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Student loans chief tax row prompts civil service inquiry

Chief executive of Student Loans Company has £182,000 salary paid via company without tax being deducted

The Treasury has asked Whitehall to review all the tax affairs of top civil servants after it emerged that the head of the Student Loans Company (SLC) is paid via a company without tax being deducted.

The SLC’s chief executive Ed Lester has his £182,000 salary paid gross to his private service company, potentially saving him tens of thousands of pounds in tax.

The arrangement, entered into in 2010, was disclosed in a HM Revenue and Customs (HMRC) letter obtained under the Freedom of Information Act by Exaro News and BBC Newsnight. Ministers will be dismayed if it is seen that they have been presiding over a system in which senior civil servants have been able to minimise their tax payments, at a time when the rest of the country is being urged that we are “all in this together”.

It is embarrassing specifically for the Treasury, which is committed to tackling tax avoidance and is planning to bring in a general tax avoidance rule in the Budget.

The arrangement is also likely to be examined by the Commons public accounts committee, its chair Margaret Hodge promised, with the support of the senior Tory on the committee, Richard Bacon.

Newsnight alleged that the arrangement was known to the higher education minister David Willetts, but the department had been desperate to hire someone capable of sorting out the SLC after years of inefficiency. Danny Alexander, the chief secretary to the Treasury, was said to be unaware of the arrangement although he was required to sign off Lester’s pay deal in common with all public sector salaries of more than £142,500.

He said: “I have asked Treasury officials to urgently review the appropriateness of allowing public sector appointees to be paid through an agency by a personal service company.

“I have also written to my cabinet colleagues asking them to carry out an urgent internal audit to ensure that all senior consultancy appointments provide value for money.

“As I have said before, I believe everybody should pay the right tax at the right time … that is why I’ve taken this action.”

Aides to Alexander believe this kind of arrangement was not appropriate in the public sector and strongly believed that tax avoidance was “wrong”.

Bacon said he was “concerned” that HMRC had approved the arrangement. “It is simply inappropriate for a full time civil servant and accounting officer for the Student Loans Company to be paid gross of tax through a personal services contract,” the MP said.

“My understanding is that this arrangement saver Lester tens of thousands of pounds each year, some of which would otherwise be paid in income tax.”

The payment method allows Lester to pay corporation tax of 21%, rather than up to 50% income tax on his earnings.

The overall pay arrangements, known to have occured with some BBC executives, are estimated by accountants to have saved him £40,000 a year, according to Newsnight.

Lester, who lives in Buckinghamshire, also receives £550 a week to pay for his travel and living expenses and cover his costs of getting to the company’s offices in Glasgow.

In emails, a letter and memos, one civil servant at the Department for Business, Innovation and Skills described the arrangement as “tax efficient” for Lester.

A Treasury spokesman conceded Alexander had approved Lester’s pay, though reduced by about £13,000, in continuation of terms already agreed on a previously interim basis.

“The chief secretary to the Treasury is required to approve senior civil service appointments where the salary exceeds £142,500,” he said.

“Terms and conditions are negotiated by the appointing department, and presented to the chief secretary for approval of the salary level.

“In the case of the chief executive of the Student Loans Company, the chief secretary approved the overall pay, at a reduced rate and in a continuation of the interim arrangements previously agreed.

“The chief secretary was not made aware of any potential tax benefit to an individual.”

Departments have been told that any appointments which do not provide value for money should be unwound “as quickly as possible”, the spokesman said. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds