The Operation of the Parliamentary Standards Act 2009

Written evidence from the Chartered Institute of Taxation

Tax and MPs – some general tax principles around pay, expenses and benefits

1 Introduction

1.1 These notes are intended to cover in general terms the tax rules around employment, expenses and benefits, with the position of MPs in mind. The paper is not a proposal, nor is it comprehensive; the tax consequences are set out in outline to help inform debate. The appendix comments on the tax consequences of the current system of expenses payments made to MPs. It is hoped that the paper will be of assistance to the Committee on Members’ expenses.

2 Employed or self-employed

2.1 Whatever salary is paid to an employee is subject to income tax (IT) and National Insurance (NICs). MPs are currently treated as employees. There are undoubtedly features of their role that would support an argument for their being treated as self-employed. In broad terms, the key points are probably:

Employed: have to perform their role personally; various conditions laid down by the ‘employer’ (Parliament) to which the MP adheres; hours laid down for when Parliament sits; set main place of work; paid a set annual salary; system of reimbursement for their expenses including ‘tools’.

Self-employed: a good deal of freedom as to exactly how they perform their role and what hours they put in; a fair amount of control over their second work location; tend to employ their own staff; provide a good deal of their own ‘tools’.

The intention of the parties is also a factor.

2.2 There have been many cases over the years before the Courts that have considered employment status. As the recent Autoclenz Supreme Court decisions emphasise, much depends on what happens in practice: documents and intentions cannot override what is obviously (or is obviously not) an employment situation.

2.3 Self-employment does normally mean lower NIC bills for the individual, offset by fewer benefits (eg no entitlement to jobseekers’ allowance) and of course no employee rights (arguments about rights, including such things as termination payments, are at the hub of many of the cases reaching the Courts). The major tax difference is no employer’s NICs to pay. This has led to much attention being paid to ‘disguised employment’ and thus the ‘IR35’ and Managed Service Company anti-avoidance legislation.

2.4 Employees can deduct expenses that are incurred wholly, exclusively and necessarily in the performance of the duties of the employment. The ‘necessarily’ word is important and is used quite strictly by HMRC to deny a lot of expenses claims. Their stance is typically that if an employee needs something for their work...then the employer should provide it. If the employer does not provide it, that suggests the item is not really necessary. Some expenses, however, are specifically tax deductible by statute (or concession). Expenses for the self-employed are essentially in terms of ‘business’ expenses – ie those incurred wholly and exclusively for the purposes of the business (though many expenses are apportioned between business and private use) but expenses do not need to be ‘necessarily’ incurred.

2.5 The rest of this note looks at expenses and other payments for employees.

3 Office expenses

3.1 Employers will routinely consider what is needed for employees to do their job properly and provide appropriately. This guides most employers to provide what is ‘necessary for the job’. Typically that would include such things (for an office-based worker) as:

· Office and office equipment (desk, chairs, conference table and chairs for senior staff, bookcases/shelves, PC and peripherals, phones, etc); and

· Office consumables (stationery, telephone calls, tea/coffee, etc).

3.2 There would normally be no question of a taxable benefit-in-kind arising on such items. One assumes that if the central authority provided similar levels of provision to all MPs, then again there would be no taxable benefit. Note that there can be an issue in practice about ‘provision for all’ – if, for example, tea/coffee is only available to a select few staff that may mean a taxable benefit for them.

3.3 Above the standard provision, employees typically have to make a case for any other equipment they require to perform their duties. Such things could be provided centrally or incurred by the individual and reimbursed by the employer. Whether there would be a taxable benefit would depend on necessity vs. private benefit. If, for example, a blackberry is provided, is it mainly for business use? Normally, one mobile phone is accepted as necessary for business but employers are expected to monitor private use to the extent of making sure that the phone is used primarily for business.

3.4 Employers will usually discuss their arrangements with HMRC and obtain a ‘dispensation’ over many expenses (whereby HMRC agree there is no taxable benefit); others will be agreed to be taxable. Presumably, a similar route could be followed for MPs with central guidelines being used and ‘normal’ office costs/equipment met.

3.5 The position over constituency office equipment will need to be considered for MPs, to the extent that such costs are covered by the public purse.

