Sunday, May 31, 2009

Ten more tax questions re the MP's expenses scandal (total 25 now)

Two weeks ago I set out 15 tax questions that have yet to be addressed in connection with this scandal. The story continues with more revelations every day and more tax issues too.

I have now identified ten further tax related questions that warrant answers:

16. Who instructed 'officials' to shred details of Tony Blair's expenses?
We learned last year that Tony Blair's expenses and receipts had been shredded. Such records were relevant to his tax position in so far as any reimbursements were excessive. They would also have revealed how far he had personally exploited the 'rules' on MPs expenses. Employers are required to retain all relevant business records for 6 years, so on what authority could any 'officials' have considered it reasonable to shred the papers in question? Are there any available details of his expense claims and reimbursements?

17. Who gave the fees office authority to ignore the principled guidance in the earlier sections of the Green Book? And what chance Gordon Brown's new initiative to insist on compliance with a NEW code of conduct? The rules were there and were broken by the very guidance that was supposed to protect them. The distinction as between the principles at the front of the Green Book and the detailed guidance as to what can be claimed are quite stark.

18. Were MPs tax returns' at the same risk of an HMRC enquiry as other taxpayers?
Stories abound of how HMRC have routinely processed MPs' tax returns with only a cursory review. Statistically were enquiries opened into MPs' tax returns more or less frequently than those of other taxpayers? Were ANY random enquiries opened into MPs' tax returns in recent years? Were ANY full enquiries undertaken into any MPs' tax returns in recent years?

19. If not, why not? If yes, why has the risk of enquiries not deterred them from excessive claims?
I have long believed that cut backs and reductions in the number of enquiries reduce the general level of compliance. If however MPs were sharing stories about how HMRC was questioning dubious claims on their tax returns this would reduce the temptation to 'cheat' or to plan upto the edge (and the same would be true for taxpayers generally).

20. Have MPs been subject to a more lax tax enforcement regime than 'ordinary taxpayers'?
This continues from the last 2 questions. If 'yes' - then on whose authority or instructions? If 'no' - can this be proven somehow?

21. Who decides which reimbursed expenses should appear as taxable benefits on the forms P11d given to MPs?
If it's the fees office then they are culpable - but on whose instructions and guidance did they operate?

22. Have such decisions been made objectively and in accordance with the same rules that apply to all other directors and employees?
The simple answer here seems to be 'no' - again we need to know on whose instructions and guidance has this situation evolved?

23. Who will decide whether any MPs should be subject to criminal prosecution in accordance with Parliament's own policy on the criminal prosecution of tax evaders?
This would be as distinct from any criminal prosecution for fiddling their expenses per se.

24. Will HMRC utilise their new contentious power to visit any 'business' premises to visit the Fees office to check all salient information that should have been disclosed?
HMRC presumably now has the power to visit the Fees office in the House of Commons under Schedule 36 Finance Act 2008. Part 2 included new powers for any officer of HMRC to enter into business premises to documents...if such an inspection is 'reasonably required for the purpose of checking the tax position of any person'. I've written about such powers on the TaxBuzz blog in the past, here and here.

25. Is there a way to secure answers to these tax related questions and for such answers to be placed on the public record, short of a formal commission or enquiry?

Wednesday, May 27, 2009

MPs' expenses: ministers not exempt from tax laws

Day 20 of the MPs' expenses scandal and HMRC have been forced to confirm that they are pursuing potential irregularities in MPs' tax returns. At least this is what some of the media are reporting.

Today's Daily Telegraph notes that HMRC confirmed that MPs were not exempt from tax laws and that tax must be paid on some expenses. In a statement it said:
“It’s a general principle of tax law that accountancy fees incurred in connection with the completion of a personal tax return are not deductible.

“This is because the costs of complying with the law are not an allowable expense against tax. This rule applies across the board.”

It now seems that more than 40 Ministers claimed and received reimbursement of accountancy fees as part of their Parliamentary allowances.

In recent posts on the TaxBuzz blog I have explained:

  • The Green Book guidance that seems to allow such claims to be made
  • The tax rules that make clear that such expenses are not deductible for tax purposes
  • Why I consider it likely that Ministers will owe tax on their accountancy fee claims
  • The tax rules that enable only self employed people to 'Do a Darling' and claim tax relief for their accountancy fees
  • The tax questions that have yet to be asked and answered about the MPs' expenses scandal
I have also set up a specific page that contains links to the key formal guidance on such matters, including the current and previous editions of the Green Book, the HMRC guidance booklet "MPs, ministers and tax" and also The June 2008 report of the Members Estimate Committee which led to the latest edition of the Green Book.

