MPs get special treatment for home to work commuting

They're at it again. Sadly it takes tax geeks to spot it and I'm indebted to Mike Truman, editor of Taxation, for spotting this little fiddle.

Regular readers will recall that my comments on the tax questions arising from the MPs' expenses scandal last year. It is VERY disappointing to learn that even under the new regime someone has seen fit to secure discriminatory and special treatment for MPs.

The explanatory notes to clause 7 of Schedule 4 of the most recent Finance Bill explained that:

"amendments to ITEPA will provide a statutory exemption for certain travel expenses paid or reimbursed to MPs by IPSA as expenses necessarily incurred in the performance of MPs’ Parliamentary functions."

That seemed reasonable to me. It created new s293A ITEPA 2003 which also looks reasonable in itself. (I especially liked the explicit exclusion in the legislation of alcoholic drinks from a tax free allowance for evening meals eaten in, what passes for an office canteen at the Palace of Westminster, if the House sits after 7.30pm).

Mike however dug a little further. s293A grants tax relief for expenses paid in accordance with s5 of the Parliamentary Standards Act 2009. This in turn refers to the MPs' allowances scheme prepared by IPSA. And Mike identified that, read carefully (see bold extracts below), this gives MPs a tax-free allowance for the costs of travel upto 20 miles to and from their home, if they live outside the constituency.

7.2 MPs may claim Travel and Subsistence Expenses for journeys which are necessary for the performance of their parliamentary functions, and fall into one of the following categories:
(a) For MPs who are eligible for Accommodation Expenses, journeys between any point in the constituency (or a home or office within 20 miles of their constituency) and Westminster or a London Area home;
(b) ......

No other employee would get such an allowance - and if they did it would be taxable as it's evidently for 'home to work' travel.

A cursory glance at the rest of the guidance provided by IPSA suggests that the new scheme is MUCH tighter than before. The expense reimbursement terms I looked at seem much more in line with the over arching principles of the scheme and similar to those that would apply in the commercial sector. So why is there any element of special treatment? It can hardly be a mistake. It must be deliberate.

It's a disgrace. Again.

Who sought the allowance? Who agreed it? Does anyone in HMRC know about it? Did they accept that special treatment for MPs was appropriate? I think we should be told. Don't you?

Afterthought: A more generous view of all this would be that the special relief for MPs is a hint as to a new relief that will shortly become available for all employees for home to work travel. Especially those who do some of their work at home.

Double standards at HMRC re IR35?

I had resisted commenting on the story in last week’s Sunday Times about HMRC’s IT Chief leaving his job and being “re-employed” as a contractor through his own limited company.

During the week I have seen it suggested in various online commentaries that HMRC are responsible for double standards here - because of what we know as IR35.

I think it's important to distinguish two issues:

Firstly, we now have proof that HMRC is the same as all other employers in wanting the flexibility to engage with contractors rather than only employees. The CIO in question resigned but was required to cover the vacant role after he left until a replacement could be found. Like other employers HMRC wanted to arrange this without risking the possibility of becoming liable to account for PAYE. The ex CIO had moved into consultancy but, given he was covering his old role an Inspector might decide his employer (HMRC) should treat him as an employee. How do employers avoid this? They insist that the contractor supplies their services through the medium of a personal service company. Employers cannot be obliged to apply PAYE or to pay employers' NICs in such cases.

The IR35 rules do NOT apply to the 'employer' (HMRC in this case). IR35 is focused on the contractor's personal service company. The rules are intended to prevent the contractor from taking dividends from his company and thus avoiding the tax and NICs that would be payable on his 'salary'.

So I would agree there is some irony in this story. And HMRC (like so many other Government departments) are avoiding liability for employers' NICs on payments to this contractor - who used to be their employee. BUT IR35 is not relevant as such.

Then again, maybe the contractor is working on terms that mean IR35 is applicable to the sums billed to HMRC by his personal service company. Will HMRC be checking and arguing the point. Did anyone in HMRC think to tell the contractor he will need to tick the relevant box on his tax return? Is anyone in that part of HMRC who engaged his services even aware of IR35?

What do you think?

What a difference. Should mean less mistakes in new tax law.

I rather anticipated that the Budget day promise of a new approach to tax policy making was the start of a revolution.

Well, the proof of the pudding is here and we now have draft legislation and an informal consultation on 32 separate technical tax measures which the coalition Government inherited from the previous government. The tax measures are to be legislated for in Finance (No2) Bill 2010 which is expected to be introduced to Parliament in the autumn.

The Government is inviting comments by 3 September on whether the draft legislation now published will work as intended. They are not seeking comments on the policy behind the measures.

In effect what is being sought is free consultancy and input from the professional bodies, retired tax geeks and any other informed commentators who might otherwise complain about poorly drafted new tax law. And we've had plenty of that in recent years - largely I suspect because of the speed with which the then Government wanted to introduce changes. "Fast even if wrong" seemed to be the mantra. Now we have a more collegiate approach intended to get it right first time. It should make life easier for everyone and reduce the frustrations and time wasted when poorly drafted law comes into effect.

