiating a further two-year contract from February 2011 that would allow him to keep what one senior mandarin called a “tax efficient” arrangement.

I have spoken with the Cabinet Office this morning who have confirmed that Gus O’Donnell is now content

E-mail from unidentified civil servant

Under a concession from HM Revenue & Customs (HMRC), the SLC was paying Lester an annual package of £182,000, plus expenses, without deducting tax at source.

Lester’s pay and expenses would go to Penna Consulting, the human-resources group that supplies his services. It would pass the money, after taking an agency fee for itself, to a company set up by Lester.

In December 2010, the SLC’s company secretary, Chris Andrew, received an e-mail from an unidentified civil servant, saying: “Gus O’Donnell has asked for an urgent clarification prior to this being put to the CST [chief secretary to the Treasury].

“Gus has asked us to set out:

“1. Why we are not proposing to put Ed Lester on the SLC payroll (ie to extend the HMRC concession and whereby the SLC will not be responsible for PAYE nor NI contributions);

“2. What the cost difference to the exchequer is of paying Ed Lester in this way, compared with him being on the payroll.”

Andrew replied by e-mail within four hours, detailing costs to the SLC of the proposed contract and of employing Lester directly for two years.

The unnamed official e-mailed Andrew back less than 40 minutes later after putting the details into a table that compared the two payment routes. He attached this to an e-mail and asked for any comments within 20 minutes, adding: “I will then send this over to the Cabinet Office to share with the cabinet secretary and the CST.”

The attachment began: “The terms that have been agreed for Mr Lester are in line with the basis on which he joined the SLC in May 2010.”

“These terms represent the basis on which he is prepared to accept a two-year, fixed-term appointment, subject to ratification by HMRC. Should Mr Lester be asked to be paid on the SLC payroll, it is understood that Mr Lester would likely seek to re-open negotiations on his remuneration.”

This suggests that Danny Alexander, chief secretary to the Treasury, was informed of the plan to keep the executive off the payroll, although he has said that he was unaware of any potential tax benefit to Lester.

Alexander’s spokesman declined to make any comment about the e-mailed attachment.

According to the table, the SLC would pay £501,000 under the proposed contract, or £588,900 by putting Lester on the payroll.

The difference is mainly put down to a higher fee for Penna. Under the proposed arrangement, Penna would be paid up to £35,600 – 17 per cent of salary and 50 per cent of any bonus.

Under the payroll route, Penna would receive up to £83,200, a “one-off finder’s fee of up to 33% of total year one remuneration package” – some £47,600 more.

If Lester were employed directly, the SLC would pay another £25,000 for tax due on expenses benefits. And, under the proposed arrangement, the SLC saves £17,000 by not paying national insurance, the table adds.

The figures took no account of the exchequer’s reduced tax take.

The unnamed official e-mails Andrew to say: “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 CST this morning.”

The e-mail asks: “What happens if the HMRC does not extend their concession for a further two years?”

Andrew replies: “We would need to renegotiate the position with Ed, to discuss the terms on which he would join the payroll, since HMRC approval is required for the current agency route to work.”

The Cabinet Office declined to answer questions about O’Donnell’s role in approving Lester’s contract.

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