Previous posts here on the subject address:

Tuesday, May 26, 2009

MPs, Ministers and their expenses claims for accountants' fees

This evening's Newsnight programme is likely to include a piece that delves further into the latest stage in the MP expenses scandal. I recorded a short contribution for the programme earlier this afternoon. [edit: sadly it didn't make the cut as the story evolved during the evening].

This item follows on from my contribution to the programme a couple of weeks ago and my blog piece yesterday: MP's expenses - the Chancellor's claim for help with his tax returns. At the end of that piece I set out the general rules as to whether taxpayers can claim tax relief for accountancy fees.

David Grossman, Newsnight's political correspondent had been doing his homework. He recently posted an insightful video blog piece about MPs, ministers and tax on the Newsnight site. As a result, when yesterday's story broke, he knew that the Green Book is very clear as regards accountants' fees.

On the one hand it seems that such fees can be claimed as part of the Incidental Expenses Provision (IEP) described at section 5 of the 2006 Green Book - this is the version that is relevant when considering the Chancellor's expenses claim as regards his 2007 tax return.

On the other hand para 5.5.1 of the 2006 Green Book also makes clear that:
The IEP is taxable and must be included in your tax return, but expenses which Her Majesty’s Revenue and Customs (HMRC) accepts as wholly, exclusively and necessarily incurred in the performance of your Parliamentary duties are eligible for tax relief.
And para 5.5.2 continues:
Some of the items allowable under the incidental expenses provision may nevertheless give rise to a tax charge. For information about tax implications see the booklet ‘MPs, Ministers and Tax’,
The implication is clear. However bizarre the rationale, the Chancellor and the other ministers were entitled to claim reimbursement of their accountants' fees - under the rules then in place. Let's leave aside for the moment that this is simply another example of how the detailed rules seem to completely undermine the high standards and supposedly over arching principles set out at the front of the Green Book.

Now let's look at that what HMRC's guidance says in the booklet: ‘MPs, Ministers and Tax’. Page 17 makes it quite clear that the following are not allowed as an expense for tax purposes:
Accountancy fees incurred in the preparation of the Self Assessment tax return or related expenses claims,
And I would be shocked if it had said anything else, although here the reference is under the heading of MPs 'Staffing allowance'. But there is no other reference to accountants or accountancy in the booklet. Indeed one might question why there would need to be. Who would imagine that accountants' fees would be suitable for reimbursement under any heading of MPs' expenses.

Did they pay tax?
So the question arises as to whether the Chancellor and the other ministers should have paid tax on the accountancy fees that they claimed under the IEP?

The simple answer seems to be that YES they should have paid tax on the reimbursements that they received for these personal expenses. BUT this would only have occurred if such reimbursements were reflected on their tax returns. I suggested on camera that I was very doubtful that this had occurred. Let me explain my thinking, remembering that MPs and Ministers are employees for this purpose:

In real life, employees are generally only reimbursed by their employer for genuine business expenses. Claim forms are prepared, submitted, checked and approved if the expenses pass the business purpose test and are within any guidelines or limits that the employer imposes.

Reporting expenses on employee tax returns
Technically all such expense reimbursements are taxable on the employee who received them. This comes as a shock to many people but it's the law. (See box 16 on the employment page SA102 of the self assessment tax return).

In practice tax is only payable if any of the reimbursements relate to personal non business items. To avoid tax being charged on all their expenses employees must make a corresponding claim on the form by completing boxes 17-20. The net effect is that the expense reimbursements less the allowable expenses claim equals the personal 'benefits' and tax is only payable on these.

The guidance notes explain that the employer should provide a form P11d which makes clear all the taxable expenses and the benefits. If the employer has a dispensation then some or all non-taxable expenses will have been excluded from the form P11d and do not need to be reported on the tax return. This will also be the case if the employer is going to pay the tax related to specific benefits.

Incidentally if an employer reimburses personal expenditure incurred by an employee this isn't strictly a benefit in kind. It's additional taxable remuneration. As such the employer would normally be penalised and forced to pay the tax and NICs deemed to have been deducted to arrive at the net additional pay.