4 Staffing expenses

4.1 Employees do not normally employ other staff; their employer does the employing. There is normally no issue around a taxable benefit arising for an employee (eg for their secretary) though this could arise (possibly for a personal chauffeur [1] /handyman).

4.2 Accordingly, if MPs were given a central guideline on what staff an MP could have (eg a researcher and a secretary) but the staff were engaged, and paid, centrally there would be no issue around a taxable benefit. That would follow despite the MP presumably interviewing and approving them, and having a certain amount of discretion over who they were, their qualifications, etc. If a family member were employed, they would of course be taxable on their salary.

4.3 This route would obviate any tax problems, given that the employer would be Parliament, even if there were an employment contract linking the staffer to the MP. It would also mean that MPs do not waste time acting as employers, making returns, etc.

5 Personal expenses

5.1 A significant category of expenses for many staff is travel and subsistence. Provided this is business travel, then expenses reimbursed do not give rise to a taxable benefit: the tax rules allow as deductible from salaries expenses ‘...necessarily incurred on travelling in the performance of the duties of the employment.’ This also covers subsistence – and hence accommodation. There are considerable rules and guidelines here; taxable benefits will arise over such matters as home to office commuting costs, over-lavish subsistence and (in most circumstances) spouse/civil partner travel. Entertaining can also give rise to a taxable benefit.

5.2 An employee with two places of work is normally able to regard travel between the two places of work as ‘business’, with reimbursement of such costs non-taxable.

5.3 The position of accommodation costs would normally be that there would be a benefit-in-kind if the employer provides a flat/house, either rented or bought [2] . In addition, there can be a benefit if running costs (eg heat, light) are paid. However, someone working away from home would normally not be taxable on the accommodation provided at the second site, though if that runs (or is expected to run) for more than two years then a taxable benefit usually starts to arise.

5.4 Clearly, travel and subsistence will be a major consideration for those MPs with constituencies well away from London. Those MPs who need accommodation in London may provide their own or there may be central provision. It is an area where MPs’ arrangements could give rise to a taxable benefit, but s292 ITEPA 2003 puts the matter beyond doubt.

5.5 Some employers will give their employees an expense allowance to cover travel costs, etc. That allowance would be taxable, with the employee able to make claims for valid expenses to reduce the taxable amount.

6 Other matters

6.1 When an employee loses their job, there is the well-known £30,000 tax-free amount. However, this needs great care: in fact, the exemption covers redundancy payments and other amounts that are non-contractual; payments in lieu of notice, for example, are normally taxable in full. MPs do receive ‘Resettlement grants’ which are probably treatable as termination payments, although their contractual nature strictly means they are fully taxable rather than the first £30,000 tax free. However, s291 ITEPA provides for the £30,000 exemption to apply.

6.2 Payments to cover special security arrangements would need care in practice; they are often non-taxable but this is not automatic.

6.3 There is also the question of pension arrangements. In simple terms, employee contributions are deductible for IT (but not NICs); employer contributions are not taxable. However, the various limits on contributions (broadly £50,000 a year and a ‘pot’ of, currently, £1.8m) need to be considered carefully.

6.4 The remainder of the special tax rules for MPs’ expenses in Sections 291-295 ITEPA 2003 need to be borne in mind.

7 Conclusion

7.1 We have tried to make this note a useful and, deliberately, relatively short general guide. As stated at the start, it is not intended to be exhaustive and is in places only a summary of the issues and tax considerations.

8 The Chartered Institute of Taxation

8.1 The Chartered Institute of Taxation (CIOT) is a charity and the leading professional body in the United Kingdom concerned solely with taxation. The CIOT’s primary purpose is to promote education and study of the administration and practice of taxation. One of the key aims is to achieve a better, more efficient, tax system for all affected by it – taxpayers, advisers and the authorities.

The CIOT’s comments and recommendations on tax issues are made solely in order to achieve its primary purpose: it is politically neutral in its work. The CIOT will seek to draw on its members’ experience in private practice, Government, commerce and industry and academia to argue and explain how public policy objectives (to the extent that these are clearly stated or can be discerned) can most effectively be achieved.

The CIOT’s 15,600 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’.

