Giving MSPs public funds to employ family members risked undermining public confidence and fuelling “public cynicism”, said the document.
Relatives are employed by 26 MSPs at present.
The report recommended banning new appointments from now and imposing a cut-off date of May 2015 for existing arrangements in which MSPs employ relatives.
Sir Neil McIntosh, a former leader of Strathclyde Regional Council, made the recommendations in a report on Holyrood’s expenses system.
He also recommends that MSPs who get public cash to buy a home in Edinburgh should give a binding commitment to declare it to HM Revenue and Customs as a second home for capital gains tax when they eventually come to sell.
If by then it has become their main home, they should either pay capital gains tax or an equivalent sum.
Issuing his report at Holyrood today, Sir Neil called the expenses scheme “robust” and gave it a generally clean bill of health.
But he said: “I believe that any expenses scheme which permits an elected MSP to access public funds to appoint and pay a family member as a direct employee carries an unacceptable risk of undermining public confidence and fuelling public cynicism.”
Three of the 26, the SNP’s Anne McLaughlin, Labour’s Michael McMahon, and the Liberal Democrats’ John Munro, employ two family members each, according to a public register.
Under Sir Neil’s proposals, MSPs would eventually be banned from giving jobs to their relatives. But an MSP would be able to employ the relative of another MSP, as long as this was publicly registered.
A total of 26 current MSPs are claiming back mortgage interest costs, under the controversial Edinburgh housing allowance scheme for MSPs, which is due to end in 2011.
Sir Neil’s report rules out making his recommendations on capital gains tax retrospective, leaving former MSPs unaffected.
He also rules out clawing back profits from property sales, saying this would be neither “appropriate or feasible”.
Sir Neil’s report, which Holyrood chiefs want to be implemented in full, also calls for MSPs to give an honesty pledge at start of each new Parliament.
This would commit them to “act in accordance with the principles and rules” of the scheme.
His findings also recommend that Holyrood bosses consider giving themselves the power to withhold some of an MSP’s redundancy pay, a “resettlement grant” of up to half their £56,671 salary, for abuses of the expenses scheme.
Sir Neil’s inquiry was ordered by Holyrood chiefs at the height of the public outcry over MPs’ expenses at Westminster.
Figures made public on November 19 showed taxpayers spent nearly £11 million last year on MSPs’ expenses and staff costs, of which staff costs made up £7.32 million.
A previous review of the Holyrood system by a panel headed by Sir Alan Langlands led to the scrapping - from 2011 - of the rules by which out-of-town MSPs can buy homes in Edinburgh using taxpayers’ cash for their mortgage interest payments.
The Langlands findings also led to the creation of a public register of relatives employed by MSPs.
Presiding Officer Alex Fergusson said: “The Scottish Parliament corporate body intends to accept this package of measures in full and bring the necessary resolutions to Parliament for its approval.”
Holyrood officials have been ordered to produce a plan for implementing the recommendations.
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