SE65970 - Tax treatment of Local Government Councillors and Civic Dignitaries: DETR guidance - Part Two - taxation of members' allowances and expenses

[Note: for councils in England and Wales this guidance supplements and amplifies the basic guidance at SE65920 to SE65950. See also:

Part One - Members' Allowances - England and Wales (seeSE65960)

Part Three - Members' Allowances and the Social Security System (seeSE65980)]

'PART TWO

Taxation of Members' Allowances and Expenses

1. Introduction

Scope of Part Two

52. This part provides general guidance on the tax treatment of members' allowances.

It covers:

• the relevant tax rules
• which allowances are taxable
• the treatment of expenses incurred by a member carrying out approved duties which are reimbursed by the authority
• what tax relief is available for expenses which the authority does not reimburse.

There is also a short section covering civic dignitaries.

This guidance is not binding and does not affect any member's right of appeal. Nor is it a full statement of the law as it applies to members' allowances and expenses. Members should refer to the relevant legislation where appropriate.

The tax charge

53. For tax purposes council members and civic dignitaries are treated in the same way as any other individual who holds an office or is an employee. Emoluments received from an office or employment are chargeable to income tax under Schedule E. Tax is deducted under PAYE. 'Emoluments' has a wide meaning - it includes salaries, fees, wages and any other profits received from an office or employment. It also includes allowances paid to cover expenses incurred in carrying out the duties of an office or employment unless these allowances do no more than reimburse expenses actually incurred which are deductible for tax purposes.

Special rules apply where an individual receives a financial loss allowance. This is not an emolument and cannot therefore be taxed under Schedule E.

Relief for expenses [Note: see SE65950 for 1998/99 and later years]

54. Under the Schedule E expenses rule (Section 198 Income and Corporation Taxes Act 1988) office holders and employees can get a tax deduction for:

• travelling expenses necessarily incurred in the performance of their duties of the office or employment.
• any other expenses which are wholly, exclusively and necessarily incurred in the performance of the duties.

55. Essentially there is a series of conditions each of which must be satisfied before a deduction can be given. The conditions are:

• the expenditure is actually incurred. So, for example, if a councillor or civic dignitary is away overnight on council business but finds it more convenient to stay with friends rather than incur hotel bills, there may be no expenditure to set against any allowance received so no tax relief would be due.
• the expenditure must be incurred in the performance of the individual's duties. This means that, to be deductible, the expense must be incurred in actually carrying out the duties of the office. It is not sufficient that an expense is simply relevant to, or incurred in connection with, the duties of the office. In particular, no expense will be allowable which merely puts the office holder in a position to perform the duties of that office.
• the expenditure must be such that any holder of the office would be necessarily obliged to incur it. The fact that an office holder is encouraged, expected or required to incur a particular expense is not conclusive evidence that it is 'necessarily' incurred. Also, the expense must stem from the requirements of the job itself, not from the personal circumstances of the office holder. Strictly, the 'necessity test' will be satisfied if (and only if) each and every person holding the office would have to incur the expenditure.
• expenditure on anything other than travel must also be incurred wholly and exclusively in the performance of the office holder's duties. For example, it may be necessary for a councillor to use home telephone in the performance of his or her duties - but where the same facility is available to be used also for personal calls, the rental costs are not incurred exclusively in the performance of duties so no deduction is due (see paragraph 74(iii) below).

In addition, a deduction may only be given if an actual expense has been defrayed out of the emoluments of the relevant office. If, for a particular year of assessment, there are insufficient emoluments from the office to cover the expense claimed, no deduction can be given against any other income, including income from other offices or employments. This means that where a councillor or non-councillor receives a financial loss allowance he or she cannot claim a deduction for expenses which are not reimbursed by the council. Similarly, where a councillor has renounced allowances to which he or she would otherwise be entitled, no expenses may be claimed as a deduction.

These tests have been interpreted very strictly by the Courts over the years. Each condition must be met fully before a deduction is due.

56. From 6 April 1998 the basis of relief for employers' travelling expenses changes. [Note: the text here refers to the Finance Act 1997 version of the new travel rules, which were never put into effect. The Finance Act 1998 version, set out in Booklet 490, applies to councillors and civic dignitaries in the same way as to any other employee or office holder.]