Tax law
Going beyond the self assessment tax form, the relevant tax law provides for these claims in s336 ITEPA 2003 (pre consolidation this was the old s198 claim). What is also very clear is that s336 is very restrictive. It contains the phrase 'wholly, exclusively and necessarily'. This makes it more restrictive than the equivalent rule for self employed people whose expenses only need to satisfy the two pronged 'wholly and exclusively' test.

What about MPs?
MPs complete a tailored version of the employee's tax return pages (The Parliament pages) and these include a box for the 'Incidental Expenses Provision' (box 5). So the full amount of the expenses reimbursed to MPs under this heading should be disclosed on their tax returns. So far so good.

So the key question is whether there was an imbalance on the Ministers' tax returns? Did the declared IEP exceed the expenses they claimed as deductible for tax purposes on their tax returns (boxes 10-13).

The view I expressed when interviewed earlier was that I would be very surprised if there was any such imbalance. If the Ministers claimed expenses under the IEP I would expect that they (or their accountants) would have automatically claimed all such reimbursements as non taxable on their tax returns. I wouldn't expect the accountants to ask for chapter and verse as to what the Ministers had claimed within their expenses. Since when does any employer reimburse personal expenses that are not deductible for tax purposes?

What does this mean?

If I'm right then the Ministers concerned have underpaid tax. [edit: their spokespeople are reported to have denied this but, for the reasons explained above I dispute those denials]
HMRC would be well within their rights to open enquiries into the Ministers' tax returns and to seek recovery of the tax. [edit: It's now being reported that such enquiries are under way - Good!] And if there's any justice they would also seek interest on the late paid tax and penalties too. Maybe, just maybe on this issue at least MPs will be treated the same as would any other taxpayer. Perhaps there is a limit as to the special rules that seem to enable MPs to operate to a different standard to the rest of us.

MPs claiming tax relief for tax advice from an MP's spouse

Yesterday we learned that the Chancellor and 8 other Ministers have been claiming tax relief for their accountants' fees. I examined this story, identified the worrying aspects of it and suggested who else could 'Do a Darling' on the TaxBuzz blog yesterday.

Today we learn from the Telegraph that Dennis Bates, husband of MP Meg Munn, has been charging ministers for the provision of tax advice. He does not seem to be a qualified accountant or tax adviser. Receipts for his charges showed his home address (rather than a business address). All the receipts for Mr Bates' services were identical and showed a charge of £345 in 2006-07 “for professional services in connection with your personal taxation affairs”.

According to the Telegraph, Mr Bates, who is Miss Munn’s paid parliamentary assistant, has also been paid from the public purse to advise his wife on her tax returns.

How much further can this story of MPs excess expenses go? I cannot recall a time when I have felt stronger about the hypocrisy and double standards that evidently exists in the minds of so many MPs.

On what possible basis can MPs have thought that it could be acceptable to seek reimbursement from the public purse for advice "in connection with [their] personal taxation affairs"?

The opening paragraph of the 2006 Green Book, that contained the rules in force when these reimbursements were claimed, clearly says:
"It is your responsibility to satisfy yourself when you submit a claim, or authorise payments from your staffing allowance, that any expenditure claimed from the allowances has been wholly, exclusively and necessarily incurred for the purpose of performing your Parliamentary duties."
I'm not sure though whether to direct my frustration entirely at MPs or at the officials in the Fees Office or at Michael Martin. Last week, in my first detailed post on the TaxBuzz blog about this scandal I set out The tax questions that have yet to be addressed. I also referred to the principles set out in the Green Book. These say exactly what we would expect. And they were last updated only a couple of months ago.

When Gordon Brown talks about MPs who may have broken "the rules", does he mean 'breached the principles clearly set out in the Green Book', or 'gone beyond the very wide and excessively relaxed detailed guidance' that seems to have driven a coach and horses through those principles?

Returning to the tax theme (as I must do on this blog) I do not accept that it is right to have one rule for MPs and another for everyone else. MPs are not the only taxpayers to find the tax rules difficult. They are not the only taxpayers for whom there are special rules. They are not the only ones who can save time and feel more confident in their tax affairs if they take professional advice. (I'm ignoring here the fact that Mr Bates does not appear to be a professional tax adviser).

