Leaked confidential letter sent by Danny Alexander admits that government had no idea of the scale of the tax arrangements
More than 2,000 senior public sector officials are being paid through private companies rather than the government’s payroll in an attempt to minimise their tax bill, according to a leaked Treasury document.
A confidential letter sent by Danny Alexander, chief secretary to the Treasury, to George Osborne, the chancellor, admits that the government had no idea of the scale of the tax arrangements.
The document – obtained by the investigative website Exaro – also sets out a plan to stamp out the practice in government departments and their arm’s-length bodies within three months. Departments that fail to co-operate would see their budgets cut by up to five times the payments involved.
The disclosure follows an outcry over the practice which has allowed civil servants to save themselves tens of thousands of pounds a year in tax. The practice has cost the government millions of pounds in lost revenue.
Alexander circulated the letter to all cabinet members including David Cameron and Nick Clegg last month. He requested responses by Thursday.
“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,” he wrote.
“Departments have provided the Treasury with information in relation to all individuals engaged off-payroll – for payment in excess of £58,200. Over 2,000 such individuals have been identified,” he said, before adding that around 1,500 are paid more than £380 a day.
He continued by stating that around 1,600 people have been working 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.
In February, it was revealed that 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 ordered the Treasury to carry out a review.
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.
“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.”
Alexander is also asking Andrew Lansley, the health secretary, and Michael Gove, the 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, said: “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.