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.
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.