tax for saints and sinners

With a second home allowance of up to £24,222 burning a hole in your pocket why not claim for something which could really make a difference to the lives of some of your most vulnerable and needy constituents?

By purchasing the Hedgehog House you could help to solve the hedgehog housing crisis and the hedgehogs will return the favour by eating all your slugs!

With its integral tunnel, this charming wooden home will keep them warm and safe from predators. Complete with a hinged inspection roof.

• Safe hedgehog habitat
• Inspection roof
• Integral tunnel
• Measures 32 x 48 x40cm

The Hedgehog House  costs just £39.95

Whisper the phrase “wholly, exclusively and necessarily” within earshot of a tax accountant and you’ll likely observe the tell-tale Pavlovian salivation signifying that well-oiled mental cogs are whirring and preparing his lips to utter dark secrets and deliver momentous wisdom. Depending on his age you’ll likely hear the words “section 336 Income Tax (Earnings and Pensions) Act 2003″ or maybe its predecessor “section 198 Income and Corporation Taxes Act 1988.”  Or if you are particularly fortunate there are still a dwindling band of tax practitioners who with misty eye will fondly quote you the section number from the 1970, or even the 1952, Taxes Act.

But here on tax for saints and sinners we do things properly. Ladies and Gentlemen, Saints and Sinners, I want to take you back to 1853, to the very source of this phrase.

Section 51 Income Tax Act 1853

In assessing the Duty chargeable under Schedule (E.) of this Act in respect of any public Office or Employment where the Person exercising the same is necessarily obliged to incur and defray out of the Salary, Fees, or Emoluments of such Office or Employment the Expenses of travelling in the Performance of the Duties thereof, or of keeping and maintaining a Horse to enable him to perform the same, or otherwise to lay out and expend Money, wholly, exclusively and necessarily in the Performance of the Duties of his Office or Employment, it shall be lawful to deduct from the Amount of the Salary, Fees and Emoluments to be assessed under this Act the Amount of all such Expenses and Disbursements necessarily incurred and defrayed in manner aforesaid.

Astonishingly the basics of this section have barely changed since the Act passed into law exactly 156 years ago today on 28 June 1853. The rules for claiming travel expenses have been made more sophisticated to reflect the modern world, and the ability to claim for keeping and maintaining a horse survived for 145 years before being abolished as recently as 1998. But otherwise the rules are pretty much the same.

Now what that means is that we have over 150 years of accumulated court cases where the meaning of those words “wholly, exclusively and necessarily” has been argued over, distilled and refined.

Tempting though it is to review the lot, there is a fairly recent case which contains a good summary of the accumulated legal wisdom.

It concerns a Mr Brown (no not that one), a professional rugby player,  who was employed in 1996/97 by Caerphilly Rugby Football Club.  His employment contract required him, among other things, to

• play to the best of his ability in any rugby match in which he is selected to play for the club;
• maintain at all times a high standard of physical fitness to meet at the very least the fitness standards set by the Club; and
• obey all reasonable directions of the Club relating to training, fitness, diet, injury prevention, treatment of injury and the playing of Rugby.

Mr Brown had a weight and bulk problem: he was naturally half a stone underweight for a flank forward. To increase his weight, and comply with his contract of employment he took various health food supplements and claimed tax relief on the £173 cost. He succeeded in convincing the General Commissioners that “nobody normal would…” take this combination of vitamin supplements, Creatine, Carbohydrate powders and whey, and he argued that the expenditure was therefore incurred wholly, exclusively and necessarily in the performance of his duties.

Our underweight Welsh flanker won initially, but lost when the Revenue appealed to the High Court. The heart of the judgement is this summary of the wholly, exclusively and necessarily incurred test.

1. The expense must be incurred in the performance of the duties of the office. It is not sufficient that the expense is incurred for the purposes of enabling the employee to prepare or qualify himself to perform his duties or for rendering or to keeping the employee fit (or improving his fitness) for performing his duties as an employee.
2. It is not sufficient that the employer requires the employee to incur the expenditure: what is required is the duties themselves must oblige the employee to incur the particular outlay.
3. The expense must be one which the employee is necessarily obliged to occur in the performance of the duties of the employment: the expense must be such as is imposed on anyone and everyone employed to perform the duties in question by the requirements or necessities of being so employed. The test is objective, and the right of deduction does not extend to expenses which are not so required but arise because of circumstances personal to the particular employee or are the result of his own volition. It is not sufficient that the expenditure is incurred in order to enable the office holder to perform his duties.

