Exclusive: Whitehall tax avoidance “scam” revealed

Flashy Student Loan Co HQ where Ed Lester works without being taxed at source. Pic courtesy BBC

Civil servants could be able to avoid legally paying tens of thousands of tax while working in Whitehall. An investigation by Exaro News and BBC Newsnight based on documents obtained by me through a Freedom of Information request has revealed an extraordinary personal tax deal negotiated by the Student Loan Company for its £182,000 a year Whitehall boss, Ed Lester. The deal is £140,000 salary,£14,000  bonus, £28,000 pension and £28,000 expenses for flight and Glasgow flat.

Documents released by the SLC and the Department of Business,Innovation and Skills reveal that Mr Lester, chief executive,pays no tax or national insurance at source but instead the SLC pay a consulting firm called Penna who pass the gross cash to a personal service company run by Mr Lester and a partner. This arrangement was approved by HM Revenue and Customs and the deal was signed off by David Willetts, the universities minister, and Danny Alexander, chief secretary to the Treasury.

As a result instead of paying tax at the top rate of 50 per cent – the company is likely to only have to pay corporation tax at the government’s new lower small company rate of 21 per cent and minimal national insurance. Mr Lester has declined to discuss the matter with Newsnight or Exaro News.

Full and extensive details are revealed in a series of articles on the Exaro News website (http://www.exaronews.com) – behind a pay wall but if you register  it is free for a week – or you can see the film about it on BBC Newsnight.

The investigation has forced Mr Alexander into ordering a  Whitehall wide inquiry to find out how many civil servants are benefitting from the same secret deals.  The reason is that ministers  DONT’ KNOW  and it looks like in Mr Willetts’ case DON’T CARE.  Alexander personally examined each top pay contract and now admits he missed the tax implications of this particular deal.

Whatever his inquiry reveals this arrangement looks to me on a par with all the recent scandals involving banker’s bonuses and Sir Fred the Shred’s stripped honours. Basically you as a taxpayer are paying the state to negotiate a deal for a very highly paid  official to avoid tax. This can’t be fair, right or decent to millions of low paid public and private sector workers who are paying a big whack in tax and can’t set up personal service companies – effectively to avoid paying tax. It also has the added insult that the man who has got this deal is pursuing every single student in the UK to make sure they pay every penny back of their student loan.

22 thoughts on “Exclusive: Whitehall tax avoidance “scam” revealed

  1. It has the further added insult that the Student Loan Company is in total disarray, unable to process the simplest data properly, unable to make payments on time, unable to operate computer systems efficiently, and that there are funny rumours circulating about its financial soundness. Whatever we are paying Lester, he isn’t worth it.

    Incidentally, this:
    “It also has the added insult that the man who has got this deal is pursuing every single student in the UK to make sure they pay every penny back of their student loan.”

    Since we have an annual overpayments fiasco, whereby they continue taking money for an entire financial year even if the loan is paid off by the first deduction in May, you understate the case. (The reason for this is that repayments instead of going straight to the SLC go into a closed fund at HMRC, which is then transferred to them at the end of the financial year. That way, they don’t have to continually diminish the size of the loan and ergo the interest payments on it.)

    Like

  2. This type of arrangement must be particularly galling when used by a civil servant or quasi civil servant.
    But it is a device widely used by may people including broadcasters, journalists, entertainers, sportsmen and ex-politician consultants as well as many mainstream small businessesmen and women.
    And, I can tell you that the formation of small limited companies was actively encouraged by Labour under the chancellorship of Gordon Brown.
    Just have a look at small company tax breaks introduced in the years 1998 to 2008.
    I would suggest that tax rules are changed so that there can be no tax advantage in trading as a small company so that a director owner can be paid a mixture of low salary, dividend and loan repayment, thereby legally avoiding much of the income tax that would be paid by an employee doing the identical job.

    Like

    • Small business people have other reasons for trading as limited companies, but in any case, should there not be some compensation for the increased risk. As an employee, you don’t have to worry about the next month’s salary, but as a freelance consultant, no orders = no bread. What I don’t understand about Ed Lester’s arrangement is that under IR35 if you have just one client, you are treated as a full time employee and cannot use the loopholes. At least, that is what ordinary people are subject to.

