The spotlight of media scrutiny has been closely applied to MPs and their expenses claims during recent weeks, following the disclosure of parliamentary expenses records to the Daily Telegraph. The political fallout from the publication of these records has been significant, leading to the suspension of MPs by their parties, announcements that some MPs will stand down at the next general election and to some MPs repaying amounts claimed. One effect of this media reporting has been to bring the tax position of MPs into focus both in respect of the income tax treatment of their expenses and the capital gains tax (CGT) position of their homes.
Before considering the tax position of MPs, it is worth noting that the tax returns of MPs are dealt with by a special HM Revenue & Customs (HMRC) unit based in Cardiff known as “Public Departments 1”. MPs are considered by HMRC to be likely to have complicated tax affairs and the HMRC guidance issued to them indicates that they would all be expected to file self-assessment tax returns. The self-assessment tax return issued to MPs includes a bespoke form known as the “Parliament” pages. This form is similar to the “Employment” pages of a standard tax return but has been designed to better report the income and expenses that MPs are likely to have.
Self-assessment does not take MPs out of the “Pay As You Earn” (PAYE) regime. PAYE is operated by the House of Commons Department of Finance and Administration in respect of MPs’ salaries. MPs have the benefit of the Parliamentary Pension Scheme which is a funded final salary pension scheme the rules of which were set by regulations under the Parliamentary and Other Pensions Act 1987; regulations were introduced to amend this scheme to ensure compliance with the changes to pensions required by the Finance Act 2004 with effect from 6 April 2006 (so-called pensions “A-day”).
One of the key income tax statutes, the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), exempts certain payments made to MPs from the scope of income tax.
ITEPA 2003, s 292 provides that no liability to income tax arises in respect of any “overnight expenses allowance” paid to an MP in accordance with a resolution of the House of Commons. An “overnight expenses allowance” is defined as an allowance in respect of additional expenses incurred by an MP in staying overnight away from his main residence for the purposes of performing parliamentary duties either in the London area or in his constituency. As this provision stands, an MP cannot claim a deduction from income tax for the actual expenditure incurred, merely the allowance so that where the expenditure is less than the allowance, the unspent amount is, essentially, tax-free.
European travel expenses
ITEPA 2003, s 294 provides that no tax liability arises in respect of sums paid to an MP in accordance with a resolution of the House of Commons providing for the MP to be reimbursed in respect of “European travel expenses” defined to mean payments incurred in travelling between the UK and any “relevant European location”: any EU institution or agency or any parliament of an EU member state.
Throwing the book
The so-called “Green Book” is the official guide to MPs’ allowances published by the House of Commons. It details the expenses which MPs can claim and the documentation required to do so. The Green Book identifies a number of allowances available to MPs such as; “Personal Additional Accommodation Expenditure”—this allowance is available to reimburse MPs for expenses incurred in staying away from their ‘main’ home. It may be used to meet either the rent or the mortgage interest payments required on an additional home (in London or their constituency) and costs associated with obtaining the property (such as stamp duty land tax). This property can be furnished but the total costs of claims in respect of furnishings are limited; Administrative and Office Expenditure—including costs of accommodation for office or surgery use; Travel Expenditure—allowing claims for costs of journeys undertaken for the performance of parliamentary duties; Staff costs—such as for secretarial and research staff.
The Green Book explains that the expenditure for which reimbursement is claimed under its provisions (otherwise than in payments under ITEPA 2003, s 291) are deductible from income as “wholly, exclusively and necessarily incurred” in the performance of an MP’s duties and so outside the scope of income tax. It is a principle of income tax that an employee is not subject to tax where expenses have been met which are “wholly, exclusively and necessarily incurred” in the performance of employment although caselaw has established that this is a test that is very difficult to satisfy.
Notwithstanding the statement in the Green Book, the HMRC publication MPs, Ministers and Tax makes clear that merely being able to claim an item as an expense to be met by the Department of Finance and Administration does not necessarily mean that it can be claimed as an expense for tax purposes: as it succinctly notes on pg 12: “The House rules and the income tax legislation do not always coincide.” This HMRC publication proceeds to analyse the expenses that MPs may claim setting out HMRC’s view as to when these are, and are not, deductible for income tax purposes. By way of example of the HMRC guidance in this area; The HMRC guidance notes that the Additional Costs Allowance (ACA) (being the reimbursement of the expenditure MPs have necessarily incurred in staying overnight away from their only or main home) for the purpose of carrying out duties as an MP is not taxable as “Tax legislation specifically exempts ACA”, presumably under ITEPA 2003, s 292.
