The other night I listened to the debate in the House about the arrangement between the Government and Head of the Student Loans Company, one Ed Lester, to remunerate him through his personal service company.
It struck me that there was a lack of decisive thought and a grasp of the issue by the MP’s. There were the usual hypocritical tirades about the shamefulness of tax avoidance, although one Conservative MP did try and correct the mob by pointing out that tax avoidance is legal and it is tax evasion which is illegal (what David Laws and other MP’s did by claiming mortgage interest relief when they were not entitled to it).
The reportage by the broadsheets was somewhat rabid in content as well.
The Telegraph reported that Mr Lester’s reward was £182,000. An accountant had advised the DT’s senior political correspondent that the use of a personal service company would have enabled Mr Lester to save up to £40,000 of tax, on the basis that a company would be paying corporation tax at 21% (actually 20% now) rather than personal tax of up to 50% (well possibly 52% with the National insurance).
Emotive stuff. But when one breaks it down the reward package would appear to be:
|
£000’s |
|
| Basic |
140 |
| Bonus |
14 |
| Pension Contribution |
28 £182 |
If we were to assume the whole of the £182,0000 was subject to tax and national insurance, then the emerging tax and national insurance liability would be £76,000.
The corporation tax liability, at 21%, would be £38,000. The difference is £38,000 so I think we can see where the accountant is getting £40,000 from.
It does seem a bit harsh to include the pension contribution though. Presumably, this might have been paid, even if he had been an ordinary employee of the Government. If we therefore take off the tax and national insurance applied to this by our zealous accountant, we reduce the saving by £16,000. We are now down to around £22,000.
The calculation does, however, assume that Ed does not need to draw any of the income out of his company to live on. If he had to draw out some of the income, this reduces the saving further. For the big winner see below.
Anyone who has had the misfortune to have had dealings with the Student Loan Company might well regard them as the most dysfunctional and incompetent organisation they have ever had dealings with, given that there is some admittedly stiff competition amongst our quango’s. Given this, apart from wondering whether Ed qualified for his bonus, the proposition that he did not need to draw any income out of the company because he was actively engaged elsewhere, might have some traction. Nevertheless, we must suppose that he was throwing in substantial time to the task in hand, particularly as he was receiving motor expenses as well for travelling from Berkshire to Glasgow (I wonder who does the P11D).
There is also the small matter of the employers national insurance saved by the Government on the use of the personal service company, something in the region of £20,000 I suspect. Is it legal? It all depends on what the contract says when I asked Duncan Forsyth, who is our expert on personal service companies and their contracts. No one in the House seemed to pick up on this particular point.
If Dave Hartnett and his mates at the Revenue are serious about clamping down on tax avoidance, then perhaps they can start fairly close to home with their fellow Government departments.
