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Revenue to investigate civil servants in Whitehall tax scandal

HMRC stands to recover millions of pounds in tax unpaid by government officials

By Steve Lodge | 14 June 2012

Revenue to investigate civil servants in Whitehall tax scandalTax inspectors are to launch an investigation into the widespread practice of civil servants working ‘off payroll’.

HM Revenue & Customs (HMRC) revealed to Exaro that it will open investigations within months into the “highest-risk cases” of suspected tax underpayment by senior public officials.

And accountants estimate that they could recover up to £100 million in revenue.

Civil servants found to have underpaid tax would have to pay money back with interest and penalties. They could be billed for unpaid tax going back up to six years, as well as penalties of 30 per cent or more of the amounts owed.

Some accountants estimate that individual bills could run into tens of thousands of pounds, and HMRC could recoup a total of up to £50 million in unpaid tax and national insurance, plus another £50 million in interest and penalties.

Last month, Danny Alexander, chief secretary to the Treasury, told Parliament that a review by his department found that more than 2,400 senior civil servants were working ‘off payroll’, and he thanked Exaro for exposing the scandal.

Officials were able to save themselves many thousands of pounds a year in tax and national insurance. Government departments and agencies paid them without deducting any tax at source, and routing their pay through personal-service companies.

But any hopes that the completion of the review marked the end of the saga have been dashed.

An HMRC spokesman told Exaro: “Where there are question marks, we shall look at those cases and take action.” He said that HMRC was already starting to “risk profile” individuals identified by the Treasury review.

“We shall be looking through the list,” he said. “If they stand out as ‘high risk’, we shall be taking action as soon as possible.”

HMRC would not pursue officials if it had sanctioned the arrangements, he said, so long as the individuals concerned had provided the “correct information”.

The issue was about “underpayment” of tax, rather than “evasion”. HMRC would listen to officials with a “reasonable excuse” for having underpaid.

He said that it was too early to say how many officials might be investigated or the total tax that could be recovered.

Priorities to be investigated will include cases where there is a lack of evidence of a process to establish whether being paid without tax deductions was legitimate, he added.

HMRC will focus on potential breaches of IR35, a rule requiring so-called “disguised employees” with personal-service companies to pay full tax.

Alastair Kendrick, a senior tax expert at the accountants, MHA MacIntyre Hudson, said: “HMRC is unlikely to be lenient. I would be surprised if we do not see a number of public examples made.”

A former tax inspector himself, Kendrick suggested that HMRC’s strategy might initially be to pursue several high-profile cases, possibly even with prosecutions, to encourage others to come forward voluntarily.

He expected to see HMRC arguing that many of the identified officials were effectively working as employees.

He said that fines could be 70 per cent – or even 100 per cent – of the amount of tax owed where someone had deliberately underpaid tax or concealed income.

Another accountant, who asked not to be named because he has civil servants working ‘off payroll’ as clients, said that officials might only be fined 15 per cent if they co-operated fully. But, if fraud were suspected, HMRC could go back up to 20 years – far beyond the standard limit.

He pointed out that some public-sector employers had told officials to work through personal-service companies.

HMRC investigations could trigger legal disputes between ‘off payroll’ officials and their employers, he said. “This will cause a lot of grief.”

Alexander also told Parliament that senior Whitehall officials must in future be on the payroll and fully taxed at source. The new rules would apply in all but exceptional, temporary cases.

He said that contracts covering 350 ‘off payroll’ civil servants had already been ended, with 35 officials continuing under new terms and conditions.

The Treasury review was triggered immediately after an investigation by Exaro, together with BBC2’s Newsnight, revealed in February that the Student Loans Company was paying its chief executive, Ed Lester, without deducting tax or employee’s national insurance under concessions granted by HMRC.

There is no suggestion that the HMRC will investigate Lester’s case. Lester is standing down from his job when his contract runs out next January.

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Exaro News investigates matters of public interest and seeks to uncover the truth.