Ansell (HMIT) v Brown - May 2001

In the next post we’ll look at how MP’s and the House of Commons Fees Office were doomed by their failure to grasp the meaning of the word “necessarily.”

As a Sunday afternoon treat I’ve been sitting in the sun with a mug of Pimms and a copy of the 1880 Taxes Management Act. Just noticed that on the inside it says

Printed for Her Majesty’s Stationery Office by Darling & Son Ltd, 1-3 Great St Thomas Apostle, EC. London 1900.

Incidently it’s a cracking read. I’ve got to section 98 which is the bit where we’re told taxes could be paid with postage stamps in Scotland or Ireland. I don’t want to spoil it for anyone, but I think in section 99 it’s going to be revealed that people in Scotland (but not apparently anywhere else in the UK) were allowed to pay their taxes by Postal Order.

Most of the MP’s who’ve been exposed for nominating a cardboard box under the Hungerford Bridge as their main home, while claiming for the upkeep of a croquet lawn and the cost of re-pebbledashing their Scheduled Ancient Monument of a second home, have twigged that bleating about the press and public not understanding the rules just isn’t going to get them off the hook.

So, what exactly are the rules concerning expenses on second homes?

The new 2009 edition of the Green Book says this:

PAAE is available to reimburse Members for the additional expenses necessarily incurred in staying overnight away from their main home for the purpose of performing their parliamentary duties. It may only be used to meet the following costs:

• Rent or mortgage interest
• Hotel expenses
• Utilities and telecommunications charges
• Furnishings
• Maintenance, service agreements, cleaning and insurance
• Subsistence

PAAE can be claimed if the principles set out in Part I have been complied with, and

• If your main home is in the constituency, for overnight stays in London
• If your main home is in London, for overnight stays in the constituency
• If your main home is neither in London nor the constituency, you can choose in respect of which of these areas to claim PAAE

The name of the allowance has changed since the previous 2006 edition, and there’s one other crucial difference:

The Additional Costs Allowance (ACA) reimburses Members of Parliament for expenses wholly, exclusively and necessarily incurred when staying overnight away from their main UK residence (referred to below as their main home) for the purpose of performing Parliamentary duties. This excludes expenses that have been incurred for purely personal or political purposes.

The 2006 rules (which were in place when the expenses which are now being dragged kicking and screaming into the sunlight were incurred) refer to expenses wholly, exclusively and necessarily incurred for the purpose of performing Parliamentary duties, while the new rules just talk about expenses necessarily incurred.

I’ll come back to the meaning of these words, because to an accountant they are redolent with hidden meaning. But for the moment let’s just concentrate on which set of words are the right ones. The answer to that is in Section 292 of the Income Tax (Earnings and Pensions) Act 2003

292 Overnight expenses allowances of MPs
(1) No liability to income tax arises in respect of an overnight expenses allowance paid to a Member of the House of Commons in accordance with a resolution of that House.
(2) “Overnight expenses allowance” means an allowance expressed to be in respect of additional expenses necessarily incurred by the Member in staying overnight away from the Member’s only or main residence, for the purpose of performing parliamentary duties—
(a) in the London area, as defined in such a resolution, or
(b) in the Member’s constituency.

The upshot of this section of tax law (which is unique to MP’s) is that if the House of Commons says an allowance is for the additional expenses necessarily incurred by an MP in staying overnight away from his main home, then it’s not taxable. There is a special set of Tax Return pages for MP’s and there is nowhere to declare the ACA even if an MP wanted to. The Revenue are not interested.

In 2006 the House of Commons passed a resolution adopting the 2006 Green Book which requires the additional overnight expenses to be wholly, exclusively and necessarily incurred, but this year they passed a new resolution and adopted the new Green Book which only requires the expenses to be necessarily incurred.

The trouble is that, as we shall see, neither MP’s nor the Fees Office seem to have the slightest idea what these words mean in tax law.

 While poking around on the Parliament web-site in the name of research I came across this passage from Lloyd-George. He was Chancellor of the Exchequer at the time and speaking in the 1911 debate which led to the introduction of a salary for all MP’s.

