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Found: 2,000 civil servants working ‘off payroll’

Danny Alexander orders crackdown on ‘tax minimisation’ after Treasury review

More than 2,000 senior UK public officials are paid ‘off payroll’ in an attempt to minimise their tax bill, a Treasury review has revealed.

A confidential letter sent by Danny Alexander, chief secretary to the Treasury, to George Osborne, chancellor, contains the finding. The letter – obtained by Exaro – also sets out a plan to stamp out the practice in government departments and their agencies within three months.

Departments that fail to co-operate would see their budgets cut by up to five times the payments involved. Alexander circulated the letter to David Cameron, prime minister, and Nick Clegg, deputy prime minister, and all other cabinet members. He requested responses by tomorrow. Exaro publishes the letter in full today following a joint investigation with BBC2’s Newsnight.

Board members and senior officials with significant financial responsibility... should be on the organisation’s payroll

Danny Alexander, chief secretary to the Treasury

Alexander wrote: “The sheer scale of off-payroll engagements across government, and the length and size of these contracts, suggests that the scope for artificial tax minimisation may be greater than previously understood.”

Civil servants are able to save themselves tens of thousands of pounds a year in tax. And the practice has cost the government millions of pounds in lost revenue.

A former tax inspector, Alastair Kendrick, a senior tax expert at the accountants, MHA MacIntyre Hudson, estimated that the minimum possible amount of unpaid employer's national insurance alone was £16 million.

An investigation by Exaro, also carried out in conjunction with Newsnight, revealed in February how the Student Loans Company (SLC) was paying its chief executive, Ed Lester, through his personal-service company under concessions granted by HM Revenue & Customs.

Alexander approved Lester’s £182,000 annual package, but said that he was unaware of the potential tax benefit, and immediately ordered the Treasury to carry out a review.

He wrote in his letter dated last Wednesday: “The aim of this review was to ascertain the extent to which use is made of arrangements whereby the tax position of appointees is minimised, and to make appropriate recommendations.”

“Departments have provided the Treasury with information in relation to all individuals engaged off-payroll – for payment in excess of £58,200.”

Of more than 2,000 such people identified, 1,500 are paid more than £380 a day.

At least 1,600 people have been working ‘off payroll’ for their departments for more than six months. Of these, 1,200 have been working for in excess of a year. And 800 of them have been working for at least two years.

He continued: “I do not believe that it would be proportionate to ban all such contracts in future.” But he is seeking “strict rules” on tax arrangements of senior public officials.

“I also believe that departments should be able to assure themselves that highly paid specialist staff are meeting their income tax and [national insurance] obligations.”

Osborne announced in his budget a crackdown on the use of personal-service companies to avoid tax.

Alexander wrote in his letter to Osborne that a consultation on the change will be published with the findings of the review – expected this month.

He said: “However, this measure will not take effect until next year, and will not cover all contracts that relate to highly paid individual engagements.”

Writing about new engagements and contract renewals, Alexander said: “Board members and senior officials with significant financial responsibility (to be defined by the accounting officer) should be on the organisation’s payroll, unless there are exceptional circumstances – in which case, the accounting officers should be responsible for approving the arrangements – and such exceptions should exist for no longer than six months.

“Engagements of more than six months in duration, for more than a daily rate of £220, should include contractual provisions that allow the department to seek assurance regarding the income tax and [national insurance] obligations of the engagee – and to terminate the contract if that assurance is not provided.”

He added: “Departments should also apply these principles to existing contracts, subject to ensuring value for money for the taxpayer.”

Alexander is also asking Andrew Lansley, health secretary, and Michael Gove, education secretary, to apply the same rules throughout the NHS and non-state funded schools.

Margaret Hodge, chairwoman of the House of Commons public accounts committee, told Exaro: “I am absolutely shocked that what was seen as a rogue case appears to be commonplace across the whole of the civil service.

“Danny Alexander has promised that our committee will receive a full report and we intend to interrogate vigorously the worst offenders. It does appear that he is taking the right steps to deal with this.”

His letter confirms that the Department for Communities and Local Government was to write to the Local Government Association to carry out a similar exercise.

Public broadcasting authorities were outside the scope of the review. But Exaro revealed that around 3,000 people working for the BBC are paid through personal-service companies, with five of them earning more than £150,000 a year from the broadcaster.

A Treasury spokesman told Exaro: “We do not comment on leaked documents.”

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