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News has broken overnight that Danny Alexander, Chief Secretary to the Treasury, has written to the Chancellor to advise that there are more than 2,000 'senior civil servants' who are being paid through personal companies rather than as employees. (The criterion appears to be that they were being paid at least £58,200 in order to fall in that bracket.)

This count excludes people on similar contracts in the NHS or in local authorities.

This is a result of Mr. Alexander's investigation following the news in February that the Student Loans Company paid its Chief Executive through his personal company, thereby saving an estimated £40,000 in tax and National Insurance contributions that would be payable if he were on the payroll.

Whilst it seems that the scale of these arrangements has come as a shock to Mr. Alexander, many accountants may in fact be surprised to hear that the numbers are so small - there is anecdotal evidence to suggest that this has been the prevailing practice in many government departments for some time.

Mark McLaughlin, TaxationWeb's Chief Editor, was unimpressed by the government's response - which includes requiring the individuals involved to demonstrate that they have paid similar amounts of Income Tax and National Insurance as would an ordinary employee - or their contracts will be terminated.

"A large number of accountants and tax advisers will have acted for - and will currently be acting for - individuals who have been taken on by government departments on these terms. As they will know, the irony here is that in very many cases, it will in fact have been that government department which has insisted on hiring the individual through a company rather than directly. 

They will have insisted on those arrangements for two reasons:

Firstly, if the individual is not on the payroll, then that government department is less likely to be directly responsible for holidays, sick pay and other standard employer obligations.

Secondly, the hiring department will have been well aware of the tax savings this way and will therefore have offered a lower pay rate to the individual in the first place - in other words, it is the government itself which has benefited from these arrangements, not the individual: the individual has broadly ended up with the same amount of money in his or her pocket as they would have as an employee.

It is therefore incredibly disingenuous of the government now to profess amazement, to treat these people as "the guilty party" and to require them to demonstrate that they have been paying tax, etc., as an employee, when it is government departments that  have structured the deal to favour themselves from the outset."