ITEPA 2003 also includes special provisions relating to termination payments made to MPs. ITEPA 2003, s 291 provides that no liability to income tax will arise by virtue of any grant or payment made in accordance with a resolution of the House of Commons to a person ceasing to be a Member of the House of Commons on a dissolution of Parliament. The Green Book does not provide details of the method of calculating the amount of any resettlement grant. It is understood, however, that a payment could be as much as 100% of salary depending on age and length of service as an MP.
Accordingly, some MPs losing their seats at the next general election might—if they are nearing retirement age and have a long-service record in the House—be expected to receive payments of amounts in excess of £50,000. To the extent that such “parachute” payments exceed £30,000 they are, as stated by the HMRC guidance, taxable. At first glance, this seems consistent with the position of the typical worker subject to UK income tax as, for most income tax purposes, only the first £30,000 of an ex gratia payment on the termination of employment will be tax free. That said, where an employee receives a payment on the termination of his employment in respect of which he has any contractual rights (such that it is not ex gratia) it will be taxable even below the first £30,000; in contrast, MPs can receive up to £30,000 as of right without any income tax charge.
Although ITEPA 2003 contains a number of provisions specifically improving the income tax position of MPs, the Taxation of Chargeable Gains Act 1992 contains no provisions which put MPs in a different position to normal UK residents for CGT purposes. CGT applies (now at a flat rate of 18%) where UK residents realise a capital gain on the disposal of certain assets to the extent that the gains exceed the annual exempt amount which is presently £10,100.
Gains made on a residential property are often outside the scope of CGT because of the exemption that applies for a dwelling house commonly known as “principal private residence relief”. “Dwelling house” for these purposes includes a property and its garden (if less than 0.5 hectares in area); to the extent that a garden exceeds 0.5 hectares, it will only be within the scope of the relief if it is appropriate to the size and character of the dwelling. The full exemption applies where a dwelling house is occupied as the owner’s main residence throughout his entire period of ownership. Accordingly CGT is not likely to be applicable to homeowners on property sales unless they have a second home.
MPs, of course, commonly do have a second property, particularly when their constituency is some distance from London; indeed, the fact that the parliamentary expenses system has allowed mortgage interest payments to be met by the House of Commons has allowed some MPs to develop small property portfolios. The CGT position becomes more complex where the owner has interests in one or more properties as he can only have one property which qualifies for principal private residence relief at a time. Where a property has been a main residence subject to principal private residence relief for only part of the period of its ownership, the gain arising on its disposal will be apportioned for CGT purposes on a time basis.
The question of whether a property is an individual’s main residence may be difficult to resolve where he has a number of properties. The determination, however, of whether a property is the occupier’s main home for the purpose of the relief is not necessarily always wholly a question of fact. Where a taxpayer has more than one residence, he can nominate one property as his main residence for the purposes of the relief such that the factual test need not be applied. The individual must make an election within two years of their having more than one residence, although it may be varied thereafter.
The HMRC guidance to MPs stresses that they are not required to nominate their “main residence”, as given for parliamentary travel expense purposes, as their principal private residence for CGT purposes. Accordingly, MPs have been able to claim for the reimbursement of expenditure on properties that are, for parliamentary purposes, second homes (such reimbursement being free of income tax) while, at the same time, having nominated that second home as their principal residence for CGT purposes and so obtaining relief from CGT on gains made in respect of it.
From a CGT perspective, MPs are not in a different tax position to their constituents. To the extent that MPs have a number of properties, they are entitled within the scope of principal private residence relief to make a nomination as to which should be treated as their main residence. However, from an income tax perspective, MPs have the benefit of a number of specific ITEPA exemptions. Overall the tax treatment of payments made by way of reimbursement of expenses to MPs appears to have been favourable when compared with the treatment of other income taxpayers.
Samantha Morgan, partner, & Philip Munro, associate, Withers LLP (London)
Samantha Morgan & Philip Munro lift the lid on MPs’ taxes & expenses