The emphasis is mine.

When we offer £400 a year as payment of Members of Parliament it is not a recognition of the magnitude of the service, it is not a remuneration, it is not a recompense, it is not even a salary. It is just an allowance, and I think the minimum allowance, to enable men to come here, men who would render incalculable service to the State, and whom it is an incalculable loss to the State not to have here, but who cannot be here because their means do not allow it. It is purely an allowance to enable us to open the door to great and honourable public service to these men, for whom this country will be all the richer, all the greater, and all the stronger for the unknown vicissitudes which it has to face by having there to aid us by their counsel, by their courage, and by their resource.

Anyone care to nominate a current MP whose absence from parliament would represent an incalculable loss to the state. Come on, there must be one? Surely?

PS After a few years the Commons obviously concluded that actually the loss was calculable, because in 1931 they voted to reduce the salary to £360.

Back in 1463 the Borough of Weymouth rewarded its MP with a generous annual salary of 500 mackerel.  I see from their website that Waitrose have fresh line-caught Cornish mackerel on sale at £5.99 each, which makes 500 worth £2,995. 

Things have changed a lot. Weymouth is now part of the South Dorset constituency and, according to the Daily Telegraph, in 2007/8 its MP Jim Knight was able to claim reimbursement from the public purse for: a leatherette shoebox (£14.99); an ironing board (£39.99); and an oven glove (£6.99).  He also claimed £3,395 for food, but it’s not clear how much of that was made up of fish.

Today, if you have the privilege of representing us in the mother of all parliaments you get a basic salary of £64,766 plus a whole range of allowances designed to reimburse you for expenses you incur to do your job effectively.

The allowances are set out in the Green Book. The book gets revised from time to time and the latest edition came into force this April whereas the Telegraph revelations are for the period up to March 2008 which was covered by the previous edition. There are some significant differences between these books, and it’s certain that recent events will lead to more changes. 

I’ll start looking at the tax treatment of these allowances in the next batch of posts, but to set the scene here’s a list of the current allowances and rates.

• Personal Additional Accommodation Expenditure (PAAE) previously called the Additional Costs Allowance (ACA). This is the controversial one. It’s designed to reimburse you for the extra cost of having to be away from your main home in the course of doing your job. There’s a special section of the Taxes Acts devoted to this allowance, and the signs are that few MP’s or indeed the House of Commons Fees Office really understand what it means. A lot more on this over the next few days.
• London Costs Allowance (LCA) If you’re one of the 25 MP’s who represent an inner London constituency you can’t claim the PAAE but you automatically get the LCA which is an extra £7,500 added to your salary. If you’re the MP for an outer London constituency you can choose betwen claiming PAAE or LCA.
• Administrative & Office Expenditure (AOE). This is designed to pay for the cost of a constituency office and equipment, and you can claim up to £22,393 per year.
• Staffing Expenditure (this evidently doesn’t merit an abbreviation). You can claim up to £103,812 towards the cost of employing staff.
• Travel expenditure. You get reimbursed for travelling that’s related to being an MP and there are also arrangements for journeys by spouses, civil partners and minor children.
• Communications Expenditure. The maximum claim under this heading is £10,400 and it can be used to claim for the cost of constituency newsletters, advertising your surgeries and for websites. But it can’t be used for anything containing party political material.
• Stationery & Postage. You can order up to £7,000 of House of Commons stationery and postage pre-paid envelopes, but you can only write to a constituent using a pre-paid envelope if replying to a letter they have sent to you.
• Resettlement Grant.  A lump sum paid to you if you’re defeated at a General Election or decide not to stand. It varies between 6 months and a year’s worth of salary depending on age and length of service. Basically it’s a very generous redundancy payment which you get even if you decide to retire or get de-selected by your party. You don’t get it if you resign your seat before a General election.
• Winding up Allowance. If you lose your seat, resign or decide not to stand for re-election you can claim up to £42,068 towards the cost of winding up your constituency work. It’s designed to be 4 months worth of the staffing and office expenditure allowances.

Phew! Over the next few posts I’ll tackle these payments individually. And for a bit of mischief I’ll maybe throw in a post or two about wannabe MP and leader of the Corrective Party, Lindi St Clair, aka Miss Whiplash.