17 October 2011

APPENDIX

Expenses for MPs: comments of the current position and its tax consequences

1 Introduction

1.1 This note contains comments on the tax implications of MPs’ expenses, as provided for in ‘The Green Book: A Guide to Members’ Allowances’ (Revised Edition, July 2009) http://www.parliament.uk/documents/commons-finance-office/greenbook0907.pdf. This covers allowances to cover the costs of running an office and employing staff, having somewhere to live in London and in their constituency, and travelling between Parliament and their constituency, among other things.

1.2 This paper is a commentary on the tax consequences of the various provisions as set out in the Green Book. No comments or judgments are made or intended on the basis of the payments or the amounts involved.

2 General comments

2.1 Pay for income tax purposes includes wages, salaries, commissions, bonuses, tips, certain benefits-in-kind (some are tax exempt) and taxable expenses payments (some expenses payments are not taxable).

2.2 Certain expenses incurred by an employee may be deducted in arriving at taxable earnings (if not reimbursed by the employer). Those expenses are those that the employee/officeholder is obliged to incur and pay as the holder of the employment and are incurred wholly, exclusively and necessarily in the performance of the duties of that employment.

2.3 This is akin to the principles that MPs are reimbursed only for the costs of a Member carrying out his or her parliamentary duties and that claims must only be made for expenditure that it was necessary for a Member to incur to ensure that he or she could properly perform his or her parliamentary duties [3] .

2.4 There are some special rules in sections 291-295 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) to exempt MPs and Ministers from tax on certain payments.

2.5 In most cases, an employer reimburses expenses necessarily incurred by an employee in the performance of their duties, so that for income tax purposes the expenditure is balanced by the employer’s payment. If an employer reimburses or pays other expenses incurred by the employee (eg private expenditure incurred on a company credit card), this will usually be taxable as a benefit-in-kind. Generally speaking, the employer reimburses actual costs, although in some cases the employer may reimburse at or up to a rate agreed by HMRC [4] .

2.6 A strict application of the rule for allowable expenses would require all expenses payments to employees to be treated as employment income, leaving the employee to claim tax relief for the allowable part. To avoid this unnecessary work, expenses payments that would not give rise to a tax liability may be subject of an HMRC ‘dispensation’. This permits the employer to make payments of expenses to the employee without tax consequences. Employers must stick to the terms of the dispensation, which HMRC will occasionally police.

2.7 There appears to be a dispensation and a PAYE Settlement Agreement (PSA) [5] covering certain expenses and benefits-in-kind for MPs, including, winding-up expenditure and cash reimbursements for allowable journeys by rail, air or sea. The exact remit is unknown.

2.8 Where an employer does not reimburse expenses incurred by an employee the employee can deduct, for the purposes of determining taxable pay, the expense that he or she was obliged to incur. Relatively few expenses satisfy the rules for a deduction but some expenses are specifically allowable by statute. An employee can also deduct qualifying travelling expenses not reimbursed by the employer.

3 Staffing Expenditure (SE)

3.1 It is not usual for employees to employ their own staff. Normally, the employer would employ the support staff they regard as necessary for the employee to perform his or her duties.

3.2 However, MPs are perhaps in a unique situation and it would not be unreasonable to regard the reimbursement of the reasonable costs of staffing expenditure incurred in the performance of the MPs parliamentary duties to be tax-free.

3.3 The MP is the employer and, assuming the staffing expenditure is that which one would expect an employer to meet [6] , then the reimbursement of that expenditure by Parliament to the MP would presumably be tax-free. This would extend to meeting or paying the expenses of staff incurred in the performance of their duties, including travel and subsistence costs incurred whilst travelling on business.

3.4 MPs presumably register as an employer and make all necessary returns and payments to HMRC, as appropriate.

4 Administrative and Office Expenditure (AOE)

4.1 If it is necessary for an employee to work at home, he or she may claim the appropriate proportion of the cost of light, heat, telephone calls, etc but not council tax. Also, reasonable expenses payments by employers to cover additional household expenses where an employee regularly works at home under a home working arrangement are exempt from tax (HMRC permit £3 per week to be paid without supporting evidence of actual costs).

4.2 An employee can also claim a deduction against taxable earnings if he or she buys equipment that is necessary for use in his or her job and for the interest on money borrowed to finance the purchase of such equipment (in both cases a restriction arises for any private use proportion).