As I said on this blog yesterday:
"Employees and office holders are not entitled to any relief for the fees they pay to accountants for help with their tax returns or for tax advice. If anyone else was reimbursed by their employer for such expenses they would be subject to tax on the 'benefit'."
It cannot be right, acceptable or justifiable for different rules to apply to MPs as to other taxpayers.

Do you agree?

Monday, May 25, 2009

MPs' expenses - the Chancellor's claim for help with his tax returns

How far will this scandal go? The Telegraph's lead story today concerns the Chancellor of the Exchequer. He has claimed reimbursement from taxpayer funds for the advice of his accountant on completion of his tax returns.

The print version of the story includes a copy of the invoice addressed to the Rt Hon A M Darling. The total fee note is for just £650 (plus VAT) for "all taxation advice and services for the year ended 5 April 2007".

I'm not sure what's worse:
  • The simple fact that he sought reimbursement of his accountants' fees - On what possible basis could he have considered these fell within the rules for MP allowances? [edit: I have examined this in a subsequent blog post]
  • The relatively low charges on the accountants' invoice - it's likely they are subsidised or else it must be a very small firm. Either explanation raises further questions.
  • The inclusion on the fee note of charges for:
  1. "Taxation advice and services... in connection with your duties as an MP, Minister of Trade and Industry and Minister of Transport." - One wonders what 'taxation advice' was required in this context.
  2. "Application for the renewal of deferment of Class 1 NIC" - this suggests that Mr Darling had another employment as well as his role as an MP. You can only claim to defer Class 1 NICs if you have more than one employment and want to avoid paying more than the annual maximum of NIC across all of your employments. Or is this another example of a special rule for MPs? [edited: A comment added below suggests that the second job is that of Minister of state]
  3. "Advice regarding the treatment of rental expenses against income" -this suggests that Mr Darling sought and received specific advice as regards the extent to which he could offset property related costs against rental income. Do we know to which property this relates?
  4. "Checking coding notices as they are issued, particularly in relation to your benefits in kind" - How many Coding notices did the Chancellor receive that year and which benefits in kind appear on there. From other disclosures in recent days it seems that all expenses and allowances are tax free so wouldn't appear on the Coding notice. Or were some there and the accountants asked for them to be removed and not taxed?
Let's be clear. MPs are not special. The law requires anyone who is obliged to submit a self assessment tax return to 'honour their tax liabilities' and to 'ensure that the correct amount of tax is paid'. Indeed you can only 'self assess' your tax liabilities after correctly reporting your taxable income and claiming only for allowable deductions.

According to The Telegraph Mr Darling was not the only Minister to be reimbursed for his accountants' fees. At least 8 other ministers are implicated.

For the rest of us the rules are quite clear. Employees and office holders are not entitled to any relief for the fees they pay to accountants for help with their tax returns or for tax advice. If anyone else was reimbursed by their employer for such expenses they would be subject to tax on the 'benefit'.

Only the self employed can claim tax relief as the accountants' work and advice is deemed to be part and parcel of preparing the annual accounts. And the costs of preparing business accounts are tax deductible. This facility is explained in HMRC Business Income Manual at BIM46450 and HMRC Enquiry Manual at EM9010.

What do you think about this latest revelation?

Wednesday, May 20, 2009

Pringles: Once you pop you just can't stop - paying VAT

It's tax cases like this one that highlight some of our crazier tax laws. Nevertheless I'm writing about it here on the TaxBuzz blog rather than the Accountant Jokes and fun blog as this is serious stuff.
Are Pringles "similar to potato crisps and made from the potato?"
That was the question. How could such a simple question be relevant to determining the liability to something like £100m of tax for the past and about £20m a year for the future?

Technically speaking it seems that Pringles (owned by Procter & Gamble) is "a manufactured savoury snack product". I always thought it was a crisp. Didn't you?

If it was a crisp then part of the price we pay for Pringles would be VAT. Procter & Gamble would have to pay this over to HMRC. But if Pringles are not crisps they would be zero rated for VAT and nothing would be payable to HMRC. The amount at stake - as I said above - is HUGE.

Food products are generally zero-rated for VAT purposes; However there are some excepted items. For example chocolate covered biscuits (see below) and VAT is also chargeable on:

"Any of the following when packaged for human consumption without further preparation, namely, potato crisps, potato sticks, potato puffs and similar products made from the potato, or from potato flour, or from potato starch, and savoury products obtained by the swelling of cereals or cereal products; and salted or roasted nuts other than nuts in shell."
Ah - well, until today I didn't know exactly how Pringles are made and would have assumed that they don't satisfy that definition. I suspect there is some 'further preparation' and maybe they aren't made only from potato products.

