Westminster accounts: Liberal Democrat leader and former Cabinet minister among ‘tax evaders’ MPs on second jobs | Politics news

[ad_1]

A Sky News investigation has found that twenty MPs since 2016 have been paid second jobs through the personal services companies they set up.

This means that these MPs can take advantage of the fact that corporate tax rates differ from those on employment, enabling them to lower their tax bills on second jobs.

This practice is legal and common in some industries, but some MPs appear to have taken additional steps to reduce their taxes on non-Parliamentary earnings.

The leader of the Liberal Democrats, Sir Ed Davey, is one of 12 MPs who have received earnings from second jobs via companies owned in part or wholly by their spouses, an arrangement that accountancy experts said is often used to cut taxes.

Find your MP using the Westminster Accounts tool

It also appears that Sir Ed and his wife took advantage of a loophole allowing reduced rates of tax to be paid on the money taken out of the company when it closed. There was more than £100,000 on the company’s balance sheet from which Sir Ed received payments for five second jobs between 2017 and 2022, before the company was liquidated earlier this year.

Former minister Ranil Jayawardena, another minister who receives earnings from second jobs via a company owned by his wife, alleged that he performed two separate roles with the same company at the same time between 2017 and 2020 – an arrangement that may have given him more tax advantages.

More on the Westminster Accounts

Sky News spoke to more than half a dozen tax and accounting experts who confirmed that while all payments are likely legal, MPs could use these methods to lower taxes on their earnings from second jobs.

Please use the Chrome browser for an easily accessible video player

1:18 pm SNP questions on Westminster accounts

The use of personal services companies makes it possible to reduce taxes to a minimum

By setting up the companies through which they provide their advisory services – known as personal service firms – MPs pay corporation tax and profit taxes on their non-parliamentary work, rather than income taxes, as they do on an MP’s salary.

When receiving money in this way, some MPs can reduce the tax rate by about 5% on their overtime, depending on how much they earn.

But using these companies allows additional ways in which taxes can be minimized.

Giving spouses or other family members a salary or stakes in the attorney’s business can further reduce their tax bills. If a family member is a basic rate taxpayer, they will pay nearly four times lower tax rates on dividends received from the business than an MP, who is a higher rate taxpayer.

Of the 24 MPs who use these companies, 12 list a family member as a shareholder or director.

But perhaps the biggest tax benefit when using a personal services company comes when profits accrue from second jobs in the company before it is closed and liquidated.

In these circumstances, the tax rates on additional earnings for MPs – who pay 40% tax on the top end of their £84,144 salary – can be as low as the 10% capital gains tax rate paid on assets when the business closes up.

Three MPs liquidated the companies by which they were receiving their second dividends, and two of these – Sir Ed Davy and Robert Butler – had large amounts of cash on the balance sheet when the companies were closed.

Click to subscribe to Sky News Daily wherever you get your podcast

Energy Destination Ltd, into which Sir Ed’s dividend was paid, closed in June this year with an asset distribution of £103,717 upon its liquidation. The company was previously passed from Mr Davey to his wife in 2017, but he continued to receive more than £350,000 in payments from second jobs to the company until earlier this year.

“It’s perfectly legal, but is it fair?”

HMRC introduced rules in 2016 to stop the practice of opening and closing businesses as a way to obtain relief.

The tax credit can still be used as long as the business owner does not open a new company within two years to do similar work.

Ian Dickinson, Director of Taxes at UHY Hacker Young, said of people who are actively taking steps in this way to lower taxes for their work:

“It’s within the tax evasion standard, which is perfectly legal, but is it fair?

“If you have people who exploit the rules and try to push as little as possible, using complex structures, which are well known but outside the purview of the average person, it’s just not right.”

Experts have criticized the broader system that encourages these arrangements. We have a poorly designed tax system,” said Judith Friedman, emeritus professor of tax law and policy at the University of Oxford. “We should tax people who work through different legal forms in much more similar ways.

“There’s the fact that you can convert business income into capital. That’s a problem. There’s the fact that you can split income. That’s a problem. And there’s the fact that you don’t pay any National Insurance dividends. That’s a problem.”

Read more: SNP demands ‘radical and by-product’ reform of MPs’ offshore earnings ‘Next big scandal’ – informal groups of MPs awarded £20m from offshore organizations since 2019

Please use the Chrome browser for an easily accessible video player

6:58 Could all-party parliamentary blocs be the “next big scandal”?

MPs risk breaking the rules

A spokesperson for Sir Ed said: “All of Ed’s work was fully in line with the rules, and he was completely transparent about that.

“The money his wife earned also went into the company. All capital gains taxes due will be paid on the proceeds.”

People close to Sir Ed were also keen to point out that the LDP leader’s earnings helped fund the care of his disabled son.

While using personal services companies to manage second job earnings is legal, there is one area where tax experts told Sky News some MPs could risk breaking the rules.

It is about whether MPs’ second jobs are considered advisory roles or whether they are considered hiring by a company. If it’s the latter, additional taxes are likely due when earnings are received through their own corporation.

Three MPs — Mark Pritchard, Ranil Jayawardena, and Ed Davey — have taken jobs that HMRC considers hiring — non-executive directors — while still receiving fees for those jobs through their companies.

It is possible to file a voluntary declaration with HMRC to ensure that the correct taxes are paid on these jobs, but experts said people rarely do so when receiving the fee via a business. Under the circumstances, the company is an “unnecessary structure”, according to employment situation expert Rebecca Seeley Harris, although there is no evidence to suggest these three MPs did not make the required voluntary declaration.

Please use the Chrome browser for an easily accessible video player

4:17 “Preventing deputies from working in second jobs”

serious operation

Former Environment Minister Mr Jayawardena had a particularly unusual arrangement, as he appears to have held two different jobs for the same company at the same time between 2017 and 2020.

His personal services company received stock options worth £20,000 a year from pharmaceutical company PepTCell Ltd in exchange for providing a “non-executive director for about four days a year”, according to his entry in the register of members’ financial interests. Companies House filings confirm that Mr Jayawardena was a director of PepTCell.

But Mr Jayawardena also announced his second role as a strategic advisor with PepTCell at the same time, with his company once again receiving £20,000 worth of share options for four working days a year.

Ms. Seeley-Harris noted that such an arrangement would have to have clear boundaries to ensure there were no tax issues, but the nature of the two roles made this difficult.

“If you are a consultant and a non-executive director (NED) at the same time, then the job of an advisor should be an entirely different business. So you cannot give strategic advice to a non-executive director, where your job as a NED is to give strategic advice.

“I’m amazed in this day and age that accountants don’t advise they can’t do this, it’s such a dangerous process.”

Mr Jayawardena did not respond when asked for comment by Sky News.

[ad_2]