4.3 An employer can also provide to an employee tax-free a single mobile phone (the cost of line rental and private calls paid directly by the employer is tax exempt). The provision of additional mobile phones is not tax exempt. However, the provision of a mobile phone solely for business use is exempt so long as any private use is not significant. At present, PDAs (eg a Blackberry) are regarded as computers and not mobile phones by HMRC.

4.4 Where an employer pays an employee’s home telephone bills the payments are normally taxable on the employee (unless private use is insignificant) but a deduction for tax purposes may be claimed for the cost of business calls (in effect, any reimbursement of the line rental and private calls are taxed).

4.5 It is reasonable in tax terms for the costs of accommodation for office use, or for occasional meetings elsewhere, and for equipment and supplies for the office to be reimbursed tax-free. Where part of the home is used as an office the claim is restricted to the ‘additional costs’ – this would include telephone costs where a separate ‘business’ line is installed but would be restricted to the cost of ‘business’ calls where this is not the case. It would probably also extend to the cost of broadband installed because of ‘business’ demands (but some ‘disallowance’ could arise if there was significant private use).

4.6 Where equipment is purchased (see 4.2 above) the claim for a tax deduction would normally be restricted to the amount deductible under the ‘capital allowances’ rules. Given that for ‘plant and machinery’ there is an annual investment allowance of £100,000 (to be reduced to £25,000 from April 2012) the net effect is likely that the ‘full’ amount would be claimed. However, there is a requirement to restrict the capital allowances claim for any private use.

4.7 Other costs (eg work commissioned and other services, and certain travel costs not met out of the travel expenditure) do appear to meet the normal requirements to be reimbursed tax-free – although they are not the sort of costs that would normally arise to an employee/officeholder, they are costs that could arise to an employer.

5 Personal Additional Accommodation Expenditure (PAAE)

5.1 It is not unusual these days for employees to have more than one workplace, or be required to stay away from home overnight because of the requirements of their employment.

5.2 Generally, an employer meeting the cost of overnight accommodation (eg hotel costs etc) and other incidental expenses, including subsistence, would not give rise to a taxable payment. This would, generally, include staying in accommodation (eg a house or flat) owned or rented by the employer.

5.3 As an individual has to eat and drink to live, such expenditure cannot be said to be incurred wholly and exclusively in the performance of the duties of one’s employment. Nor can it be said to be additional expenditure if one normally resides away from home for part of the week [7] .

5.4 Accommodation

5.4.1 It would be quite unusual for an employer to meet, tax-free, the costs of the employee providing permanent accommodation for him or her at, or near, one or other (or both) workplaces. It is difficult to think of a situation where an employer could reimburse the cost of a second home without the payments being liable to tax.

5.4.2 Normally, if an employer provides an employee with living accommodation the employee is charged to tax on the amount of rent the employer pays (or the ‘rental value’ if the accommodation is owned by the employer) (less any amount made good by the employee).

5.4.3 Generally, the only exception to this rule is where it is customary for employees to be provided with living accommodation for the better performance of their duties or the accommodation is provided for security reasons. In such circumstances, the exemption from tax extends to the payment by the employer of council tax and water charges. However, normally, the employer would own or rent the accommodation.

5.4.4 From a tax viewpoint, the position is less clear-cut with regard to rent, mortgage interest, etc. If a ‘second home’ were ‘necessary’, it would be more normal for the employer to own or rent it. However, if we assume that MPs are in a unique position and that they should personally own or rent the ‘second home’ then it would seem reasonable to regard the accommodation as ‘job-related accommodation’. Consequently, it would then be reasonable to reimburse tax-free the rent (including ground rent), service charges, mortgage interest, council tax, etc. However, it would not be correct to claim overnight subsistence in such circumstances (such reimbursements are for the additional cost of staying away from home overnight but if the employee is residing in their ‘second home’ it is a cost that would normally be incurred when at ‘home’ and so is not an additional cost).

5.5 Travel and subsistence

5.5.1 Where an MP stays overnight away from their home for the purposes of performing his or her parliamentary duties, it is reasonable in tax terms for the additional expenses necessarily incurred to be reimbursed tax-free.