Indeed it seems that is exactly the conundrum that caused the dispute in the first place. Proctor & Gamble claimed that Pringles were outside that definition and so zero-rated for VAT. HMRC disagreed.

Stage 2 was a hearing before the Tribunal. The Commissioners decided that Pringles are crisps so HMRC won the argument. Procter & Gamble didn't like that so they appealed. The key point here is that the Tribunal had to determine all the relevant facts. Subsequent hearings are limited to consideration of the law.

Stage 3 was at the High Court last summer. This time Procter & Gamble won. Pringles are not crisps. Guess what? HMRC didn't like that and appealed. As indicated above the judge was only permitted to reach a different decision to the Tribunal if he believed that they had not applied the law correctly.

Stage 4 (in April 2009) was at the Court of Appeal. Yesterday we heard that HMRC had won. In effect the High Court judge was wrong and the Tribunal had applied the law correctly originally.

The key questions seem to have been whether the test is potato-ness, the relative proportions of potato in crisps and Pringles distinctive taste.

The decision is quite an entertaining read - in parts (or maybe I'm just sad!). Did you know for example that Procter & Gamble's 'Dippers' contain just as much potato as Pringles (about 40%) but that in 2003 they were held NOT to be like crisps? As result - they are zero rated for VAT.

You have to wonder whether the VAT treatment of crisps was taken into account when the recipe for Pringles was being settled. I'm doubtful but then again the amount of VAT at stake is pretty big. Maybe the instruction given was to create something like a crisp that's not a crisp for VAT purposes.

This whole case is reminiscent of the earlier high profile case on a similar issue - whether or not Jaffa cakes were VATable chocolate covered biscuits. They're not. They're VAT-exempt cakes!

Rather than dwell any further on the technicalities of the case let me offer just a couple of quotes from the judgment:
"not even potato crisps or potato sticks (no-one knew about potato puffs, even what they were) are 100% potato."

"I think that most children, if asked whether jellies with raspberries in them were "made from" jelly, would have the good sense to say "Yes", despite the raspberries."
And just to clarify:
The price of Pringles won't be going up. Procter & Gamble have been paying the VAT to HMRC in case they lost the case. The £100m is how much would have been repaid to Procter & Gamble if they had won the case.

What do you think of these technical distinctions between VATable and zero rated foods?

Monday, May 18, 2009

MPs expenses - The tax questions that have yet to be addressed

There's more to this scandal than has so far become apparent. And as this is the TaxBuzz blog I will focus here on the tax issues. I've identified 15 tax related questions below. I think these are simply a sub set of those that demand answers.

Reference is frequently made to the Green Book, subtitled "A guide to Members' allowances".
In its opening section it states that "Parliamentary allowances are designed to ensure that Members are reimbursed for costs properly incurred in the performance of their duties". (My emphasis). The current version was only published in March 2009, following a report in June 2008 after a full review of the MPs allowances and expenses.

Indeed, the entire first section of the Green Book contains exactly the restrictions and guidance that the media and the public has been saying should apply. I have copied the entire first section onto a separate page of this blog for ease of reference. I have also included a link there and quoted from the previous 2006 edition of the Green Book.

What we need is for the practical application of the rules to support the worthy aims set out in section 1 of the current Green Book AND for the tax rules to apply to MPs in the same way as they apply to all other employees and directors.

MPs' tax returns are very similar to those for employees and directors. However instead of the general 'employment' pages they have 'Parliament' pages. These have been specially designed to cover the income and expenses which MPs and Ministers have.

The Parliamentary Dept of Finance and Administration acts as the employer for the income paid to MPs.

So here are my 15 tax questions that have yet to be addressed. If you can think of any more, please add them as comments below this blog post. And equally if you know the answers or can offer reasonable explanations please do so.

1 - Does tax law really contain a blanket exemption for all amounts paid out as allowances?
(Section 292 ITEPA only refers to Overnight expenses allowances. Para 2.1 of The Green Book refers to "personal additional accommodation expenditure (PAAE)" which is 'available to reimburse Members of the additional expenses necessarily incurred in staying away from their main home for the purpose of performing their parliamentary duties'. Later sections describe other allowances that bear no relation to 'overnight expenses').

