Civil service tax loopholes: Thousands on special contracts

More than 2,000 public-sector workers could be avoiding the full rate of income tax through special contracts, government research has found.

An investigation was ordered after a civil servant was found to be getting paid £182,000 without deductions for tax or National Insurance.

Details are revealed in a letter from Treasury Secretary Danny Alexander to the chancellor seen by BBC Newsnight.

Mr Alexander says he is shocked at "the sheer scale of the off-payroll" deals.

The scandal first came to light in February when BBC's <link> <caption>Newsnight programme reported</caption> <url href="http://www.bbc.co.uk/news/uk-politics-16709780" platform="highweb"/> </link> on the special contract arrangements of the chief executive of the Student Loans Company, Ed Lester, discovered by investigative website <link> <caption>Exaro News</caption> <altText>Exaro News</altText> <url href="http://www.exaronews.com/" platform="highweb"/> </link> .

Now Newsnight has discovered that Mr Alexander is recommending that anyone paid more than about £58,000 should not be able to use this loophole to avoid paying tax.

Departmental "board members and senior officials" should be compelled to become staff, he argues, as should anyone engaged for more than six months on more than £220 a day.

Mr Alexander has called for it all to happen within three months.

But overturning the legally agreed pay deals of thousands of workers could represent significant challenges.

One former tax inspector said the government could be biting off more than it could chew.

The government, as employer, could potentially have to meet the extra costs of National Insurance and pension payments, as well as various statutory employee rights.

Any compensation payments would reduce the amount of lost tax revenue that could be recovered.