5.5.2 Generally, PAAE may only be claimed in respect of one ‘home’ (whether in London or in the MPs constituency) (there are exceptions for MPs with constituencies within 20 miles of the Houses of Parliament). Section 292 ITEPA 2003 provides a ‘special’ exemption for PAAE (see paragraph 3.3 of The Green Book).

5.5.3 The reimbursement of hotel accommodation and overnight subsistence when travelling away from ‘home’ in the performance of one’s duties would be normal business practice.

5.5.4 An employee away from home overnight on business is exempt from tax on payment or reimbursement by his or her employer of incidental personal expenses such as newspapers and telephone calls so long as they do not exceed £5 per night.

5.5.5 The Green Book permits a flat-sum of £25 to be claimed. Presumably, this is to cover the cost of meals and incidental personal expenses. HMRC may grant a dispensation to an employer for subsistence and incidental costs incurred in an overnight stay in this sort of sum.

5.6 Capital Gains Tax

5.6.1 The Green Book says that MPs must make a declaration that a property on which PAAE has been claimed is not their main residence for CGT purposes (see paragraph 3.3). It is unclear to whom this declaration is made.

5.6.2 Normally, for CGT purposes, where an individual (or couple) has an interest in more than one residence, they should make a declaration to HMRC, within 2 years of residing in the additional residence, of which is their main residence for CGT purposes. In the absence of an election, it becomes a question of fact (it is not impossible, for example, for one residence to be the main residence during the week and another at weekends – the main residence exemption may be apportioned between the two in appropriate circumstances).

5.6.3 MPs are, perhaps, in the unusual position of having to declare which is not their main residence. It is, however, unclear whether on a subsequent sale of a property on which PAAE has been claimed any gain is automatically fully chargeable to CGT. This should not be the case and HMRC’s guidance [8] would seem to agree. Thus, if a property on which PAAE has been claimed has been the MP’s main residence at some other time the usual CGT exemptions (eg last 36 months, etc) will apply and the gain will be apportioned appropriately.

5.6.4 In essence, the same CGT rules as apply to individuals generally apply to MPs. The only difference between an MP and any other individual with two residences is that the MP receives tax-free help with the costs of running the second residence.

6 Communications Expenditure (CE)

6.1 The types of expenditure outlined here would appear to be those one would expect an employer to incur direct, as part of their normal business expenditure. It would be expected that the reasonable costs of CE incurred to be paid or reimbursed tax-free.

7 House Stationery and Postage (SP)

7.1 Similarly, one would expect an employer to provide stationery, etc for an employee’s use in the performance of his or her duties, as part of their normal business expenditure. Therefore, it would be reasonable for the provision of House SP to be tax-free.

7.2 Any modest use of House stationery for personal correspondence would probably be regarded as an incidental benefit and would not be taxable.

8 Travel expenditure

8.1 An employee/officeholder is entitled to relief for the full cost he or she is obliged to incur in travelling in the performance of his or her duties, or travelling to or from a place, he or she has to attend in the performance of his or her duties. This is provided the journey is not ordinary commuting between his or her home and his or her permanent workplace or private travel (ie travel for a private rather than business purpose).

8.2 It would be reasonable to reimburse tax-free the full cost of travel and subsistence incurred whilst journeying on parliamentary business. Where appropriate, reimbursement should be made at agreed rates (eg when using one’s own car for business it would be reasonable to expect the reimbursement to be made in accordance with the Authorised Mileage Allowance Payment (AMAP) rates incorporated into the Income Tax Acts (note: this is what The Green Book provides for).

8.3 In tax terms, an MP has two permanent workplaces, the Houses of Parliament and his or her constituency. Travel between the two would be ‘business travel’, as would travel from either ‘workplace’ to any other place the MP has to attend in the performance of duties.

8.4 However, for most people travel from one’s main home to one’s permanent workplace (as opposed to another location one travels to in the performance of one’s duties) would normally be ordinary commuting and any reimbursement of the costs of travelling by an employer would be expected to be a taxable expenses payment.