2 - Does the relevant resolution of the House relate to the principles or the details?
(Section 292 ITEPA exempts the 'overnight expenses allowance paid to a Member of the House of Commons in accordance with a resolution of the House'. Did the House agree the principles set out in section 1 of the Green Book or did it cover the entire contents of the Green Book?)

3 - Were MPs aware that they were voting themselves a more liberal expenses regime than applies to all other employees and directors?
(If MPs are to escape tax on generous expense allowances and 'reimbursements' why not all those workers who have to work long hours or who live away from home due to the requirements of their job?)

4 - Who will decide whether HMRC has the power to investigate the extent to which MPs have received reimbursement of expenditure that does not relate to 'additional expenditure necessarily incurred for the purpose of their parliamentary duties?
(The 2006 edition of the Green Book contains very clear statements that suggest that the same rules apply to MPs as to other employees and directors. Do we have an equivalent of the often maverick District Attorneys that take on the establishment in US dramas and films?)

5 - What is the correct tax treatment of the sums received by MPs that are now to be repaid?
(Tax law normally determines that such payments to employees and directors should be treated as loans and tax paid on the notional interest on this 'borrowed' money)

6 - Why does HMRC's guidance booklet 'MPs, Ministers and tax' refer to 'Additional Costs Allowance (ACA)' as if it were synonymous with the 'overnight expenses allowances' in s292 ITEPA 2003?
(The phrase 'Additional Costs Allowance' does not appear in the current edition of the `Green Book' but it is used elsewhere to describe a number of expenses - It is however used in the 2006 edition of the Green Book where it is noted that the ACA is 'sometimes referred to as the Living Away from Home Allowance, Overnight Allowance and Accommodation Allowance' - to confuse or to clarify do you think?).

7 - To what extent do HMRC have the authority (and available man power) to check MPs tax returns have been correctly completed?
(The expenses related section of the HMRC guidance notes that accompany the Parliament pages are explicit. "Expenses that might put you in a position to do your official duties, rather than actually doing them, are not allowable." This accords with the tax rules that apply to all other employees and directors).

8 - To the extent that MPs have been reimbursed expenditure that does not satisfy the principles set out in section 1 of the (March 2009) Green Book, can they be required to pay tax as would other employees and directors receiving money from their employer for personal expenditure?

(Such situations commonly arise where directors of small companies, that they own, use company funds to pay for personal expenditure).

9 - How culpable are the 6 MPs on the Members Estimate Committee which last reported on its Review of Allowances in June 2008?
(Michael Martin (Chairman), Harriet Harman, Theresa May, Stuart Bell, Nick Harvey and David Malean sat on the Committee which had 4 functions of which one was: to modify [the] provisions from time to time as the committee may think necessary or desirable in the interests of clarity, consistency, accountability and effective administration, and conformity with current circumstances;)

10 - Why were the comparable tax rules not also considered when that Committee considered the six main categories in which Members’ work is supported by the taxpayer?
(The report stated that it's top priority - in June 2008 - was to improve public confidence in the House by better systems of financial assurance! It identified the following categories in which MPs work is supported by the taxpayer: employment of staff; office costs; communicating with constituents and the public; travel; overnight costs; and redundancy).

11 - Why are MP's exempt from having to supply receipts for expenditure under £25 (previously £250) when ALL other employees and directors are not?
(Either this rule should apply to taxpayers or else MPs should be subject to the same record keeping obligations as everyone else).

12 - Why was it necessary to add a further £10,000 (now £10,400) 'communications allowance' in 2007/08 on top of the existing Staffing, Additional costs and incidental expenses allowances?
(If MPs were treated the same as other employees and directors then such expenses would previously have qualified for tax relief as being unfunded expenses incurred 'wholly, exclusively and necessarily' for the purposes of their job. Were they claiming such relief? If not, why not?)

13 - Are any of the auditors culpable or were their actions constrained by the terms under which they were required to operate?
(Para 24 of the June report notes that claims are not accepted without question and that claims are rejected often because the items claimed for are not allowable. para 25 states that "A process of audit is carried out, both internally by the Internal Audit team (in partnership with PwC) and externally (by the NAO). These audits check on the operation of the internal controls).

