Leona Helmsley was a US businesswoman, entrepreneur and tax evader. Her most famous comment, reported at her tax evasion trial was:
“We don’t pay taxes. Only the little people pay taxes.”
The Government has now released the figures relating to the effective rates of tax paid by the UK’s wealthiest individuals, as the latest instalment in the wide-ranging debate over large-scale tax avoidance and how to deal with it. And the infamous Leona Helmsley quote has been dusted off by Brendan Barber, General Secretary of the TUC, in response to that data.
“Almost 75% of UK individuals earning more than £10 million pay at least 40% tax” is more a ‘dog bites man’ headline than a ‘man bites dog’ headline, so of course instead we hear that more than 25% of those concerned pay less than 40% income tax, with 6% paying less than 10% and a further 3% less than 20%. Much better story, that.
Of course one assumes that from 2013-14 fewer of these wealthy individuals will be paying at least 40% tax, on the grounds that the top rate of income tax will have fallen from 50% to 45%. The government’s alleged commitment to making the tax system fairer (per the usual anonymous “Treasury spokesman” – when will these people stand up and be counted for their views instead of lurking behind a cloak of anonymity?) is an interesting one in the light of that impending change.
Might I also speculate that another reason why 9% of people earning over £10 million might be paying so little tax is the tax regime for non-UK domiciles? If you allow people earning that sort of money to buy themselves out of the UK tax system for as little or £30,000 or £50,000 per year (which is, I calculate, 0.3% to 0.5% of £10 million) then of course you will find rich taxpayers who pay such small amounts of tax. Making the tax system fairer? I think not in this case.
Still, I have to agree that it would be nice if the minority of very wealthy individuals who are paying such low amounts of tax did more to sustain the precarious financial health of our nation. The problem is that the government’s plans to achieve this appear in some cases to hit the ‘wrong’ targets, whilst almost wilfully avoiding the ‘right’ ones.
I will give three examples, and in case I am accused of negativity, I will then give three examples that I believe would work better for the government.
Flawed tax policies for the very rich
It used to be the case that if you were not domiciled in any of the UK countries (and a surprising number of UK residents are not) you only paid UK tax on non-UK income and gains to the extent that you brought them to the UK (“the remittance basis”)
This became the subject of much media agitation during the mid-2000s, and a proposal was put forward by the then shad0w-Chancellor (one George Osborne – whatever happened to him?) and adopted by the Labour Chancellor Alastair Darling to charge non-domiciles resident in the Uk for at least 7 years a £30,000 annual tax for continuing, or indeed starting, to use the remittance basis. Otherwise their worldwide income would all be taxed in the UK. Mr Osborne has just raised the £30,000 annual charge to £50,000 for those who have been resident here for at least 12 years.
I said at the time, and my views have not changed, that this was one of the most pernicious pieces of tax legislation ever introduced in the UK. It removed the benefit of the remittance basis for a large number of non-domiciles of relatively modest means (although admittedly there is a £2,000 foreign income de minimis limit below which the remittance basis can still be used ‘free of charge’) whilst barely scratching the surface of the potential tax liabilities of the fabulously rich of various nations who choose to base themselves in the UK. How badly do we think Roman Abramovich misses £30,000 (or even £50,000) per year? – you take my point.
This was not, therefore, making the tax system fairer, but it is a policy enthusiastically endorsed by the Chancellor, who I believe has recently said that the current £30,000 and £50,000 levels of the annual charge are intended to prevail long term. This seems to me to be a totally misguided policy.
2. The proposed cap on tax reliefs
Firstly, this is not aimed exclusively at the mega rich. To potentially fall foul of the cap it is necessary only to have an income in excess of £100,000 and to be in the habit of giving more than half of that income to charity (I have a client who falls precisely into this category, with an income level not greatly in excess of £100,000 but in the habit of giving around £60,000 of it to charity each year). Is that really something we wish to discourage?
Indeed, the mega rich arguably stand to benefit more from the regime than the more modestly endowed. Let us consider a long-standing trading partnership between a taxpayer with an income of £2 million and one with an income of £200,000. The partnership has a disastrous trading year in 2014-15, and generates a loss of £1 million, shared equally between the partners.
The taxpayer with an income of £2 million can offset against that income the higher of:
25% of his taxable income (£500,000). Thus he can fully relieve his loss in 2014-15.
The taxpayer with an income of £200,000 can offset against that income the higher of:
25% of his taxable income (£50,000) i.e. £50,000. If his income was the same for 2013-14 he can offset a further (capped) £50,000 in that year, leaving £400,000 of loss which he can only carry forward against future profits.
