‘Pay top civil servants more’ to discourage tax avoidance

Union leaders representing senior civil servants have called for higher pay for top staff, after the Guardian newspaper revealed that salaries totalling more than £4m were paid to 25 people working for the Department of Health through limited companies – a practice that is likely to reduce tax bills.

The department apologised for any ‘confusion’ after the news came out. Health minister Simon Burns told Parliament in a written answer last year that no Whitehall staff were paid in that way. The department insisted today that the definition of staff referred only to civil servants and not the ‘contractors’ involved.

Jonathan Baume, general secretary of the First Division Association union said: “What we have found is that in certain cases, because the market rate was so much greater than the salary that would have been offered in the civil service, various deals were being done and some of these are now being exposed.

“Frankly, it’s a shambles…ministers are going to have to raise salaries.”

“It’s not illegal but it’s not a normal way of working”

If someone sets up as a limited company they then become a director and receive their salary in full, without tax or National Insurance taken off at source. They are paid as a contractor by the employer, but then they pay themselves by a salary or through share dividends.

This allows them to then pay corporation tax of 21% rather than the rate of PAYE tax taken at source, which could be at the higher rates of between 40 and 50%.

So is it just a way to save money on tax?

Janet Peers is an accountant at Sampson Peers and West. She told Channel 4 News that anyone can, in theory, set up as a limited company on their own, but to fit the definition of contractor they should not be an employee in a normal sense. Often a company themselves will prefer to pay a ‘limited company’ than a self-employed individual.

“Certain sectors are more prone to it, the banking sector for example and the media and film industry. It’s not illegal, but it’s not a normal way of carrying on business. We do work with small one man limited companies, often because the employers don’t want self-employed people on their books, because of the national insurance contributions they would then have to pay.”

It was done as a tax saving and it’s very embarrasing for them. They are clearly an employee of the Crown. Janet Peers, Sampson West

“People perceive it as being a route to paying less tax but that is debatable. It can save tax but we would have to look at an individual’s circumstances. You have to pay fees to run the company and have a whole set of other accounts. Someone might come to me and I’d say you will save tax but you will have other costs associated that would wipe out that benefit. It benefits the very wealthy, it’s definitely better for the well off. You wouldn’t save very much on a salary of £100,000.

The Guardian has reported that in some cases the individuals working for the Department of Health are being paid more than £250,000 a year, as well as additional expenses.

But she says that from her experience, the rule is not being properly applied in the case of the Whitehall staff: “It was done as a tax saving and it’s very surprising. It’s very embarrassing for them. They are clearly an employee of the crown so it doesn’t seem right. If somebody came to us and asked if they could do this I would say I don’t think so.”

Could the HMRC investigate a breach of tax regulations?

The email was part of a discussion about a written question asked by Gareth Thomas, the shadow cabinet office minister. He asked if any health department staff were paid by means of payments to limited companies in lieu of salary, to which the health minister Simon Burns said in a written Parliamentary answer that no payments were being made to civil servants in this way.

But the department later clarified: “The definition of staff in this context refers to civil servants and we can confirm that no civil servant who is an employee of the Department of Health is paid in this way.”

Health department sources said it allowed staff to define themselves, for payroll purposes, neither as civil servants nor payroll staff.

An email referred to by the Guardian mentions the possibility of the HMRC investigating whether employees are ‘disguised’ behind the limited company, which could trigger an IR35 case.

An IR35 case is where the tax office look at whether someone who is really an employee is avoiding paying a fair amount of tax by providing the service through an intermediary ‘limited company’.

Janet Peers says that in these cases the HMRC could remove the ‘veil’ of the limited company: “If you are hiding behind a veil of being a corporation, then you are saying you are not an employee. HMRC could strip away the corporation – they can act.”

Government red faces

The revelation is an embarrassment for the government after they promised in early February to end a deal which meant the head of the Student Loans Company, Ed Lester, avoided thousands of pounds of income tax by being paid via his own private company.

The Chief Secretary to the Treasury, Danny Alexander, promised to “unwind” any tax avoidance schemes being used by top public servants – after it emerged that Mr Lester’s £182,000 salary was paid into his private service company in full, potentially saving him tens of thousands of pounds a year.

Mr Alexander said at the time that there was no place for tax avoidance in government and said he would be launching a review to ensure there were no other instances of the same arrangement elsewhere in Whitehall. That audit is still ongoing.