Department of Health apologises over tax deals 'misunderstanding'

The Department of Health has apologised after documents sent to the Guardian showed that contrary to assurances given to parliament, more than 25 senior staff employed by the department are paid salaries direct to limited companies, with the likely effect of reducing their tax bills.

In some cases, the documents show the named individuals are being paid more than £250,000 a year, as well as additional expenses. The payments amount to almost £4.2m in one year.

The department claimed the 25 were not civil servants, or technically even staff, although a large number have been employed by the department for many years and hold very senior positions. It said the arrangements will be subject to review by the Treasury.

One Whitehall source said: "We cannot defend these arrangements, but it may be it is very common in Whitehall and this is just the tip of an iceberg."

Danny Alexander, the chief secretary to the Treasury, set up a cross-Whitehall review this month into the extent of the pay arrangements after it was revealed the Department for Business, Innovation and Skills had sanctioned a similar salary deal for Ed Lester, the chief executive of the Student Loans Company.

At the time it was presented as a rare practice.

The single largest payment was £273,375. Nineteen of the staff are paid more than £100,000.

In the majority of payments at the DH, the fees were paid to companies with the same address as the home address of the staff.

The majority of companies provided to the department are registered as business and management consultancies, yet the internal DH payroll information also details the health department offices in which they work, job title and email address. In most cases the companies' names emerge to be little more than an adaptation of the individual's surname. The Guardian holds details of the payments to 25 individuals, month by month, for the tax year ending April 2011, the identity of their limited company and their work in the DH.

The staff work in a variety of areas such as the policy, strategy and finance directorate, medical directorate, the office of the chief scientific officer, and commercial contracting.

The emails handed to the Guardian also show senior civil servants at the department discussing the possible reputational damage to the department and seeking to avoid ways of revealing the nature of the payments sought in a written question last December by Gareth Thomas, the shadow Cabinet Office minister.

Asked by Thomas if any health department staff were paid by means of payments to limited companies in lieu of salary, the health minister Simon Burns said in a written parliamentary answer that no payments were being made to civil servants in this way.

He also stated: "It is not the department's policy to permit payments to civil servants by ways of limited companies."

In a fresh statement on Wednesday the department said: "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. To this extent it was certainly not our intention to mislead anyone involved.

"We would be happy to clarify the situation in greater detail with anyone who asks and apologise for any misunderstanding involved. We are currently carrying out a full audit of such arrangements in line with the recently announced Treasury review of tax arrangements of public sector appointments."

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

In the emails, Jason Skill, in the procurement centre for expertise, discusses the motivation of the written question by Thomas, saying: "There is probably an employment and taxation angle to this question though it might not be in the mind of Mr Thomas.

"Salary is paid to employee. It may be that some or all of the non-payroll workers are in reality employees and the payments made to their limited companies would be in lieu of salary, but we would not want to suggest that all payments to limited companies are in lieu of salary."

The email also goes on to discuss Revenue and Customs (HMRC) rules, including tests "to differentiate between a contractor who HMRC deem to need to pay tax like an employee and a contractor who does not".

It continued: "The department would probably want to avoid anything that implies its NPWs [non-payroll workers] are disguised employees reputationally, to avoid unnecessary employers' national insurance and because HMRC may use this to take forward IR35 cases with those NPWs."

The emails also discuss whether it would be possible to reply that an answer cannot be provided due to disproportionate cost.

Thomas said he was writing to the health secretary, Andrew Lansley, to seek clarification. "The question was clear enough and I am therefore very surprised that the Department of Health was unable to provide a complete and accurate answer.

"Given the importance of parliament being given accurate answers from government ministers I will be writing to Andrew Lansley for a full explanation. I will also be asking other departments to check whether their answers were complete and accurate, and whether they have similar numbers of staff asking for their salaries paid to companies to reduce their tax bill."

In the wake of the students loans episode, Alexander said Lester's tax and national insurance will in future be deducted at source. He urged Whitehall departments to unwind similar schemes as quickly as possible, adding: "When we all have to pull in the same direction to tackle the country's financial problems it is essential we all pay our full and fair share."