Teresa Hunter: Wrongly claimed expenses can bring the taxman to your door

Published on Saturday 16 May 2009 14:21

MPs WERE last week falling over themselves to repay expenses as the runaway Westminster gravy train hit the buffers. Some had made genuine mistakes which they wished to put right, while others were reacting to the angry and disappointed response they had received from their constituents.

However, some writing out cheques may have done so partly out of concern that their affairs could now come under the spotlight of the tax officials from HM Revenue & Customs.

Once aware of tax irregularities, HMRC has investigative powers which can result in heavy financial penalties and even jail sentences. And unlike normal justice, where someone is innocent until proven guilty, the onus is on the taxpayer to prove their innocence.

Head of tax at PricewaterhouseCoopers, Edinburgh, Valerie Smart explains: "Investigations by the tax authorities are not pleasant experiences. They can require you to produce every piece of documentation going back five years and ten months, and they can fine you 3,000 per missing document or receipt. More importantly, if those documents are missing you cannot claim that an expense was legitimately incurred."

But it goes further than that. If the inspectors come to your home and decide that your lifestyle cannot be justified by the version of your income they have received, then they will require you to justify how you have become accustomed to living at that standard. Again the onus is on you to prove that you do not have other sources of income.

Ms Smart says: "Often it is simply not worth doing anything which will attract the attention of the Revenue. People have to think seriously whether they are prepared to risk their good reputation for the sake of pushing the tax rules to the limit."

Finally, any taxpayer exploiting the capital gains tax loopholes by repeatedly "flipping" between which is their main home and which is their secondary residence should almost inevitably come under the scrutiny of the taxman.

Ms Smart advises: "The CGT on second homes concession was introduced to help those having to move in difficult markets, where for a short period they might own two houses, because they could not sell one.

"However, if I have a client who comes in and says that they are doing up a property to sell and this is the third one they hope to sell this year, I warn them that not only will they not qualify for any CGT relief, but that the profit on the transaction could be treated as income, and taxed accordingly."

According to HMRC, MPs are not taxed any differently than the rest of the public.

The one exception is the controversial Personal Additional Accommodation Expenditure Allowance, which is supposed to reimburse them for the cost of having to live part of the week in London. They can currently claim up to 24,000 towards the cost of mortgages, rent, maintenance and cleaning, and this sum will be entirely free from tax.

On top of this, the accusation is that some have misused the allowance, claiming for items from manure for the garden to chandeliers and swimming pool repairs.

Rows over the extent to which MPs broke the House of Commons rules are likely to rage on until the general election. However, it is perfectly possible that the HMRC may take action even sooner, where it deems tax exemptions have been claimed inappropriately. The public will also be watching closer for it to pursue cases which look like blatant infringement of tax regulations.

So what can we legitimately claim as work expenses, and what behaviour might bring the tax inspectors knocking at your door?

"Wholly, necessarily and exclusively"

Employees can only claim tax exemption for expenses which are "wholly, necessarily and exclusively" related to their work. This means they cannot do their job without incurring this expense, and it must not relate to any other aspect of their lives. This may apply to compulsory professional subscriptions, for example.

The rules are slightly less onerous for the self-employed. They can offset any expense which is "wholly and exclusively" used for their work, but they do not have to prove that they could not do their job without it. Even so, claiming the relief is difficult.

A key case known as the Mallieu judgment involved a lady barrister who wanted to offset the cost of her work clothes, claiming that she never wore dark suits and stockings in her private life and only did so because she was forced to in order to attend court. However, the High Court ruled that the clothes weren't exclusive to her work, and her plea failed.

Travel expenses

Employees can normally expect their employer to reimburse their travel expenses, but they will require receipts to prove each trip was actually taken, even a short bus ride. Company cars are taxed as a benefit in kind on their private usage, according to their carbon emissions.

The self-employed can claim their travel expenses against their tax. However, they will not only need receipts but should take caution with the way they compromise business travel with private journeys. HMRC will, for example, closely scrutinise any business trips to Spain which coincide with two weeks in the sun.