2. Members' allowances

Members' Allowances which provide Remuneration

(I) Councillors on main and 'secondary' authorities

57. Allowances taxable under Schedule E include the following:

• Basic allowance
• Attendance allowance
• Special responsibility allowance
• Conference attendance allowance

(ii) Parish, Town and Community Councillors

58. Allowances taxable under Schedule E include the following:

• Attendance allowance
• Conference attendance allowance

59. Financial loss allowance is not taxable under Schedule E but is taxable under Schedule D if the councillor is self-employed and the allowance takes the place of profits which could have been earned or additional business costs which would have been avoided if the councillor had not devoted his or her time to approved duties.

(iii) Non-councillors

60. The tax rules for financial loss allowance paid to non-councillors are the same as for parish, town and community councillors set out in paragraphs 58 and 59 above.

(iv) Renunciation

61. Renunciation of allowances which provide remuneration will mean that there will be no liability to income tax, but it will also mean that no expenses can be claimed as a deduction (see paragraph 54) and affect entitlement to social security benefits (see Part Three, paragraph 100).

Travel and subsistence allowances [Note: see SE65950 for 1998/99 and later years]

62. As elected representatives, councillors are accepted as normally having two places of work - the council offices and in their electoral area. Often councillors need to use their own homes to see constituents. Where a councillor does use his or her own home to undertake representative duties on behalf of the council, an allowance paid for travel between home and the council offices or some other place on council business is not taxable provided that any mileage allowance paid does not include an element of profit.

63. If it is not necessary for a councillor routinely to see constituents at home, any allowance paid for travel between home and the council offices will be taxable in the normal way. The fact that a councillor chooses to do some work at home - for example reading council papers or completing correspondence - does not make that home a distinct place of work for the purpose of claiming tax relief on travel expenses.

64. For non-councillors, any allowance paid for travel between home and the council offices will be taxable unless he or she can show that home is itself a place of work in the real sense for that office - that is to say any holder of that office is necessarily obliged to perform substantive duties there.

65. For the treatment of mileage allowances paid for travel on council business generally, see paragraph 74(i) below.

66. Day subsistence allowances are taxable unless they are paid in respect of the extra expense of subsistence incurred as a consequence of travel on council business away from the council offices.

67. Overnight subsistence allowances are not taxable provided there is no element of profit. A profit could arise, for example, if someone travelling on council business stays overnight with friends or relatives rather than in a hotel.

Dispensations

68. A 'dispensation' is a notice given by an Inspector of Taxes to an employer if the Inspector is satisfied that expense allowances paid or benefits provided by the employer would be fully matched by an expenses deduction, with the result that no tax liability arises. A dispensation relieves the employer of the need to report details of the particular expenses payments or benefits provided to the Revenue or (for 1996/97 onwards) to the employee or office-holder. And the employee or office-holder need not show them in his or her tax return if they get one.

69. The dispensation does not exempt from tax items upon which the taxpayer would otherwise be taxed. The aim is to eliminate unnecessary administrative burdens where no tax will be due, not to reduce the tax paid. Dispensations are reviewed from time to time and can be revoked. More advice on dispensations and an application form can be obtained from any Tax Office.

70. Dispensations are not appropriate for 'round sum' expenses allowances. But where an allowance is clearly intended to do no more than reimburse expenses actually incurred in carrying out the employee's or office-holder's duties, and the expense was incurred only because of the office or employment, the Inspector may be prepared to authorise payment of the allowance without deducting PAYE. Before doing this, the Inspector will need to be satisfies, however, that the allowance is at a reasonable scale and is clearly intended to do no more than reimburse expenses actually incurred.

71. Whenever there is no dispensation in operation authorities should consider whether or not PAYE should be applied to the allowances they pay. The Inspector will give guidance on this point.

72. Where a parish, town or community councillor or non-councillor member elects to receive financial loss allowance no liability under either Schedule E or Schedule D will arise on the payment of travel and subsistence allowances or conference travel and subsistence allowances.

3. Relief for expenses

73. Where an authority does not reimburse all expenditure incurred members may claim the excess as a deduction from their emoluments received from duties on behalf of the authority provided the expenses satisfy the rules in paragraphs 54 and 55 above. No deduction can be claimed:

• where entitlement to all allowances has been renounced (see paragraph 61);
• where a member could use services provided by the authority, for example, postage or stationery but incurs expenses because he or she chooses not to do so;
• for expenses incurred for political purposes, for example electioneering;
• for expenses incurred on the cost of newspapers, books and periodicals of general interest. (Where however a magazine or journal is obtained by a member because he or she subscribes to a professional body or learned society which is approved under Section 201 ICTA 1988 and the activities of this body are relevant to his or her work as a member a deduction may be given for the subscription);
• for donations to charity (unless these are made under a payroll giving scheme or by way of gift aid).

