Peter Harrup of PKF examines the wider implications of the MPs expenses scandalIN the last few weeks, MPs may have been writing cheques and returning expenses because they fear for their jobs or simply as an act of repentance.

Peter Harrup of PKF examines the wider implications of the MPs expenses scandal

IN the last few weeks, MPs may have been writing cheques and returning expenses because they fear for their jobs or simply as an act of repentance.

However, some MPs will also be aware that there is a potential tax liability and penalty due on the amounts they have claimed.

The rules for all MPs' expenses are set out in the “Green Book” and this makes reference to the standard “wholly, exclusively and necessarily” test for assessing the validity of an expenses claim. However, it is left to MPs to ensure that all expenses claimed meet that test.

The recent epidemic of altruism amongst MPs has seen many repay expenses they had claimed by mistake, so it seems likely that they had also made a looser interpretation of the test than HM Revenue & Customs (HMRC) would have.

Being charitable, this can be a complex area and one in which a wide range of businesses make mistakes. However, I hope that HMRC has always taken the sort of keen interest in MPs' reimbursed expenses that it has for private sector employees. If there is to be a parliamentary examination of MPs' expense claims for the past four years as suggested, a similar exercise on their tax returns seems sensible - if only because those MPs repaying expenses may now be entitled to tax refunds.

For most of us, the tax rules for expenses are particularly demanding, especially if you are an employee: to be exempt from tax, expenses reimbursed to an employee must have been incurred wholly, exclusively and necessarily in the performance of the employee's duties. Tax case law has established some very tight parameters for this definition. For example, a train journey for work purposes is often allowable, but the cost of a newspaper to read on the train is likely to be taxable if reimbursed: most employers pay the tax on such expenses for their employees through the dispensations system.

MPs are on less shaky tax ground when it comes to Capital Gains Tax on their second homes. The tax rules for an individual's main residence have evolved over a number of years to give a fair result in different situations and there are a number of exemptions and options that can be used perfectly legally to reduce an individual's tax charge on selling their former home.

For example, there is a rule that exempts a proportion of the gain made on an individual's former main residence relating to the final three years of ownership of the property - regardless of whether or not the individual lived in the property during those three years. This exemption is particularly useful where an individual has to move home but cannot sell their former home immediately - quite likely in the current market.

I do hope that a knee-jerk reaction to these scandals does not result in all home owners losing out on valuable tax breaks already used by some MPs. However, simpler rules on tax deductible expenses would probably make life easier for most businesses.