Andrew Goodall

CGT: private residence relief claimants under fire

HMRC guidance spells out how longstanding exemption written into tax law saves capital gains tax

Tax experts have warned that CGT private residence relief is likely to be curtailed after several members of parliament came under fire for "flipping" the designation of their main residence in order to maximise parliamentary expense allowances and save capital gains tax. A number of MPs offered to pay CGT that they were not liable for, even though they denied that they had done anything wrong. There has been fierce and widespread criticism of the practice, which the prime minister has suggested is "unacceptable". The recent revelations may prompt HMRC to reconsider its interpretation of the provisions in Taxation of Chargeable Gains Act 1992, "even before the law is changed", said Mark Lee, chairman of the Tax Advice Network. Mark McLaughlin, in an editorial column at TaxationWeb, said:

"Some people, it would seem, consider the tax rules which allow for CGT savings in respect of second homes to be overly generous and open to abuse. This point will almost certainly not be lost on HMRC. It would not surprise me to see claims for [PRR] coming under much closer scrutiny in future for those with second homes. Nor would it surprise me if the CGT relief rules are changed very soon to make them somewhat less generous."

Richard Curtis of Taxation magazine asked whether claiming the relief along with a related "lettings relief" amounted to tax avoidance, tax evasion or tax planning:

"Acceptable or unacceptable? And does it make any difference if you are a government minister, junior minister, shadow minister, employee of HMRC, professional adviser, television celebrity? ... Answers on a postcard please because I am now totally confused as to who may take advantage of such planning (or avoidance or evasion depending on your point of view) and when."

The law and HMRC guidance on this relief is explicit. Private residence relief, including the 36-month "final period exemption", was passed by Parliament long ago. But we can expect change, and soon.

The current issue of Tolley's Practical Tax newsletter (3 July) has more on this and other developments.

MPs’ expenses and the ethics of tax avoidance

This caught my eye. The Telegraph has quoted Bill Cash MP as saying: "What is lawful is appropriate." Oh dear. Cash has serious questions to answer, David Cameron has said following the disclosure that "he claimed more than £15,000 in taxpayer-funded expenses to pay his daughter rent for her London flat".

There are parallels between the MPs' expenses scandal and the tax avoidance debate. No doubt some of the MPs who have been criticising businesses for acting outside the spirit of the law are now suspected of bending their own rules on expenses.

The BBC News website's City diarists are enjoying "a little peace and quite (sic) as attention is still focused on MPs and their expenses and not on the City". "Anthony" has observed that:

"People in the City approach the expenses issue in a rather pragmatic way. City firms have whole departments dedicated to finding a way of reducing tax liabilities in a legitimate way. They do not question the moral aspect of what they prefer to call tax planning. Applying that logic to MPs' expenses and the view in the City would be that they were acting within the rules and the rules were deliberately lax, which indicated that this was a reasonable way to supplement their income without incurring the voters' wrath about an old fashioned pay rise. In the City morals do not come into it which is probably why so many people outside the City detest the way we operate."

I wonder whether that's a fair assessment, or representative of most City workers' views.

[Update 30 May: See this earlier post on the difference between "tax planning" and "tax avoidance".]

MPs’ expenses: a statement from Cafod director Chris Bain

Cafod has published on its website a detailed statement from Cafod director Chris Bain in response to a recent Daily Telegraph article about the expenses of Paul Goggins MP. His statement does not appear to have been picked up by the Telegraph or any other major national paper as I write. Why I am linking to this? As a taxpayer and tax journalist I am, as I have said, outraged by the behaviour of some of our MPs. But it is of course important, especially in the present atmosphere, that MPs and others who may be cited in news stories have the opportunity to explain their position and, where necessary, set the record straight. As a Cafod schools volunteer I was particularly interested in this story. Chris Bain has set out his position and concluded by saying: "I hope that the above explains that Paul Goggins and I acted in good faith and that we will make good anything which is considered inappropriate."

HMRC’s tax guidance for MPs and ministers

David Grossman at the BBC's Newsnight seems to have his finger on the MPs' tax and expenses button, as Mark Lee mentioned here. In this video, posted last week, Grossman illustrated how some MPs have been able to save capital gains tax on their second homes. The CGT exemption is set out clearly in the legislation, and HMRC guidance to MPs (published by Newsnight) includes this statement:

"If you have more than one residence you can choose which one is to qualify for the exemption from capital gains tax. It does not have to be your 'home' for the purposes of [the MPs' additional costs allowance] and travel."

HMRC adds that:

"You can change your choice at a later date ..."

All very helpful, well known to tax advisers and hardly controversial until now. Suddenly the rules seem rather too generous, and people are starting to ask why.

On expenses, the HMRC guidance also seems perfectly clear. A list of items that are not allowed as a deduction includes:

"Accountancy fees incurred in the preparation of the self assessment tax return or related expenses claims."

That's the tax position. The really interesting question, though, is why on earth the taxpayer should be expected to pay a minister's fees for personal tax advice. David Cameron has said, according the Telegraph:

"It beggars belief. If any Conservative MP has used an accountant to do their personal tax return and has claimed that off the taxpayer I will make them pay that money back. They ought to pay that money back, it is completely wrong."

Expenses, personal tax advice and vilification of MPs

I was back at work yesterday after a fortnight's holiday that began on day two of the MPs' expenses scandal as revealed by the Daily Telegraph. Now I need another holiday. I am outraged, of course, by the behaviour of some of our MPs, and I worry about the effect of the scandal on our already weak democracy. If this "political earthquake" leads to more transparency and accountability, then some good will have come out of it. Scandal is the right word – even Jack Straw, the justice secretary, used it several times in a radio interview yesterday.

But there are limits and it would be completely wrong and dangerous to vilify politicians generally. As Joan Smith as pointed out, most of our elected representatives have not done "anything terrible". The danger is that "in this uniquely poisonous atmosphere, years of conscientious public service count for nothing".

There are a few important tax angles here, with possible implications for all taxpayers. I trust we can expect HM Revenue and Customs to conduct a thorough investigation into MPs' tax returns – including those of government ministers whose fees for personal tax advice have been funded by the taxpayer. More on this soon. But I'm going to see MPs' scrutiny of the current Finance Bill in a new light, I think.