Vir Cantium

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Category Archives: Sleaze

MP Expenses – the Fallout for the Man in the Street

So, various MPs from all sides (even the Lib Dems, who like to think they’re in the middle rather than to the left of Labour, as they actually are) have been caught with their snouts in the trough. Cue much hand wringing, squealing, weasel words and sudden discoveries of consciences. Oh, and an awful lot of blog posts and column inches.

Only good can come of this in the long term, surely? Like pruning, there may be apparent damage in the short term, but the plant – democracy in this case – will grow stronger as a result.

Well, sort of. What about the ordinary taxpayer? Fine, we the Treasury will get our money back, but what are the wider implications?

Let’s look at the so-called “flipping” of second and main homes. Some of the flipping has been contrived, for sure. Some has been genuine. The point is that flipping, in terms of capital gains tax (CGT) – which is the other taxpayer interest in the scandal, alongside the expenses claims themselves – is not restricted to just MPs. Anyone with two “homes” can switch the “only or main residence” (aka “Principle Private Residence”) nomination, thus taking advantage of various exemptions from CGT, which have survived while other areas of tax avoidance have been pursued as if those practising it were not far removed from the followers of Gary Glitter’s chosen hobby.

In the last few days the government has made noises about dealing with flipping and CGT – after all, the Finance Bill is progressing through the legislative process, so it could be done fairly quickly. MPs may still have the audacity to do nothing, or even to amend any anti-avoidance measures, but it is quite possible that the rules around flipping, as they are used by ordinary taxpayers, may still be tightened up. You may not have much sympathy with those who would lose out (even if they are, say, those who have inherited a second home but cannot sell it), but has the principle set out in IRC v Duke of Westminster (1936) – applicable to us all – not been eroded enough?

“… every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be.”

After all, isn’t tax avoidance about playing by the rules but not in the spirit?

Yet there is also the wider question of expenses that have been declared as “wholly, exclusively and necessarily in the course of duties” per the Green Book. Many ordinary taxpayers will be familiar with the phrase as it underpins the rules around what employees can be reimbursed for without it counting as taxable income. Indeed, the great unwashed are penalised even further, finding that even fares or mileage between home and work cannot be reimbursed tax free, or claimed for tax relief.

This, at least is where the taxpayers may gain a benefit. Not that the rules will be relaxed for everyone – as if! Rather, with all the information now in the public domain, the length and costs of all those tax enquiries should be mitigated, and the new harsher penalty regime will bring in a few bob.

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A Little Knowledge

It may seem a bit behind the times to be commenting on the Budget, now over two weeks’ ago – but as any accountant will tell you, the least reliable way to try and work out what’s in the Finance Bill is to listen to the Chancellor’s speech. In any case, I’ve been on paternity leave, so there.

Now then, if you will bear with me for a short technical bit, we come to the new provisions for pension contribution tax relief for the “rich”.

Until 22nd April, someone earning, say, £200,000 a year could put up to £200,000 into their pension fund that year and get tax relief at 40% – their marginal tax rate*. After 22nd April, of course, anyone earning more than £100,000 is a disciple of the devil and must be squeezed until the demons are exorcised (or emigrate). So from April next year, those on much more than £150,000 per year will only get 20% relief on their pension contributions – and that’s quite a loss (£40,000 on a £200,000 contribution).

So, suppose you were in the higher echelon of earners – say, an MP or maybe even a minister – and wanted to get in before the new rules come into effect. You might suddenly whack in a big lump sum into your pension now before the government shut the door.

But the Treasury has thought of that, and special rules came into effect from Budget Day to stop such “forestalling” measures. So that’s that. You’re stuffed.

Except …

You are, as I mentioned earlier, an MP. As it happens, you are a Labour MP and on the Monday, two days before Budget Day, you contact your financial adviser and put £400,000 into your pension – something you wouldn’t be able to do the following week without losing £80,000 in tax relief.

Not that you’re doing anything akin to insider trading – it was pure coincidence, of course.

And don’t let anyone tell you otherwise. Move along now, nothing to see here.

P.S. As that Labour MP, you will no doubt be aware that you can do the decent thing and get a refund of said contribution – though that might not stop the grubby details coming out….

* (Pedantic note: Technically they could put up to £245,000 if they have enough relevant earnings.)