Student Loans Chief Ed Lester In Tax Row
The Treasury is to review the tax affairs of top civil servants after it emerged the head of the Student Loans Company (SLC) is paid via a company without tax being deducted.
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.
It is embarrassing for the coalition government, which is committed to tackling tax avoidance.
Chief Secretary to the Treasury Danny Alexander was said to be unaware of the arrangement although he was required to sign off Mr 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 and that is why I've taken this action."
A source said Alexander, one of the most senior Liberal Democrats in the government, instinctively felt this kind of arrangement was not appropriate in the public sector and strongly believed that tax avoidance was "wrong".
Tory backbencher Richard Bacon, a member of the Commons Public Accounts Committee, 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 saves Lester tens of thousands of pounds each year, some of which would otherwise be paid in income tax."
A Treasury spokesman said 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.