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KEY POINTS
- MPs’ reimbursed expenses used to be treated as income.
- Excessive expense claims triggered investigations.
- Strict application of the law was considered undesirable.
- MPs were given special treatment.
- Publicity was to be avoided at all costs.
The commotion surrounding MPs’ expenses rumbles on, but how did this situation arise? This article analyses the background to the creation of a tax exemption for the additional costs allowance as revealed in documents released under the Freedom of Information Act 2000.
The allowance is intended to reimburse MPs for the additional expenses of staying overnight away from their main home for the purpose of performing their parliamentary duties and is often referred to as the second home allowance.
What is interesting and novel about the allowance is that, although up to 1984 monies reimbursed were counted as income and then subjected to the usual stringent tests before qualifying for an equal and opposite deduction, thereafter they were made completely tax free.
Given the recent furore over the allowance, it is surprising to discover that the relevant clause was passed without any comment or vote. Clearly, at the time it seemed completely uncontroversial!
Knowing that reimbursements for some very dubious and unusual items have been made recently makes one wonder whether the Inland Revenue (as it then was) encountered any difficulties with expense claims prior to the allowance becoming exempt.
The review of parliamentary allowances by the Top Salaries Review Board (TSRB) published in May 1983 (Cmnd 8881) does show some evidence of problems.
It refers to some MPs finding the allowance unsatisfactory because of restrictions applied by the Revenue on what could be claimed and the strictness of their approach. It is interesting that so soon after these difficulties were reported, the allowance was exempted from tax.
A freedom of information request was made to the Treasury to find out the policy behind this change. After some correspondence and internal consideration of where the balance of public interest lay, the relevant documents have just been released.
They show what was causing friction between the Revenue and MPs, what options were considered to try to resolve the matter and how the chosen solution was carefully presented in a persuasive, low-key manner to minimise discussion or controversy.
Causes of friction
The Revenue was aware that the Fees Office required neither evidence nor a detailed analysis of expenses to support claims against the allowance. Despite this, it generally allowed deductions without enquiry provided they did not exceed the maximum allowance.
The Revenue did so on the grounds that ‘the Fees Office must be satisfied that the expense is proper, therefore no great purpose will be served by further enquiry’.
However, by the early 1980s some MPs were submitting expense claims to the Revenue exceeding the maximum allowance. As a result, it felt obliged to ask for details. The findings seem to have caused surprise. Claims had been submitted for meals taken other than when travelling.
Matters were made worse when two MPs made large error or mistake claims for the cost of meals going back six years and used flat rates rather than actual expenses.
This prompted the Revenue to investigate more thoroughly. It found many other large claims expressed in round-sum terms which would not have been accepted from any other group of taxpayers.
It also uncovered, though on a less widespread scale than for meals, substantial claims for items such as carpets, dining tables, sideboards, bedroom and bathroom furniture, towels and sheets. For example, one claim for 1981/82 included £2,693 for ‘renewal of carpets’.
Another claim for 1981/82 included £1,109 for ‘dining table and large glass-fronted bookcase and sideboard’ and another for £7,306.60 for furniture and ‘effects’ ranging from bedroom and bathroom furniture to glasses, towels and sheets. So much for this being a recent phenomenon.
The Revenue took legal advice, which categorically concluded that normal meals taken when not travelling could not be deductible and that capital allowances for domestic furniture could only be allowable where, as a fact, it was necessary for use in the performance of parliamentary duties.
Revenue practice had been to allow claims for equipment for use in an office based at home, but to reject ordinary domestic furniture because it was not used in the performance of the duties.
As a result of its enquiries, assessments were made. Appeals were subsequently received, and the Revenue believed it had no choice but to defend the assessments.
New guidance
To clarify matters for the future, the Revenue informed the Financial Secretary (Nicholas Ridley) and the Chancellor (Geoffrey Howe) about its discoveries and obtained approval for a new edition of Notes on Income Tax for Members of Parliament.
Published in June 1983, this clearly stated that no deduction could be given for meals at Westminster or elsewhere, other than when travelling.
This ‘provoked a barrage of representations from all sides of the House’ and, just before Parliament reassembled in October, the newly appointed Financial Secretary (John Moore) was fully apprised of the situation in a memorandum from the Revenue.
It reminded him that the TSRB had recommended that MPs provide a more detailed account of expenses claimed against the allowance. It also advised him that although such changes would help, there would still be
‘discrepancies between what the House authorities considered it proper to reimburse and the sort of expenditure which can pass through the “strait gate” of [TA 1970] section 189’.
The Revenue said that it was in touch with the Fees Office to try to arrange for a dispensation for certain types of expenditure and made it clear that it would like this to cover as much as possible so as to avoid detailed investigation of expense claims.
‘The last thing we want is a kind of trench warfare with a series of individual Members about their expenses.’
The memorandum ends with a warning that ‘some of the claims – ranging from television sets to bedroom furniture and the Member’s everyday living expenses – are of a kind which could well catch the headlines, if it was known that they were being made, let alone accepted.’
It was to be many years before the public discovered what was going on and the exemption for the allowance almost certainly contributed to this delay.
Possible solutions
The problem was soon brought to the attention of the Chancellor (Nigel Lawson). The Revenue briefed him for a meeting with the Chief Whip (John Wakeham) and the Lord Privy Seal (John Biffen).
In its memorandum, the Revenue scotched the prevailing rumour among MPs that it had changed its view on expense claims and explained that the only change was that relatively small claims, to which a relaxed attitude had previously been taken, were being supplemented by large unvouched claims to which it could not turn a blind eye.
