Two dozen MPs since 2016 have been paid for second jobs through personal service companies they have set up, a Sky News investigation has found.

It means these MPs can exploit the fact that tax rates on companies differ from those on employment, enabling them to reduce their tax bills on second jobs.

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

Lib Dem leader Sir Ed Davey is one of 12 MPs to have received earnings from second jobs via companies owned partly or solely by their spouse, an arrangement accounting experts have said is often used to reduce taxes.

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Sir Ed and his wife also appear to have taken advantage of a loophole that allows reduced tax rates to be paid on money taken out of a company when it’s closed. More than £100,000 was sitting on the balance sheet of the company through which Sir Ed received payment for five second jobs held between 2017 and 2022, before the company was liquidated earlier this year.

Ex-cabinet minister Ranil Jayawardena, another to receive earnings from second jobs via a company owned with his wife, claims to have been doing two separate roles with the same company at the same time between 2017 and 2020 – an arrangement that may have afforded him further tax benefits.

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

Use of personal service companies enables taxes to be minimised

By setting up companies through which they offer their consultancy services – known as personal service companies – MPs pay corporation tax and dividend taxes on their non-parliamentary work, rather than income taxes, as they do on their MP salary.

In receiving money this way, some MPs can reduce their tax rate by around 5% on their additional jobs, depending on how much they’re earning.

But using these companies enables additional ways through which taxes can be minimised.

Giving spouses or other family members a salary or shares in the MP’s business can further reduce tax bills. If the family member is a basic rate taxpayer, they would pay tax rates almost four times lower on dividends received from the company than an MP, who are higher rate taxpayers.

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

But perhaps the biggest tax benefit when using a personal service company comes when earnings from second jobs are built up in the company before it is closed down and liquidated.

Under these circumstances, tax rates on additional earnings for MPs – who pay 40% tax on the upper end of their £84,144 MP salary – can be as low as the 10% capital gains tax rate paid on assets when a company is closed.

Three MPs have liquidated companies through which they were receiving their second earnings and two of these – Sir Ed Davey and Robert Butler – had significant amounts of cash on the balance sheet when the companies were closed.

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Energy Destinations Ltd, the company Sir Ed’s earnings were paid into, was closed in June this year with £103,717 of assets distributed upon its liquidation. The company was previously transferred from Mr Davey to his wife in 2017, but he continued to receive more than £350,000 in payments from second jobs into 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 companies as a means of obtaining relief.

The tax break can still be used however as long as the business owner doesn’t open a new company within two years doing similar work.

Ian Dickinson, tax director of UHY Hacker Young, said of people taking active steps in this way to reduce taxes on their work:

“It’s within that parameter of tax avoidance, which is perfectly legal, but is it fair?

“If you’ve got people exploiting the rules trying to pay as little as possible, using convoluted structures, that are well known but beyond the remit of the normal person, it just doesn’t sit right.”

Experts have criticised the wider system that encourages these arrangements. Judith Freedman, emeritus professor of taxation law and policy at the University of Oxford said: “We have a poorly designed tax system. We should be taxing people operating through different legal forms in far more similar ways.

“There’s the fact that you can convert your labour income into capital. That’s a problem. There’s the fact that you can income split. That’s a problem. And there’s the fact that you don’t pay any national insurance on dividends. That’s a problem”.

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MPs run the risk of breaking the rules

A spokesperson for Sir Ed said: “All of Ed’s business was entirely in keeping with the rules, and he has been fully transparent about it.

“Money that his wife earned also went into the company. All capital gains tax due on the proceeds will be paid.”

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

While the use of personal service companies to manage second-job earnings is legal, there is one area where tax experts have told Sky News that some MPs could be running the risk of breaking rules.

It relates to whether MPs’ second jobs are considered consultancy roles or whether they are deemed employment by a company. If the latter, additional taxes are likely due when receiving earnings through their own companies.

Three MPs – Mark Pritchard, Ranil Jayawardena, and Ed Davey – have taken on jobs that HMRC considers employment – non-executive directorships – while still receiving fees for these jobs through their companies.

It is possible to make a voluntary declaration to HMRC to ensure the correct taxes are paid on these jobs, but experts said that people typically rarely do so when receiving fees via a company. In these circumstances the company is an “unnecessary structure”, according to employment status expert Rebecca Seeley-Harris, although there is no evidence to suggest these three MPs have not made the required voluntary declaration.

‘A dangerous operation’

Former environment secretary Mr Jayawardena had a particularly unusual arrangement, where he appears to have done two different jobs for the same company at the same time between 2017 and 2020.

His personal service company received share options valued at £20,000 per year from pharmaceutical company PepTCell Ltd in return for providing “a non-executive director for approximately four days a year”, according to his entry in the register of members’ financial interests. Companies House filings confirm Mr Jayawardena was a director of PepTCell.

But Mr Jayawardena also declared a second role as a strategic consultant with PepTCell at the same time, with his own company again receiving share options valued at £20,000 in return for four days work per year.

Ms Seeley-Harris noted that an arrangement like this would need to have clear delineations to ensure there weren’t tax issues, but that the nature of the two roles made this difficult.

“If you’re both a consultant and a non-executive director (NED), the consultant work has to be an entirely different piece of work. So you can’t give strategic advice to a company that you’re a non-executive director of, where your job as an NED is to give strategic advice.

“I’m surprised in this day and age that the accountants aren’t advising them that they can’t do that, it’s such a dangerous operation.”

Mr Jayawardena didn’t respond when asked for comment by Sky News.