14 - How much or little guidance appeared in previous versions of the Green Book?
(para 71 of the June report recommends that the Green Book be 'Revised to specify more detailed rules and that the new version be brought into effect by 1 April 2009'. It seems likely that the previous version was even more liberal but did it contain the same aspirational standards and restrictions set out in section one?)
- I have now traced the 2006 edition of the Green Book and there is clearly a big difference in style and content.

15 - When the Prime Minister refers to MPs breaking the rules, does he mean the spirit of the rules or the letter of the guidance?
The Green Book contains precisely the obligations on MPs and restrictions to prevent abuse as one would expect. It then goes onto to permit a wide range of expenses that do not always meet the aspirations of the guidance itself. When the PM talks about sacking MPs who broke the rules, exactly what does he mean? - In this connection I wrote a piece for this blog in February 2008: Is it one rule for MPs and another rule for the rest of us?

Thursday, May 14, 2009

Hazel Blears and Gordon Brown - a genuine gesture or deliberately deceptive?

When it was fist reported that Hazel Blears had volunteered to pay 'back' the Capital Gains Tax (CGT) that she avoided through 'flipping' her main residence, I wondered whether she was simply naive, badly advised or deliberately deceptive.

According to the original Press Association report, Hazel denied that Gordon Brown had prompted her to resolve matters - which involves paying £13,332 CGT.

It's now been reported in the Independent that Gordon Brown did personally asked her to do this. In which case my question should be directed to the PM who was Chancellor for ten years. Whilst I wouldn't expect him (or anyone) to have full grip on all tax issues I would expect him to understand some basic points.

If someone, like Hazel Blears, voluntarily pays tax that HMRC's tax system is not expecting the money will be initially credited to her self assessment (SA) tax account. After a short while this will be checked and if no liability to tax is 'charged' to the account the 'overpayment' will be automatically refunded. Does she know this? Does Gordon know this?

For the computer to accept the monies as due they will need to be matched against a liability on Hazel's SA record. To create such a liability requires her to admit that her return was incorrectly completed, in which case interest will also be payable and possibly a penalty too. The return in question was filed under the old penalty regime so the unprompted(?) disclosure may justify a nil penalty, but nil interest too? I think not.

Or did Gordon tell Hazel that she can safely offer to send a cheque to HMRC safe in the knowledge that they will send it straight back?!

The only bit that seems odd here is that Gordon will certainly know that the taxman was renamed HMRC in 2005 so I'm sure he would have told Hazel to send the money to them. But I heard Hazel say she'd be sending a cheque to the "Inland Revenue".

Wednesday, May 13, 2009

Tax Advice Network on BBC - twice in two days

Not strictly TaxBuzz but arguably worthy of note. I was interviewed for BBC's Newsnight programme on Monday evening and subsequently appeared live on BBC's Working Lunch programme on Tuesday.

For Newsnight I think they filmed about 15 minutes of Q&As and broadcast just 15 seconds.
(It's around 19 minutes in if you're desperate to catch it on BBC iplayer for the next few days).

For Working Lunch my piece was somewhat longer - about 3 minutes of air time right at the start of the programme.

On both occasions I was asked to comment on Flipping properties - avoiding CGT when you have more than one main residence - partly on the back of the TaxBuzz blog comment I wrote on Sunday.

Newsnight simply used one sentence I said, in the context of the final 3 years deemed useage rule for property that has at some stage been your main residence: Looked at objectively one has to question whether the rule has remained in place and as generous as it is because so many MPs are able to benefit from it.
After all how many other people take 3 (or even 2 years as it was previously) to sell their old house after buying a new one?!

On Working Lunch the journalist explained the basic 3 year 'overlap' rule then Declan Curry (the presenter) asked me to explain the facility to elect which of two properties is your main residence. I also had to explain the rent a room scheme and the charge to CGT if you sell a rented property. So, not much to squeeze into 2 or 3 minutes of airtime!

Monday, May 11, 2009

Pension tax changes that hit high earners NOW

In his Budget the Chancellor talked about changes to the pension rules that would come into effect in two years time. He also mentioned, and the Finance Bill now contains, what are referred to as, anti-forestalling provisions. These restrictions were explained in BN 47 and apply to anyone:

• whose income is £150,000 or higher this year;
• who changes their normal, regular ongoing pension contributions; and
• whose total pension contributions are more than £20,000.

In practice these rules mean that higher rate tax relief is no longer available for many people earning more than £150,000 this year. In effect the new rules come into effect two years earlier than was announced.