74. Typical deductible expenses which may be claimed include

(i) Travelling expenses

By public transport

The expenditure incurred is where it is not covered by an allowance for which the authority has a dispensation.

By car [Note: see SE65950 for 1998/99 and later years]

Members who use their own cars in the performance of their duties are normally paid an allowance to cover their costs. Normally, these payments are based on an amount per mile for the mileage travelled on council business but they can also be in the form of a lump sum or periodic payment. These payments are taxable to the extent that they exceed the motoring costs for which tax relief is due.

To simplify the taxation of motor mileage allowances the Inland Revenue operate an administrative arrangement known as the Fixed Profit Car Scheme (FPCS). Under this scheme, taxable profits are calculated on the amount that the authority pays over tax-free mileage rates which the Inland Revenue publish each year, usually in December to take effect from the following April. These rates are estimates of the average tax-allowable costs for a range of car engine sizes. Different rates apply above and below 4,000 miles of business travel.

Whether or not a taxable profit arises under the FPCS depends upon what allowances the particular authority pays to its councillors.

(ii) Postage and stationery

The actual costs wholly, exclusively and necessarily incurred in the performance of the duties as a councillor for which no allowance can be obtained from the authority.

(iii) Telephone

The cost of calls made wholly, exclusively and necessarily in the performance of duties as a member. No deduction can be given for any part of the rental of the telephone unless no private use is made of it. Any claim should be reduced by any non-taxable reimbursement made by the authority. Where that reimbursement covers the cost of the official calls no claim should be made.

(iv) Secretarial assistance

The costs of secretarial assistance incurred wholly, exclusively and necessarily in the performance of council duties, where such assistance is not provided by the authority. Any amounts claimed must be reasonable in relation to the member's allowances and to the assistance given. The Inspector may want to see supporting evidence for the claim.

(v) Hire of rooms

Where money is spent on the hire of rooms for 'surgeries' or public meetings, e.g. objections to planning applications. A claim cannot be allowed in respect of the hire of rooms for party political purposes.

(vi) Household expenses

Where additional household expenses are incurred (light, fuel etc.) relating to those parts of members' homes that are set aside solely for use for duties as members, the Revenue will accept a standard deduction of £120 per year (an amount agreed between the Association of Councillors and Inland Revenue Head Office) to cover this. Members claiming more than this amount will have to show the additional amount is fully justified by reference to the expenses deduction rules explained in paragraph 54 and 55.

(vii) Other expenses

Members with other expenses not covered by the above should itemise them on their Tax Return. The Revenue may require evidence and details of the expenditure.

4. Other points concerning a member's tax affairs

(Including new points arising form Self Assessment and related changes to the tax system for 1996/97 onwards)

Provision of benefits in kind etc.

75. Members who receive payments (including all allowances whether or not tax is paid on them) and benefits together totalling £8,500 a year or more (before any deduction for expenses) are subject to special rules. These require that details of all benefits and expenses not covered by a dispensation be reported to the Inspector on Forms P11D and a copy of the details be given to the member. (Any member who is in this position and who receives facilities from the council other than in cash should contact the local Inspector for advice.)

76. No tax charge arises on the provision - solely for use in the performance of the duties as a member - of office accommodation, secretarial assistance, stationery or other facilities of a similar nature at an authority's premises. But if the authority provides equipment etc., for use at home, full details need to be provided to the Inland Revenue on forms P11D because a tax liability may arise. (For 1996/97 onwards, a copy of the P11D details have to be provided to members as well.)

77. However, if it can be shown that the provision of the equipment is necessary for the performance of the councillors' duties, and that there are enforceable rules which prohibit using the equipment for private purposes, then a deduction may be available. Any councillor wishing to make such a claim should contact their Tax Office.

78. If an authority paid for a member to have a telephone installed at home any cash reimbursement for installation or any subsequent rental payments should be subjected to PAYE. If it is impossible to apply PAYE, for example because the authority pays British Telecom directly, the authority must give details to the Revenue after the end of each tax year. The member will then have to pay tax on the amount paid by the authority.

