The Department of Health will also be sanctioned £470,740 for two breaches at NHS England, where two board members were off-payroll for over a year, with the money going to health charities.

The announcements were made as the Treasury published its second evaluation of new rules designed to ensure that those working as temporary government contractors are meeting their tax obligations, and to outlaw the use of personal service companies.

Of the 2,505 people that departments sought assurance of their tax affairs from, 4% (94 people) were asked to leave because they were unable to provide evidence that they were meeting their tax obligations.

While the review shows that 95% of government departments were ‘broadly compliant’, off-payroll guidance was not correctly applied at the MoD which failed to seek assurance from a number of workers on their tax arrangements due to administrative error in 2012-13. The £1m fine will be earmarked for military charities, the Treasury said.

The Treasury’s review has also found that the Department for Work and Pensions (DWP) made errors in its reporting of the policy, but the department has since corrected its accounts and is not being fined as it did not breach the guidance.

The DWP is being asked to demonstrate that all further reporting will be in full compliance with the guidance, while the government internal audit agency is to carry out an independent audit of the implementation of the guidance at UK Export Finance, as the review identified some concerns which require further investigation.

Danny Alexander, chief secretary to the Treasury said: ‘I introduced tough new rules to tackle tax avoidance by off-payroll workers in the public sector in 2012, and it’s heartening that the vast majority of departments are compliant in ensuring that all their contractors are paying the correct amount of tax.

‘The Treasury review for 2013-14 shows that where senior or higher paid workers have been unable to provide assurance that they are paying the right tax, their contracts have been terminated and their details passed to HMRC.’

Alexander said the Treasury will continue to monitor compliance  and will conduct a similar review for the 2014-15 financial year.

The rules on off-payroll appointments, introduced in May 2012, make government departments responsible for ensuring that their temporary off-payroll workers were meeting their tax obligations, and that board members and senior officials with significant financial responsibility are not off-payroll except in exceptional circumstances, and then only for up to six months.

They were introduced after it emerged that Ed Lester, the head of the Student Loans Company was being paid through a personal service company, saving up to £40,000 a year in tax.

A Treasury investigation found 2,400 public sector employees using similar options for up to a decade, which, it said ‘created the conditions where tax avoidance could be taking place’.