It's the disingenuous nature of the announcements that get me. And if not disingenuous then ignorant. It's one or the other. And then there's the way that Ministers and top civil servants are unaffected. Coincidence? I fear not.

The provisions are likely to affect far more taxpayers than those at which we are told they are targeted. For example anyone making ad-hoc pension contributions of more than £20,000 who:
• was made redundant and whose termination payments push them over the £150,000 income threshold for one year only; or who
• was approaching retirement and had deferred making effective pension contributions until they were older and more financially stable.

In both of these cases the reason for the increased pension contributions is nothing to do with trying to obtain relief at a higher rate than might be available in the future. Nevertheless if their contributions exceed £20,000 this year, they will not qualify for higher rate tax relief.

And then there are the self-employed who do not make regular pension contributions every month. They will also be disadvantaged if they continue to make their annual pension contribution only once they know what they can afford to pay. This is typically only the case after they produce their annual accounts. If they want to pay more than £20,000 in one go their tax relief will be restricted. This seems most unfair – but at least on this point the Government has agreed to listen to representations.

Ministers and civil servants are unaffected
It’s also worth noting that the new provisions favour those in final salary pension schemes, predominantly government and similar organisations. Few other employers can afford to provide final salary related pensions.

Under the new rules ministers and civil servants, for example, are only affected if their benefits increase as a result of changes in accrual rates or pension scheme rules. Increases in salary alone will not bring these individuals within the anti-forestalling provisions.

Compare this with anyone in an employer’s money purchase pension scheme. They could lose tax relief immediately on additional contributions which arise only by reason of a pay increase.

What do you think? Disingenuous? Unfair? Reasonable? Fair? Please add your comments to this post below.

Sunday, May 10, 2009

Flipping properties - avoiding CGT when you have more than one main residence

Part of the row over MP's expenses relates to the way that they can 'flip' (or revise) their choice as to which of 2 or more properties is their main residence. Today the media is focusing on Hazel Blears, but it's likely that many other MPs have done the same thing.

I have no sympathy at all with ministers or other MPs who have been playing the system and claiming all that they could 'within the rules'. That the rules need reform is now beyond doubt.

I raised the question on this blog back in February 2008: Is it one rule for MPs and another rule for the rest of us? I was concerned about the apparent double standards that applied when it comes to tax planning. I noted that, in the context of the then brewing concern over MPs and their expenses:
There is rarely any suggestion that anyone has broken the law. No. They have simply looked to secure the maximum reward for their efforts within the strict wording of the rules.

Those involved have adopted a literal and precise approach to interpreting the rules. Not a purposive approach.
I was drawing an analogy with attitudes to tax rules where there is increased debate as to the distinction between acceptable and abusive tax avoidance (both approaches being legal and within the rules).

It's certainly the case that many people 'play the system' in the context of CGT if they own more than one property. The tax rules permit such choices to be made and revised. And good advice as to what can be achieved through timely and carefully made elections can save taxpayers large amounts of CGT.

The general position
Most people know that they do not pay Capital Gains Tax (“CGT”) when they sell their home. This is because the profit or gain you make when you sell your main residence is automatically free of tax.

If you own more than property however you are allowed to 'elect' which of them should be treated as your main residence for tax purposes. HMRC explain their interpretation of the rules for people who own more than one property in help sheet 283 "Private residence relief".
Only or main residence
If you live in, as your home, two or more houses, you can only have one main residence at a time for private residence relief.

You can nominate which residence is to be treated as your main residence for any period. Your nomination must be made within two years of the date you first have a particular combination of residences. If there is a change in your combination of residences, a new two-year period begins. If you do not make a nomination, the question of which is your main residence will be determined on the facts. (My emphasis)

This rule becomes even more valuable when it is combined with another relief relating to private residences. This is the general rule that often treats the gain on disposal of a property as exempt from tax even if it ceased to be your main residence upto 3 years ago.

This is a pragmatic rule that effectively allows you to keep the entire profit on sale of your house even if it takes you upto 3 years to sell it after you move into a new home. In such cases both of your homes qualify for the main residence relief during that 3 year period.

Have MP's been advised to exploit this rule - just as ordinary taxpayers may have done in the past? Probably. Does the basic rule exist for good reason? Yes, although there is scope to abuse it. And here we come back to the question of whether that makes it fair game?