Around 2,000 civil servants are working via personal service companies in order to avoid PAYE according to a leaked review created for chief secretary to the Treasury, Danny Alexander and reported on BBC’s Newsnight this week.

Given the Civil Service Code and specialised nature of the job it is surely impossible for a civil servant to supply a substitute worker. There must also be an ongoing mutuality of obligation between government and a civil servant to provide work and accept it. Most tax advisers are probably very surprised to find that any tax saving would be possible. IR35 would invariably apply to income of their personal service companies.

It seems that HMRC has either permitted this widespread practice, or is blind to it. So, 2,000 companies might be expecting a discovery and some sizable tax penalties for failing to operate PAYE correctly.

The Treasury review was commissioned following the revelation in February 2012 that Ed Lester chief executive of the Student Loans Company has been receiving his civil service salary via a service company. A practice which HMRC had been quite happy use - in 2009/10 it engaged its ex-IT officer via a personal service company too.

IR35 links:

IR35 (with examples): the IR35 tax rules may apply when a worker supplies his personal services through an intermediary trading vehicle such as a company or partnership.

Employment status checklistunder IR35 an intermediary needs to evaluate the hypothetical contract between the individual and the end-client: the written terms of any contact between the end client and and intermediary or individual and intermediary may sometimes be persuasive however again it is the reality of the situation that is considered by the courts.