HMRC’s part in the MPs’ expenses fiasco

Following on from my own posts on the subject of the tax issues of MPs' expenses I was approached by tax writer Chris Reece. In this guest post on the TaxBuzz blog, Chris Reece asks why HMRC has allowed the MPs’ expenses problem to lurch towards crisis?

The subject of MPs’ expenses has generated a huge number of column inches already, without more than a passing mention of the tax implications. This is a pity as, in my opinion, had HMRC shown adequate leadership in facing up to the issues, the UK would not be anything like such a deep constitutional crisis.

Confidentiality issues mean that I am going to have to make assumptions and skirt around a number of the more interesting matters of detail. That is not a bad thing, however, as it is the general principles which I believe expose HMRC to criticism, not what may or may not have happened in any individual case.

So, what do we know, what don’t we know and what must we assume? We know that under the July 2006 version of the Green Book (Parliamentary salaries, allowances and pensions) it is clearly stated that the Additional Costs Allowance (which is what appears to have been the root of all the revelations in the newspapers in recent weeks) ‘reimburses Members of Parliament for expenses wholly, exclusively and necessarily incurred when staying overnight away from their main UK residence … for the purpose of performing Parliamentary duties’. This reflects ITEPA 2003, s 292 and confirms that MPs were not at the relevant time subject to a materially less stringent expenses regime than any other employees.

However, it is clear from the details published in the newspapers that the Parliamentary Fees Office has not been applying the ‘wholly, exclusively and necessarily’ restriction as strictly as case law has taught us it should be applied. Now I’m going to make an assumption here: that under whatever auspices and whichever nomenclature, the Fees Office and HMRC agreed a dispensation that would allow the payment of the Additional Costs Allowance to MPs without attracting a tax charge on payment. I will make a second assumption: that HMRC allowed a dispensation for expenses incurred ‘wholly, exclusively and necessarily’ and was not asked to go further and ‘allow’ a more generous expenses regime. I am hesitant about that second assumption but the alternative is to assume that HMRC agreed to allow MPs a more generous regime than the law permits and that would be unthinkable.

So we have a situation where HMRC has agreed in theory to the Fees Office paying out expenses incurred ‘wholly, exclusively and necessarily’ for the purpose of performing Parliamentary duties. I cannot imagine that the subsequent mess can be put down to the small discrepancy between ‘in the performance of the duties’ and ‘for the purpose of performing Parliamentary duties’, so I will not mention it again. Anyway, the Fees Office then starts paying out Additional Costs Allowance on a far more generous basis than HMRC would have expected when agreeing to a ‘wholly, exclusively and necessarily’ regime. That is not necessarily a cause for alarm. Employers have always been prone to taking a rose-tinted view of what is an allowable expense. That is why HMRC carries out assurance visits after having agreed a dispensation: so that both parties can be comfortable that they are singing from the same hymn sheet.

This is where the story starts to get harder to imagine: what happened to that assurance visit? We know that HMRC carries out checks on a small number of the self-assessments of unnamed individual MPs, because it has said that it does. But we cannot expect HMRC to discuss in public whether it has carried out an assurance visit on the Fees Office. Thus I will have to make a further assumption: that HMRC has not carried out that visit. I make that assumption on the basis that what happened in reality was so far removed from the ‘wholly, exclusively and necessarily’ restriction that HMRC cannot have seen it and waved it on: once again, the alternative is to assume that HMRC allowed MPs a more generous regime than the law permits and that once again would be unthinkable.

Why then do I accuse HMRC of a lack of leadership? Because if it had given the Fees Office the assistance it needed, by carrying out a routine assurance visit, as HMRC so often does with other employers all over the country, the Fees Office would have been put straight about its misunderstanding of what ‘wholly, exclusively and necessarily’ means and MPs would not now be trying to explain why they made claims that in time past they were assured were within the rules.

There is one further alternative: that HMRC has given the Fees Office all the guidance it needed, that many of the expenses reimbursements failed the ‘wholly, exclusively and necessarily’ test and that an additional liability arose as a result. I feel safe in guessing that if MPs accused of making unreasonable claims had been subjected to tax on those unreasonable claims, they would now be making it well known that they had paid whatever tax was necessary. It is thus not unreasonable to assume that the MPs have not paid that tax. If not, and HMRC has identified it as payable, one must assume that the tax has been paid by the employer and grossed up accordingly. Maybe MPs earn more than we ever thought?

The above post represents the views of the author Chris Reece. I raised a number of related issues last year in my own first set of questions about the tax consequences of the MPs' expenses row.