Among this week’s usual crop of new HMRC publications giving the riveting details of our latest tax treaty with the Cayman Islands and advice for anyone thinking of  exporting a ship, is this extremely well written and well produced leaflet Taxes and benefits - Information for our lesbian, gay, bisexual and transgender customers.

 Now it really is excellent - and both the Gender Trust and Stonewall who advise the LGBT communities, think so too, because they’ve welcomed it in glowing terms on page 2 - but what on earth is the picture on page 8 all about?

 I’m all for holding hands. Who wouldn’t want to hold the hand of their lover while you enjoy a stunning sunset?  And  holding onto a hand may be all we can do for someone who’s enduring death, childbirth or the Oblivion ride at Alton Towers. But why would any couple want to hold hands while they fill in a tax return?

And I do wish they’d kick this silly habit of referring to us all as customers. We don’t buy anything from you, so we’re not your customers. It’s all a bit patronising.

It took the genius of Douglas Adams to come up with the character Hotblack Desiato, the intergalactic rock star who spends a year dead for tax reasons.  But if that seems just a bit too drastic here’s a tax planning wheeze that could save you £16,000 of National Insurance if you’re currently a man under 65.

HM Revenue & Customs have obviously been giving a lot of thought to the tax consequences of gender reassignment surgery and they’ve produced this helpful guidance for employers on what they should do if an employee between the ages of 60 and 65 changes their gender.

If your employee was previously male and acquires female gender, she no longer has to pay Class 1 NICs from the date of issue shown on the full Gender Recognition Certificate. (This is because she has reached the State Pension age for women, currently 60.) So instead of deducting any Class 1 NICs from her earnings, you must pay ‘employer only’ NICs on amounts above the earnings threshold.

The sums involved can be quite high. Any employed male earning over £34,840 a year is paying NI of at least £3,260 each year until he reaches 65, and the government has already told us that NI rates are going up next year. So there’s potentially a lot of money to be saved.

I should point out that it works the other way round for any woman over 60 but under 65. So if you’re contemplating sex change surgery it might be best to wait until after you hit 65.

I guess we won’t see a vast number of high earning men prepared to give up their bollocks to save tax, but if you’re under 65 it might be worth thinking about. And, on behalf of the nation, I’d particularly like to commend the idea to any former bank executives who may be reading this.

Imagine for a moment that you’re an MP. You are sitting down. The atmosphere in the chamber is hot and sticky but  the green leather feels cool against your skin. That’s right, you’re naked. You are also gagged. Your hands are behind your back,  and you are securely roped to an IKEA swivel chair (Klitlik - £289 Leather - College green. 78×79, H88cm.  42243.666.70). Facing you, the lady of negotiable virtue, into whose chamber you have strayed, is dressed in a pvc nun’s habit accessorised with red stilleto-heeled thigh boots and matching lipstick. For the last 10 minutes she has been ferociously pelting your quivering body with chocolate profiteroles and now she  advances towards you with a menacing look and a handful of clothes pegs.

What are the immediate thoughts that bubble up unbidden into your conscious mind?

If, like me, you can’t help wondering whether it would be more tax efficient for the lady rather than her client to buy the cream cakes, or you’d like to know whether her tax position would be altered if she was a real nun with this as a part-time hobby-business, or if you’re simply thinking of a career in politics and want to know what you can claim for in the way of research: whichever it is, this blog is for you.

So the plan is to delve into some of the obscurer corners of British life and provide a clear and, I hope, entertaining account of how the tax system deals with them. I’m starting with the taxation of MP’s because one of the things which hasn’t been properly brought out in the scandal of their expense allowances and property transactions is just how they are taxed. Like much of the tax system it is complicated, but if properly explained, not difficult to understand.

I’m the type of person whose reading habits involve flipping from one book to another; and I write like that too. So this blog is not going to be 6 weeks on MP’s followed by 2 weeks of lap dancers and then 3 months on deep-discounted unitised unsecured preferential bearer bonds - whatever they are. There’ll probably be a couple of serieses [that word really doesn't look right] running at any time interspersed with any other tax news that appeals to my sense of the ridiculous, as well as posts sparked off by comments from readers.

So join me as I take up the baton dropped by the BBC and set out to inform, to entertain, and to pillory.