Operation of PAYE

79. Tax is collected under the PAYE system. The amount of tax deducted by the authority depends on the code number issued by each member's own tax office. It is open to any councillor to ask to have the PAYE code number adjusted to take into account expenses which are deductible for tax purposes. If the Inspector is satisfied with the estimate provided, the code number for the year will be revised and the matter finalised after the end of the tax year when the accurate information will be available. How this works depends on whether or not the member receives a tax return (see paragraphs 76 and 77).

These arrangements apply, for example to:

• the basic allowance
• attendance allowance
• special responsibility allowance
• any allowances payable to councillors in their capacity as civic dignitaries.

Procedure at the end of the tax year

80. Members who receive tax returns for 1996/97 onwards should include figures for all their income on their Self Assessment tax return. They will also include all claims they wish to make.

They should send their completed tax return back t their tax office by 30 September after the end of the tax year if:

• they want the Inland Revenue to calculate their tax bill for them and/or
• they wish tax (below £1000) to be collected through next year's PAYE code where practicable.

The deadline for sending back their tax return is 31 January after the end of the tax year.

The Inland Revenue will make any repayment due. If there is tax to pay, the member should pay it by 31 January after the end of the tax year.

81. Members who do not receive tax returns will have their tax checked by the Inland Revenue in the traditional way. They should send any claims to their tax office after the end of the tax year as now.

Further information

82. If members have any questions about the taxation treatment of their allowances they should contact their Inspector. Council Treasurers Departments are usually in a position to answer routine questions and to seek advice on a member's behalf.

5. Civic dignitaries

83. Like councillors, civic dignitaries are office-holders and the same tax principles apply to their allowances and expenses. In particular, to qualify for relief expenditure must meet the conditions of Section 198 ICTA 1988 - explained in paragraphs 54 and 55 above. The following paragraphs set out how the rules apply to particular circumstances affecting civic dignitaries.

Clothing

84. Expenditure on ordinary clothing worn at work is not incurred wholly and exclusively in the performance of the duties. Consequently no deduction can be given for expenditure by civic dignitaries on ordinary clothing.

85. Exceptionally, a deduction can be given for expenditure on clothing which is recognisably a uniform or part of a uniform and the office holder is required, as part of the duties of that office to wear it. [A useful test is whether someone wearing the clothing would be recognisable in the street as wearing the uniform of that particular office - just as a uniform identifies, say, nurses or policemen.] Expenditure on, for example, maintenance of a mayor's regalia would normally, therefore, qualify for a deduction.

Donations

86. If a civic dignitary is given an allowance and the freedom to spend that allowance largely as he or she sees fit, it is extremely unlikely that any such expenditure would be deductible. There would be an element of personal choice - and so expenditure would not be 'necessarily' incurred. This would apply to charitable donations as much as to any other use to which the money was put.

87. The tax position may, however, be different if there is a special fund set on one side, out of which agreed charitable donations are made. In these circumstances, when the funds are dealt with by the civic dignitary in a fiduciary capacity, it is possible that no 'emolument' arises. Each case will, however, depend on the precise arrangements in force.

Entertainment

88. If a civic dignitary is given an entertainment allowance which he or she has freedom to spend in any way he or she sees fit, the allowance is assessable to tax as part of the emoluments of the office - except to the extent that the expenditure met out of the allowance qualifies for a deduction. Only entertaining expenses which are incurred wholly, exclusively and necessarily in the performance of the office holder's civic duties will qualify. No deduction is due for the cost of entertaining which is incurred primarily for personal or political reasons even if some civic business happens to be discussed.

89. As with donations, the tax position may be different if there is a special fund set on one side out of which entertainment is paid for in accordance with the council's wishes as to the amounts spent and persons to be entertained.

Conclusion

90. Local authorities sometimes ask how their systems can be structured so that no tax liability arises for their civic dignitaries in respect of expenses payments made to them. The paragraphs above should indicate that a system which in practice provides for reimbursement only of those expenses actually incurred wholly, exclusively and necessarily in the performance of the duties of the office is unlikely to give rise to tax consequences. In addition, it is likely that a dispensation (see paragraphs 68 and 72 above) could be agreed with respect to such a system - eliminating reporting requirements.'