At the meeting, with a Revenue representative present, both Biffen and Wakeham referred to complaints they had been receiving and the latter expressed his concern ‘that if the volume of complaints grew, backbenchers on both sides of the House would join forces to exert pressure on the Government’.
The meeting concluded that the approach suggested by the TSRB and the way the Revenue had to apply the current law would lead to increasing complexity and friction between MPs and officials in the Fees Office and the Revenue because they would be obliged to examine the minutiae of MPs’ expenditure.
Such a state of affairs was claimed to be contrary to the House’s intention. The Chancellor saw that there was a real parliamentary problem and asked the Financial Secretary to undertake urgent further investigations.
Immediately after the meeting, the Revenue’s representative and the Financial Secretary discussed the problem at length to try to find an early and permanent solution. Taking account of the Chancellor’s comments, the Financial Secretary decided:
‘it would be proper to ask the House to put the matter beyond doubt by declaring the additional costs allowance to be a tax-free allowance’.
However, as this could only be done in the Finance Bill almost six months later, ‘in view of the strength of feeling among Members an early opportunity should be taken of announcing the Government’s intention to the House’.
This still left the problem of what to do with claims for earlier years being dealt with under the existing law.
The Revenue was left to grapple with this issue and suggested two possible approaches to the Financial Secretary.
The first was that ministers could authorise an extra-statutory concession so that for open years, amounts up to the maximum allowance would be treated as exempt. The alternative was for full scale retrospective legislation declaring the allowance never to have been taxable.
The problem with a concession was that it would create inequities. Those who had settled their liabilities based on the existing law would be disadvantaged compared to those who were either late in making their claims or who had not settled their appeals.
The Revenue was adamant that there was no question of extending the concession to the re-opening of assessments and repaying of tax to avoid inequity.
This could only be achieved by statutory retrospection, which would be difficult to justify in principle and expensive in terms of the work involved. It therefore strongly favoured the operation of a concession.
Extraordinary concession
The Revenue’s proposed concession took an extraordinary form. MPs who had open assessments or who had not yet been assessed for earlier years were to be given a choice for each year.
They could either elect for retrospective application of the new provisions so that the allowance would be treated as tax-free and no expenses would be allowed for the additional cost of living away from home, or they could choose to operate the previous system.
However, in the latter case MPs were thought by the Revenue to be entitled in law to have their claims determined on the basis of the practice prevailing at the end of the year following the year of assessment for which their claim was made. Consequently, many would be entitled to claim full deduction up to and including 1981/82.
As many MPs would be unable to substantiate their claims for meals, the Revenue proposed to allow the lesser of the amount claimed and £9 a day.
The latter figure was chosen because it was roughly twice the level of subsistence paid to the highest ranking civil servants when they were absent for more than ten hours.
Where an MP could provide evidence of greater expenditure on meals, the Revenue was willing to allow the amount in full.
Where an MP chose to use the existing system for either 1982/83 or 1983/84, no claim was to be allowed for the cost of meals. Most Members would therefore opt for the new rules to be applied retrospectively to those years as this would normally be to their advantage.
As a separate matter, up to and including 1981/82, reasonable claims for capital allowances on domestic furniture and fittings and for the expense of upkeep of basic furniture were to be allowed and ‘inspectors will be encouraged to take a reasonable view of what might be expected to fall within this category of expenditure’.
However, for 1982/83 and 1983/84, such claims were to be rejected. The Revenue suggested that this approach would enable it to meet the reasonable expectations of many MPs while turning down extravagant claims.
Special treatment
The Revenue’s advice to the Financial Secretary then turned to matters of presentation. Foreseeing political difficulties in singling MPs out for special treatment, it suggested that ministers should stress that ‘the additional costs allowance is subject to parliamentary control in a way which does not apply to expenses incurred by employees and directors of commercial companies’.
In view of what we now know about the lack of controls over the allowance, this is an astonishing claim. In any event, the Financial Secretary believed that any public criticism would be limited because most people probably assumed the allowance was tax-free anyway!
He wrote to the Chancellor supporting the Revenue’s suggestions for legislation to resolve the position for the future and a concession to deal with problems of the past as this was ‘the least difficult of all the possibilities’.
He argued that without these changes, ‘the Revenue could not help but ask questions in more and more detail in an area where the answers can only be subjective’.
Furthermore, this ‘would lead to permanent disputes between erudite tax lawyers… and the Inland Revenue: while interested journalists looked on and ordinary sensible MPs got lost somewhere in the shuffle’.
MPs were thus to be given special treatment quite distinct from other employees and office holders who have to face the stringent and exacting expenses rules and the Revenue’s strict application of them.
At the beginning of November 1983, the Chancellor held a meeting in which it was agreed ‘that the simplest method of dealing with the problem of MPs’ meal allowances would be to introduce legislation to make the additional costs allowance tax free but to state that… MPs would not be able to claim against tax any expenditure on items eligible for the additional costs allowance… in excess of the Fees Office ceiling’.
Greater scrutiny
However, as there were obviously going to be presentational problems, the Revenue was instructed to provide a statistical analysis of claims exceeding the allowance ceiling and the Fees Office was instructed to report on action it planned to take to improve its scrutiny of expense claims.
The die was now cast; all that remained was to set the stage for the presentation of the changes in a manner that would convince the Prime Minister, satisfy MPs and yet not provoke too much public interest or awkward questions.
David Stopforth FTII, FCCA, PhD is Professor of Revenue Law in the Division of Accounting and Finance, Stirling Business School, University of Stirling. A second article on MPs’ expense claims will appear in a future of Taxation.
