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MPs, tax avoidance and sub-clause 554E (8) of the Finance Bill

Growing controversy is being caused by sub-clause 554E (8) of the Finance Bill which contains a specific exemption for MPs from the ‘disguised remuneration’ legislation in the Bill.

The possibility of MPs being affected by these proposals was – so far as I am aware – first highlighted by CIOT Tax Policy Director John Whiting in evidence to the Treasury Committee on the Monday after the Budget:

“One points to the disguised remuneration because that is a particularly complex thing trying to tackle a complex area, but when, on one reading - if I'm allowed to say this - it could affect MPs and their expenses and how they are assessed, you begin to wonder whether we are getting over-complex rules and not really thinking them through properly.”

The reason MPs could have been affected is that they are paid by a third party – the Independent Parliamentary Standards Authority (IPSA) – and this is how the Government has chosen to define ‘disguised remuneration’ for the purposes of the anti-avoidance legislation.

By the time the Bill was published, a little sub-clause had been added to the legislation stating that it would not apply to payments by IPSA to MPs. This has been written about in Accountancy Age (“One rule for MPs, 59 pages for everyone else”) and the Telegraph (“Why should MPs be exempt from new law to block tax avoidance?”) and, today, a Conservative MP has said he is furious about the exemption and revealed that he has written to the Chancellor asking him to remove the provision (“Steve Baker MP: Who drafts Government bills?”).

So is the sub-clause unreasonable?

The legislation was not intended to cover payments by IPSA to MPs. No-one is suggesting MPs are paid this way to avoid tax.

But the fact that the parliamentary draftsman felt that they might be caught by the legislation is indicative of the wider problem the CIOT have highlighted of it unintentionally catching legitimate arrangements which have nothing to do with tax avoidance as well the tax avoidance schemes that are its (entirely legitimate) target. As we said in our written evidence to the Treasury Committee (now available on the Treasury website):

“The proposals are moving to taxing the form (involvement of a third party) rather than the substance (reward or loan in connection with the employment) of the arrangement; they override the existing benefits-in-kind code and could potentially impact in mainstream situations involving, eg share plans, pension schemes, relocation assistance, earn-outs and international assignees.”

The legislation has been improved since the draft clauses were published in December, and the Government deserve credit for this. Clearly the intention is that third party arrangements that do not constitute tax avoidance, such as arrangements involving some (though not all) group companies, are not caught. But the fact that the draftsman was still not sure that it would not catch MPs shows the difficulties inherent in this kind of approach.

And we remain concerned that if discretion is left to HMRC to decide what arrangements are the right side of the line and which are not then the position will always be uncertain and subject to a change of HMRC view. Many employers will want clearance from HMRC that they are not caught inadvertently in the new rules.

The CIOT continues to take the view that it would be better to frame the law around the substance (the financial gain from an arrangement which reduces tax due) rather than the mere existence of a third party payment structure (alongside a list of exemptions).

George Crozier
External Relations Manager
Chartered Institute of Taxation
Tuesday 12 April 2011


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