The Chief Executive Officer of the Student Loans Company at the centre of controversy over his tax arrangements was advised to account for tax and national insurance contributions under special rules introduced to counter tax avoidance via personal service companies.
It is not known whether Ed Lester did apply the “IR35” rules for 2010/11. Tax for that year would have been payable by 19 April 2011 and the tax return deadline passed earlier this month.
Ministers have come under fire since it emerged that Lester's pay arrangements were approved at ministerial level in December 2010 for a two-year contract that began in February 2011. He was initially engaged as interim CEO, from 28 May 2010. Payments were made gross to his personal services company, via a recruitment agency, until last month.
Lester is an SLC employee with effect from 1 February 2012, and tax and NICs will be deducted at source under PAYE, the company said after Danny Alexander, the Chief Secretary to the Treasury, told MPs on 2 February that the arrangement for gross payments would cease.
HMRC's role in granting what the SLC called a “concession” has also been questioned, but the department has declined to respond to questions on the grounds of taxpayer confidentiality.
"HMRC clearly have to respect taxpayer confidentiality, but in this case surely they could agree with Mr Lester and the SLC to issue a simple confirmation that no sweetheart deal was done, and that Mr Lester or his company will account for the full amount of tax due – that would take a lot of the heat out of the debate,” Heather Self, Director at McGrigors (pictured), told Tax Journal yesterday.
The SLC was unable to comment other than to say that Lester's tax affairs were “a matter for him and HMRC”. Tax Journal has invited Lester to comment.
Correspondence released by the SLC in response to a freedom of information request indicates that in July 2010 KPMG advised the SLC that while HMRC might agree to apply the published concession A37 – allowing the SLC to pay Lester’s remuneration gross to the personal service company – HMRC was unlikely to do so unless IR35 was applied, by either the personal service company or the recruitment agency through which the payments were made.
KPMG’s initial advice, given in June 2010, was that the SLC itself should deduct tax and NICs. KPMG asked that the July 2010 advice be published even though it was outside the scope of the FOI request filed by Exaro News. The firm asked the SLC to publish a standard disclaimer in respect of both reports.
Email correspondence shows that on receipt of the initial advice the SLC sought a second opinion, and KPMG’s advice itself was revised the following month in the light of “further information provided by SLC”. One SLC correspondent noted that “interim appointments are made routinely in a variety of organisations, and consultancy contracts with payments [via] personal companies are commonplace”.
HMRC authorised the company in October 2010 and March 2011 to make gross payments in respect of Lester’s services. It is not known whether authority was actually given on the basis of concession A37.
Heather Self told Tax Journal: “It's important to remember that there is nothing wrong with making gross payments to an intermediary company – the IR35 rules are there to make sure that the personal service company pays the tax due in relation to the employment. Many contractors and consultants work in this way for genuine commercial reasons and IR35, while not perfect, generally makes sure the right amount of tax is paid."
She added that “a simple employment contract would have been a much more straightforward way to employ Mr Lester as Chief Executive of the SLC”.
The SLC said in a statement on 2 February: “Ed Lester accepted the position as permanent Chief Executive and Accounting Officer to the Student Loans Company, on a two year contract, which was formally announced in December 2010.
“He was offered this post after a solid performance as Interim CEO, where his leadership led to considerable improvement in the company's overall performance. SLC followed all government guidelines on the appointment and remuneration of the CEO. Mr Lester's two year contract with the SLC officially started on 1 February 2011 and will end on 31 January 2013.”