The draft legislation now published includes the following measures:

1. Capital gains tax private residence relief adult placement carers
2. Collection of income tax where sum deducted by payer
3. Company distributions
4. Consortium claims for group relief
5. Enterprise management incentives
6. Film tax credit - unused losses
7. Financing costs and income of group companies
8. First-year allowances for zero-emission goods vehicles
9. Landfill tax criteria for determining material to be subject to lower rate
10. Long cigarettes
11. Non-business use of business assets etc.
12. Payments to special guardians and those in receipt of residence orders
13. Penalties for failure to make returns etc.
14. Penalty for failure to make payments on time
15. R&D relief for SMEs - removal of intellectual property condition
16. Real estate investment trusts - stock dividends
17. Recovery of overpaid tax stamp duty land tax and petroleum revenue tax
18. Settlor to return excess repayment to trustees etc.
19. Venture capital schemes

Definition of SME: Bet you didn't know what it means

Maybe it's just me. I get a little frustrated by constant references to SMEs as if this were somehow shorthand for small businesses. Indeed, SME is commonly used to reference the smallest of businesses. (And don't get me started on those people who say they specialise in helping SMEs).

Few people, other than some accountants, seem to be aware that 99.9%* of ALL UK businesses fit the official definition of a Small or Medium sized Entity (SME). This is clear from the statistics for SMEs published by the Department for Business Innovation and Skills* (previously the DTI and BERR). These reference a total of almost 4.8 million UK businesses.

The EU definitions for distinguishing businesses of different sizes, and which are used for many official purposes in the UK are effectively:

Small = upto 50 employees and upto £6.5m turnover.
Medium sized = upto 250 employees and upto £25.9m turnover.

I'm sure very few people realise that businesses with multi-million pound turnovers fall within the official definition of SMEs.

The term 'micro' business also derives from EU definitions but is less common in UK official statistics etc. The EU definition of micro entities covers those with fewer than ten employees and both turnover and balance sheet totals of less than 2m euros.

I suspect that when most people reference SMEs they are really thinking about micro businesses. Some people may also assume that the smaller 'small' companies are also included.

The previous Government often made reference to tax reliefs and exemptions intended to help SMEs. Perhaps the coalition Government will do the same thing. When the smallest (micro) businesses really can benefit that's fine. In the past however frequently the real beneficiaries were only the 27,000 'medium' sized companies rather than the 4.6 million micro entities. These figures come from the most recently published statistics* which also suggest that there are only around 170,000 'small' (rather than micro) and 6,000 'big' companies in the UK.

Perhaps we need a new term, phrase or abbreviation that better describes such businesses. My contribution would be to talk about MiBiz - and we could then refer to the MiBiz community.

* The latest stats from the BIS relate to 2008 and were published on 14 October 2009. They can be accessed through this link.

Caprice asks the taxman to enquire into her tax affairs

My attention has been drawn to the Weekend FT - money section - which contains an interview with Caprice. Frankly she might just as well have written an open letter to the taxman asking them to open an enquiry into her tax affairs.

Caprice Bourret, 38, is a well known 'super-model', actress and businesswoman. She claims to have a full-time accountant in her office who is very pedantic and a great help. However - either the accountant is also very naive or they were unaware of the interview in which Caprice proudly announced:

"I have been interested in property since my mid-20s, when I invested in government repossessions both here and in the US. After careful research, I would select a place, hold on to it for two years – so I did not have to pay capital gains tax – then I would fix it up and flip it. I made a lot of money doing this, sometimes doubling my original outlay."

Is this just what MPs were caught doing last year as part of the expenses scandal? Er no. Caprice claims to have been buying repossessed properties, doing them up and electing for them to be her main residence for CGT purposes. Almost by definition she has not been living in any of them. As an image conscious 'super-model' it's hardly likely is it? And yet residence of some sort is required to qualify for main RESIDENCE relief.

Residence is not defined in the legislation , but the, not unreasonable, HMRC view is that the person must live there for at least some of the time. So if Caprice never actually slept at these places nor ever treated them as any sort of home, then none qualified for the main residence exemption and the elections she made were inappropriate. You don't have to live in an elected property full time, but you must live in it for some of the time - as did each of the MPs who were flipping their properties before selling them for a profit.

HMRC's help sheet 283 makes a similar point:

Your period of ownership begins on the date you first acquired the dwellinghouse, or on 31 March 1982 if that is later. It ends when you dispose of it. The final 36 months of your period of ownership always qualify for relief, regardless of how you use the property in that time, as long as the dwelling-house has been your only or main residence at some point.

There is another related point here that is often overlooked too. Buying properties with the intention of selling them at a profit (and then doing so without ever making them your home) makes the profits subject to income tax - not capital gains tax.

I would be surprised if HMRC ignored such a high-profile interview. It is quite likely to be included as evidence that feeds into the risk assessment which determines whether an investigation should be opened. This has long been part of their strategy for identifying high profile targets for investigations.

About the only thing that could save Caprice is the falling HMRC staff numbers that may mean there are insufficient resources available to pursue such a public confession.