Should the tax relief cap really be discriminating against the taxpayer who has 1/10 of the income of his business partner in such a dramatic way? Is this making the tax system fairer? Are we stupid? I think not.
3. The cut in the 50% rate
‘We would like the rich to pay more tax, so we are going to cut their top tax rate by 5%’. Sound logical? To be fair, cutting tax rates actually worked for the Labour government with corporation tax, but in a time of economic prosperity and stability, when tax revenues would probably have increased regardless of rate movements. It seems much less likely to work in times of economic hardship.
Also, the idea that the rich will pay significant professional fees to avoid tax at 50% but not at 45% is an intriguing one. The schemes that I have seen would still be well worthwhile undertaking at a 45% tax rate in the light of the fees chargeable; indeed one might imagine that if this was not the case the very large fees charged might be somewhat reduced?
And then there is the political impact, which is considerable. It is all very well, and indeed all very necessary, to ask us to bite the tax bullet to help escape the current economic malaise, but asking the bulk of the population to do that whilst giving very large tax cuts to the richest in our society makes no political sense whatsoever, and just opens the government up to easy criticism. If it made clear economic sense I would praise them for their single-mindedness, but as I say it is by no means clear to me that it does.
So far so negative and grumpy. So what would I do instead in the staggeringly unlikely event that I was Chancellor?
1. Minimum effective rates of income tax
I have shown that the cap on tax reliefs is perverse in its impact, and thus unjustifiable as a progressive income tax measure, which is how it is being presented by the government. Instead I propose that there is a rising scale of minimum effective rates of income tax applicable to taxpayers with particular levels of income.
Let me explain. Given the target of a £10,000 personal allowance, the minimum effective rate of tax for an income of £10,000 would presumably be £0. This rate would slowly rise as taxpayer income rose. Given that almost 75% of those with an income in excess of £10 million are currently paying tax at an effective rate in excess of 40% that would be a possible overall effective rate for them, although I might be inclined to go a little higher myself. There would be a progression of minimum rate bands through the income levels, increasing as income increased.
The advantage of this over the cap would be that the tax system would remain progressive, in the sense that those with more gross income would automatically pay more tax. If their tax liability after reliefs etc came to less than the minimum rate, the amount due at the minimum rate would be substituted. Everyone would know where they stood and could act accordingly.
Domicile status would cease to be of any relevance for tax purposes, and UK-reisdent non-domiciles would be taxed in the UK on their worldwide income, subject to the minimum rate referred to above. I assume the government would throw up its hands and say that such people would then leave the UK in droves, to which I say two things.
One, the government has introduced a wholly admirable tax relief for non-domiciles remitting money to the UK to invest in trading ventures, and I would be delighted to exclude such monies from taxation at the minimum rate. Thus if non-domiciles were prepared to put their money where ttheir residence is they could obtain some tax advantage from so doing. Two, we are not a tax haven and never will be, so if people only want to live here because of the tax regime, do we really want them here? I would argue not. And of course if they love the UK enough, they will stay regardless of the tax regime, won’t they?
3. General anti-abuse rule
Harking back to my post on Tuesday, here is another part of the overall solution to the rich paying sufficient tax. In order to achieve a tax rate below 20% on an income of £10 million, it is probably reasonable to assume that the relevant 9% of taxpayers are engaging in some fairly aggressive tax planning. In its (occasionally) infinite wisdom, the government has the necessary weapon to hand in the proposed General Anti-Abuse Rule.
In the light of Professor John Tiley’s CIOT Conference presentation on Sunday, this sounds to be pitched exactly right to counter this type of aggressive, artificial and abusive tax planning. So the government needs to adopt precisely as proposed and encourage HMRC to enforce it thoroughly, consistently and fairly.
To my mind a combination of these three measures would do far more than the government’s proposals to solve the problem of the richest paying too little tax. And let me make it clear that I applaud this concentration on the richest individuals, and would hope to see it matched by a concentration on the largest and most profitable companies in the UK, and their abusive tax planning devices. There is serious money to be collected by taking this approach.
And harking back to Leona, zero tolerance for tax evaders. The tax profession would like to see some serious resources thrown at bringing to book those who simply disregard and flout their obligations under the tax system, without even the cloak of legality that covers the abusive tax avoider. There would be an admirable message indeed to give to the British public, that the government is committed to everyone meeting their minimum obligations under the UK tax system. Is anyone in Westminster listening?