Revealed: Whitehall angst and a KPMG U-turn on Lester’s tax affairs

ImageNew e-mails and financial advice put up today on the Exaro news website (http://exaronews.com) reveal more of the background surrounding the extraordinary decision to grant Ed Lester, the chief executive of the Student Loans Company, an arrangement when he was not taxed or paid his national insurance at source.

It shows that senior civil servants were really uneasy about the deal. In one e-mail, Daniel Jenkins of the Department of Business, Innovation and Skills legal department wrote: “Applying the tests of employment status, I wonder whether it is possible for a CEO to be anything other than an employee/office-holder, given the degree of integration into the company which he presumably needs to carry out his duties.”

In another e-mail Michael Hipkins, then a BIS appointee to the SLC board writes:

“The risk, which nearly the whole interim industry currently runs, is that a contract for ‘supplying an individual’ is deemed to be an employment contract, rather than a commercial contract for services. So it appears there is a risk, and there is a judgement whether the risk is worth running.

“For my part, I note that when the terms of the interim CEO’s remuneration were cleared with Treasury, they raised no objection to the form of the contract, nor that there was an agency acting as intermediary.”

“It looks as if the company would be running no greater a risk than any other company employing interims on consultancy contracts; and the fact that the Treasury raised no objection to the proposed arrangement in the case of the CEO must mitigate that risk further.”

But the angst is nothing to the role of KPMG, the auditors and advisers to the SLC, who gave contrary advice in the space of a month.

 First they said – as subsequently was proved right by Chief Secretary to the Treasury,Danny Alexander’s decision to cancel the deal,- that no office holder could be a  limited company.

 Then they changed their mind saying; HMRC “may agree on a concessionary basis”, under a provision known as the extra-statutory concession, A37, to override the rule that all company office-holders must pay tax and national insurance.

It said that Lester’s pay can then be treated as “income of Penna (who acted as the recruiting agency for Ed Lester) for corporation-tax purposes and not income of EL for income-tax purposes.”

KPMG said that the SLC should make no expenses or bonus payment direct to Lester, but only through Penna to his personal company, otherwise it would invalidate any concession.

Even more interesting  given the developing furore over this issue the memo reveals that KPMG had done this before.

 It said KPMG “have been successful in the past in agreeing with HMRC that the concession can be extended to circumstances similar to the arrangements in place here. However as this is a concession (rather than a statutory provision) there is no guarantee that HMRC will agree that the concession  applies in this case given the agency and personal service company arangements in place.”

The next questions in this saga will be who else has benefitted from this arrangement and what George Osborne, the chancellor, proposes to do to close this loophole in the budget this month. The full story is revealed in four new articles on the Exaro website.

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