      Like

  3. If any other service company with one client worked in this way, it would be pursued by HMRC under the IR35 legislation and mad to pay PAYE on virtuall all of it’s income. Why is there on rule for Civil Servants and another for the rest of us?

    Like

    • “Why is there on rule for Civil Servants and another for the rest of us?”

      There isn’t. You’ve just invented one in your head.

      Shock of the day: plenty of private sector workers use/get away with this too, but that doesn’t anger the Daily Mail brigade.

      Like

      • Maybe they used to, in the IT industry particularly, but I think you will now find HMRC telling you about IR35 if you do.

        Like

  4. Dear Mr Hencke – you really should have consulted a tax expert or two before bursting into print. As has already been said, Lester clearly comes under the ambit of IR35 (do you even know what this is?) and should therefore be paying income tax and NI on at least 95% of his company’s income from its SLC contract.
    Hence there is no “misconduct” in officials or ministers approving the arrangement. What matters is whether Lester has declared his income as subject to IR35 on his tax return and whether his company has paid up. You should be asking HMRC whether or not they have started an employment status enquiry and, if not, why not.
    As Peter W Jones points out, this arrangement is commonplace within the BBC – even John Burt got caught using it. Perhaps your next fearless investigation should look at how many Newsnight journalists are doing the same?
    Finally, if you really want to do something useful, how about a programme on the need to harmonise the definitions of self-employment in tax law with those in employment law?

    Like

    • This doesn’t fit with the man demanding a higher salary if he had to go on PAYE which he said he wanted if he couldn’t get this arrangement – nor the fact that the IR 35 rules were linked in this case to an arcane concession which required a waiver. I asked the Revenue tons of times for an explanation and they would not give it.

      Like

      • David, you’re spot on. And HMRC often go after the ’employer’ in these cases rather than the ’employee’ to get the Employer’s NICs on a grossed up basis.
        IR35 is only there as the anti-avoidance backstop in “disguised employment” cases (which is exactly what this is), it’s not there as a fig leaf to excuse two fully informed parties to a contract dressing it up to suit their own ends.

        Like

  5. Above posters are quite right, Lester’s personal service company should be caught within the IR35 rules and should be paying the normal rates of tax on 95% of its income with 5% allowed to cover expenses, which is probably more than generous enough. Give HMRC a call and dob him in.

    As a slight aside, if I had to live in Glasgow, I’d want a lot more than that to compensate.

    Like

  6. Hopefully HM Revenue and Customs will eventually get around to auditing Barnet Council where there are several senior executives on more than £100,000 holding what are clearly staff positions who are not paid under PAYE. They include the Chief Financial Officer on £1,000 per day and this is an analagous situation to the Student Loans Company as he is the official officer charged with looking after Finance. Unlike at the SLC the non-payment of PAYE has not been cleared by HM Revenue & Customs.

    The list includes the Assistant Chief Executive, the interim Assistant Director for Human Resources (interim for 3 years now) the Assistant Director of Communications and so on.

    They should all know better.

    Barnet Council don’t like, however much they protest to the contrary, being open and transparent and, following lots of FOI questions about these pay arrangements, the payments are now being channeled through HAYS HR which contract was really designed for normal short term temporary help.

    Like

  7. While its good that you are shining a light on one case may I point out that the public sector is riddled with these deals (the NHS has plenty of them) and they have been extensively covered in Private Eye for years

    Like

  8. High earning coves like Mr Lester will have been advised professionally to use the service company device. There will have been the potentiaql attraction to the employing managers of avoiding employer’s NI contributions as well as some employer obligations. Although you can bet that the contract will provide many advantages and protections for the individual.

    What amazes me about this is the aquiescence of both HMRC and the managers at the employing agency or business.

    I

    Like

  9. @Peter Jones

    Yes it does seem that HMRC are conniving with government departments in tax avoidance. Avoiding Employer NICs, which are a tax on jobs, is a deep irony.

    It shows how ridiculous NICs are when the government avoids paying its own taxes.

    Like

  10. HMRC can apply the IR35 rules over the previous 6 years. Given the scale of this KNOWN tax avoidance, it looks like there is a massive boost to the coffers just waiting to be collected. I won’t hold my breath but wouldn’t it be nice if HMRC were to do the job we pay them to do , just this one time.

    Like

  11. Pingback: Pay restraint? Not if your a Student Loans Company boss | PCS Croydon (Home Office)

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s