Rees-Mogg loans - Have Labour bagged the elephant?
Updated: Mar 18, 2022
So a journalist for the Mail on Sunday said that Jacob Rees-Mogg may have broken the rules by not declaring cheap Director’s loans. Loans are not generally declarable, otherwise the Register of Members’ Interests would be full of mortgages and car loans. A loan is not income. The reason it is reportable is that it is cheap.
If you buy a car from the car company you work for you don’t need to pay tax on its receipt. If your firm subsidises you 75% of the cost it will become a taxable benefit. So the loan is not a problem here, it’s the price, or rather the interest rate. If your firm gives you an interest free loan it could be a taxable benefit, if you simply take a loan from your firm that is also offered to the general public, it isn’t. You get the picture!
Following the cheap Director's loan allegations in the article, Angela Rayner has reported Jacob Rees-Mogg to Kathryn Stone, the Parliamentary Commissioner for Standards. The loans were advanced from Saliston Limited, a company he owns 100%. Kathryn Stone has now begun her investigation, and this is the entry on her website:
So this is "Category 1" (Employment and earnings) from the Register of Members' Interests:
"Any of the following received as a director or employee or earned in any other capacity:
a) Salaries, fees and payments in kind; gifts received in recognition of services performed;
b) Taxable expenses, allowances and benefits such as company cars;
c) Redundancy and ex gratia payments;
d) Income as a member of Lloyd's; and
e) Payments for opinion surveys (unless they fall below the registration threshold)."
As above, a "cheap" loan would be captured in b) because it is a taxable benefit. Not only would Mr Rees-Mogg have to pay tax, but he would also have to declare it in the Register of Members' Interests, which he has not.
OK, but how do we know the loan is 'cheap'? Who decides? There is a rate, known as the official rate, which is set by Treasury Order, and published by HMRC. This is the rate that determines whether a loan is at a preferential rate, and therefore a taxable benefit.
The loans in question here ran from tax year 2017/18, 2018/19 and 2019/20 - so the 2.50% rate applies throughout. Receiving a Director's loan at or above that rate, no problem, anything below 2.50% is a taxable benefit, and you pay income tax on the difference.
Anna Mikhailova broke the story for the Mail on Sunday here. This is key:
"The £6 million he took in loans includes £2.94 million in 2018, £2.3 million the following year and £701,513 in 2019-2020, Companies House documents reveal.
In the first year he paid no interest, in the second he paid £46,915 and in the final year £2,030 – £48,945 in interest over three years, equivalent to a rate of 0.8 per cent."
So £2.94million + £2.3million + £701K = £5.901million. Total interest £48,945, interest rate 0.82%. Anna Mikhailova understates the issue here, because that's not per annum, that's 0.82% over three years!
Clearly that interest rate would be lower than the official rate - elephant in the bag?
No, and it's really hard to believe this allegation was born from such a fundamental error. The rate would only be 0.8% if the loan of £5.901million was outstanding for the full 3 years. Not only are we not in a position to assume it was, we know it wasn't. There were at least three installments, at least one in each year, as in the article.
So how long were the loans outstanding for? We just don't know. What do we know about the loans? As Anna Mikhailova states, they can be found on Companies House. These are 2017/18, 2018/19 and 2019/20 in that order.
So we can see the loans were originally taken out some time in 2017/18, with more added in 2018/19 with almost everything being paid off that year. Then in 2019/20 there was a smaller loan of £701K, which was repaid the same year. There is absolutely no way of knowing how long these loans were outstanding for, and therefore no possible way to calculate the rate of interest. The 0.8% wasn't just based on assumptions, it is clearly incorrect - yet it forms the basis of the conclusion that these loans were cheap. There is also no suggestion of Rees-Mogg taking out a loan and not paying it back (which makes it taxable anyway), the loans were paid back (or converted to dividends) as per the accounts.
Can we glean anything from these accounts which might tell us if these loans were 'cheap'? Er, yes. The interest rate which accrues for these loans is literally published in the accounts. It's there, right in front of you. 3.5% in 2017/18, and 2.5% in the next 2 years. If Jacob Rees-Mogg ultimately paid the interest at the rate published in the accounts, this was not a taxable benefit (remember the official rate of 2.5% above). If it is not a taxable benefit there is no route to it being a declarable interest.
Now, the only way of reconciling the fact that no interest was paid in 2017/18 would be if the interest had accrued for that period, but hadn't been charged. That suggests to me that the loan must have been taken out towards the end of the Saliston tax year end of March 31st. Is that a reasonable assumption for me to make? It's not really an assumption at all - these loans were to fund a house purchase, as Anna Mikhailova states in her article (my emphasis), "Mr Rees-Mogg bought his house, formerly Tory HQ, in February 2018 using a mortgage with Coutts bank, Land Registry documents show."
Mr Rees-Mogg is a very wealthy individual, and it's perfectly likely that he didn't actually need a long term mortgage to fund a house purchase, but just required short term fixes to his cash flow. If so, it's not unreasonable in any way to use a Director's loan.
Companies Act 2006 s413 requires the following information to be disclosed in the accounts:
"(3)The details required of an advance or credit are—
(a) its amount,
(b) an indication of the interest rate,
(c) its main conditions,
(d) any amounts repaid.
(e) any amounts written off, and
(f) any amounts waived."
From this list one could argue that 3(c) hasn't been met because no conditions have been stated. However, given that this was effectively a loan from Mr Rees-Mogg's own company to Mr Rees-Mogg, the imposition of conditions on the loan are going to be fairly elementary. Even if there has been an accounting error and something is required here, that still isn't a matter for the PCS. The PCS investigation is to ascertain whether the loan was declarable to the Register of Members' Financial Interests, not whether Saliston's accounts are compliant with FRS 105!
The difference between the Mr Rees-Mogg allegation and most other allegations is that in Mr Rees-Mogg's case the prima facie evidence points to no wrongdoing at all. Indeed, the only way I can see that this investigation finds that these loans should have been declared is if the company accounts published on Companies House are incorrect.
This isn't a basis for an investigation by the PCS. If we don't take it as prima facie evidence that the Companies House records are correct, then literally any MP with an interest in a company should be investigated. "I know what your accounts say you made, but what did you actually pay tax on?" is a ridiculous line of enquiry. The PCS isn't supposed to be performing the role of a tax inspector.
Is there any actual evidence of any wrongdoing at all? And if there isn't, why are we having the investigation? The PCS is being used to perform a witch-hunt - a scattergun of allegations made without any actual concern for veracity. The Labour Party have almost certainly not bagged the elephant, but they may have just cried wolf.