MPs escape taxation on expenses: benefits in kind

Brian Friedman, a retired senior Ernst & Young tax partner, explains why MPs should pay tax on their expenses, fines for false or incomplete tax returns and shot be fired.

Here’s something to send shivers down the spines of a few MPs. Under normal expenses rules, if a company pays for a capital asset, then it remains the property of the employer. Put simply, all those plasma TVs and duck houses and elephant lamps ought to belong to us, not to our MPs: when they get kicked out, deselected or retire, they should hand them back to the new intake.

As a senior partner, recently retired, at one of the Big Four accountancy firms, I like to think I know a thing or two about expenses and tax. But clearly, I don’t know as much as I thought. In the case of Hazel Blears, I believed that, despite her kind offer to pay capital gains tax on the sale of her second home, the tax system didn’t work like that. The taxman doesn’t accept voluntary donations: if you try to pay tax where none is due, he will simply return your cheque. Either the minister submitted an incorrect tax return, in which case she should be liable for interest, and probably penalties, or the whole thing is a charade.

Then there are the other MPs who have offered to pay money back. If I robbed a bank, but handed over the loot when the police came knocking, they wouldn’t just say thank you and walk away. If an employee fiddles his expenses, he will be dismissed, and quite likely prosecuted.

Why do our MPs think repaying the money is sufficient compensation? And why do they then think they can hang on until the next election and claim their generous resettlement allowance?

From a tax perspective, any expenses incorrectly claimed and subsequently repaid represent a beneficial loan. If the total is over £5,000, the MPs should be subject to tax on the notional interest arising – so the taxman should be charging interest and penalties on all those incorrect tax returns.

When you or I send in our returns, we make a declaration that our return is “correct and complete”. We are warned that if we give false information, or conceal any part of our income or chargeable gains, we may be liable to penalties or prosecution.

In practice, what often happens when the taxman realises we have submitted an incorrect return is that HM Revenue & Customs gives us one last chance to come clean: our accountant must write a full report of anything else we would now like to declare, and we must sign a “Certificate of Full Disclosure”. If HMRC then finds anything else untoward it gets angry – so angry that it will usually prosecute. If MPs had to review their returns and sign such a certificate, it would certainly focus their minds. If they could not or would not sign, why should we trust them with our votes?

Then there is something else that has had tax professionals spluttering over their morning coffee – the fact that Alistair Darling, and many of his ministerial colleagues, used their office allowances to pay for preparing their tax returns.

The idea that tax doesn’t have to be taxing as long as you’re an MP is galling on so many levels. First, it is an inappropriate use of their office allowance. Second, there are no grounds in tax legislation for these sums to be treated as tax-free. If there are any MPs who have been reimbursed for the cost of employing accountants through their allowances, and have not declared the amount they received as a benefit in kind – as Darling and others say they have – they will have submitted an incorrect tax return, and should be investigated by the Revenue.

Finally, the only reason that tax is this complex is because successive Chancellors have made it so: if even Mr Darling can’t submit a tax return without specialist help, then perhaps now is the time for a radical simplification of our incoherent and archaic system.

You may be getting the sense by now that there is one law for them, and another for us. In fact, that’s truer than you realise. Members of Parliament have created a special section of the tax code – Section 292 – which effectively ensures they receive less scrutiny than the rest of us, by exempting their overnight expenses from consideration.

We are still just scratching the surface of the way MPs have abused their allowances – any expenses investigator knows that mileage allowances tend to involve some pretty murky goings-on, and resettlement allowances, winding-down allowances and, above all, MPs’ pensions seem to have been equally generous.

But while there are a host of ways to improve things in the medium term – the abolition of Section 292; receipts for all expenses; the establishment of serviced apartments for MPs near Westminster; the abolition of a second-home allowance; and no recruitment of relatives – the most important thing is to stop the rot.

First, MPs who fiddle their expenses should be fired, just as they would be if they worked for corporations. Second, all MPs should submit their tax returns to the fees office for scrutiny prior to submission, and should sign an annual declaration that their tax affairs are in order. Finally, all expenses claims should be suspended with immediate effect until a Certificate of Full Disclosure is submitted to the fees office. That is the simplest way of getting immediate results, and separating the rotten eggs from the rest.

This article appeared in the Telegraph.

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