8.5 Hence, if an MP’s main home is in their constituency, the cost of travelling from home to the Houses of Parliament would be a business journey (one permanent workplace [the constituency] to another [the House]) but the cost of travelling to the constituency office would be ‘ordinary commuting’ and, if reimbursed, should be taxed (see below regarding MPs’ special exemption). Similarly, if an MP’s main home is in London, the cost of travelling from home to their constituency would be a business journey but the cost of travelling to the House would be ‘ordinary commuting’. Travel from the MP’s main home to any other place he or she attends in the performance of their duties would be business travel. Travel from an MP’s ‘second home’ to a workplace would probably be a business journey although there are arguments to the contrary [9] .

8.6 Thus, although travel between Westminster, the MP’s constituency and his or her main home may be considered to be routine, it would not automatically all be tax exempt.

8.7 The Green Book does not require a full breakdown of mileage for constituency travel. However, HMRC would expect employees to maintain full records of all business journeys and it would therefore seem reasonable to expect MPs to retain the same information (even if they are not required to provide it to Parliament to support allowance payments).

8.8 The reimbursement of travel and subsistence costs incurred by the MP’s staff, when travelling in the performance of their duties (including accompanying MPs who are travelling in the performance of their duties) would be expected to be paid tax-free.

8.9 Statutory overrides

8.9.1 Section 293A ITEPA 2003 provides a specific exemption for the UK travel and subsistence expenses of MPs. This includes certain journeys by the MP’s spouse or partner if they share caring responsibilities. It would not normally be the case that, when travelling within the UK, the paying or reimbursement of the costs of an accompanying, or visiting, spouse, or civil partner, or dependent family member would be considered to be tax-free.

8.9.2 Section 294 provides a specific exemption for European travel expenses.

8.9.3 Section 293A(1)(b) only provides a limited exemption for ‘relevant subsistence expenses’ (where the House sits beyond 7.30pm). It is unclear whether other subsistence expenses (eg those incurred whilst travelling in the performance of one’s duties) falls within the exemption for UK travel expenses at Section 293A(1)(a) or whether the ‘normal’ travel and subsistence rules apply.

8.9.4 Section 293A(1)(a) is limited to ‘relevant UK travel expenses’ (being those journeys that are necessary for the performance of the MPs parliamentary duties). Presumably, this is to ensure that there is no exemption for the payment or reimbursement of the costs of ‘ordinary commuting’ (ie home to the constituency).

9 Resettlement Grant (RG)

9.1 At face value, this would appear to be akin to a termination payment, so that the exemption in Section 291 ITEPA 2003 may apply.

9.2 The rule for termination payments is that, usually, the first £30,000 is exempt and only the balance is taxable [10] . However, a payment may be taxable under the ‘normal rules’ for earnings from employment because it is a payment for services already rendered rather than a termination payment (eg outstanding pay or bonus, pay in lieu of notice, compensation for loss of office or payment for a restrictive covenant). In effect, to be a payment made in connection with termination (and, thus, fall within the special rules) the payment(s) must be by way of compensation because the employer has broken the contract, is purely ex-gratia, or is redundancy pay.

9.3 It could be said that, since The Green Book provides for the RG, it is a ‘contractual’ entitlement and it would be taxable in full. However, Section 291 overrides this conclusion and makes the termination payments rules apply.

10 Winding-up expenditure

10.1 Given that it is designed to meet the costs of completing outstanding parliamentary duties, the costs it is designed to cover are those that are incurred wholly, exclusively and necessarily in the performance of the duties of the former ‘employment’. As such, the reimbursement of the costs incurred in this respect should be tax-free [11] .

10.2 There is apparently an HMRC dispensation in place for winding up expenses.

11 Security budget

11.1 It is difficult to find parallels in ‘UK business’. It would be interesting to see if HMRC would grant a dispensation to other employers for the reimbursement of this expenditure.

11.2 That said, MPs are in a unique situation and it does not seem unreasonable in tax terms for the costs of security measures that are taken on police advice to be paid or reimbursed tax-free. There are, in any event, limits on the costs that will be paid or reimbursed.

12 Help for Members with disabilities

12.1 Help is provided for MPs with disabilities (see paragraph 2.10 of The Green Book).

12.2 The Income Tax Acts do, generally, provide exemptions for expenditure incurred by employers to assist employees with disabilities to carry out their duties of employment. Therefore, it is not unreasonable in tax terms for assistance provided to MPs with disabilities to be paid or reimbursed tax-free.

17 October 2011