"Truth is stranger than fiction, but it is because Fiction is obliged to stick to possibilities; Truth isn't."
Mark Twain
Mark Twain
Occasionally a news story will come to light that reminds us just how right Mark Twain was. A classic example is the news that Alastair Darling, among around half of his cabinet colleagues, not only had to pay an accountant to complete his tax return, but then claimed back the cost of the accountancy fees as a deductible expense.
So let's start with the marginally less amazing aspect of this, namely the fact that MPs can apparently legitimately reclaim the cost of professional fees associated with completion of their tax returns. I had never previously come across a case where an employee has successfully established such a claim for income tax purposes, or indeed would even have considered the remotest possibility of such a claim being successful. And yet I had understood that, in applying what passed for the expenses system for MPs, the employee income tax test of being incurred 'wholly, exclusively and necessarily in the performance of the duties' was applied. And indeed, this would be a very sensible approach, as otherwise MPs would end up potentially being taxed on large amounts of the expenses that they reclaimed.
However, the test has been applied in a very odd manner in the case of advice on tax returns. In what sense are professional fees expended on this basis incurred 'wholly, exclusively and necessarily in the performance of the duties'? I have sometimes had occasion to argue with the taxman over one aspect (normally the 'necessarily' test in practice), and have had doubts over some MPs expenses claims in respect of one or the other of the tests, but I cannot for the life of me see that fees for tax return completion meet any of the tests, let alone all of them.
Wholly
One does not complete a tax return in the performance of one's duties; rather it is a by-product of the performance of those duties that one needs to complete a tax return. So this test is clearly not met.
Exclusively
The principal reason for completing a tax return is to enable HM Revenue & Customs to satisfy themselves that the correct amount of tax has been paid. Given that MPs may well have other forms of income than their MPs' salary (rental income seems to have been a favourite here), the exclusivity argument falls at the first hurdle.
Necessarily
One might of course choose to complete one's own tax return, and not incur professional fees at all, and thus such expenditure can hardly be necessarily incurred in the performance of the duties.
In the performance of the duties
It is no part of the duties of an MP to complete a tax return, as stated above.
I think this analysis helps to explain why the claim of dozens of MPs that it was the system that was to blame for the current scandal, and not the administration of that system, simply does not hold water. To my mind the system was based on the soundest of principles, namely that MPs should only be able to reclaim those expenses that they would be legitimately entitled to claim for tax purposes as employees. I think that is an excellent system, and would have no problem with it had it been properly applied. The trouble is that it clearly has not been, and MPs have been allowed to claim many items that clearly do not meet this test, which is a notoriously restrictive one.
For this reason I would expect HM Revenue & Customs to have a field day in pursuing those MPs who have claimed items which are ineligible for a tax deduction, which may be why we are seeing a rush to repay some of the more controversial claims. But even in such cases, if the amount concerned exceeded £5,000 it seems to me that MPs have had beneficial loans from their employer, which would also have tax consequences.
Which brings me to Hazel Blears, whom I defended robustly when this story first broke, but who subsequently did something rather odd, which merits comment here. She announced that she was paying the capital gains tax that she had avoided by electing for her London property to be her main residence, and indeed I believe brandished the cheque in front of photographers. However, I don't see how she can do that. She had legitimately elected for the London property to be her main residence, and legitinmately claimed the resulting tax exemption. Thus I suspect that HMRC will send her cheque back, or credit it against her next tax liability, in which case she will not have paid the tax at all. Just a thought........
Of course the more amazing aspect is that the Chancellor, the man responsible for the design of the tax system, finds the tax return completion responsibility he places upon millions of taxpayers so demanding that he has to employ someone to complete his own tax return for him. So much for claims of simplification of the tax system. If you made this sort of thing up, no-one would believe you, which means, I guess, that Mark Twain was right all along.
Mark Simpson
26 May 2009
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