Archives for category: Topical tax issues

 

I quote:

“The action is making sure that very high asset wealth is reflected in the tax system in a way that isn’t now, making sure that we continue to crack down very hard on tax avoidance, making sure that tax breaks don’t go disproportionately to people at the very top.”

As I said yesterday, I am very sceptical about the value of, and justification for, a wealth tax in the UK, unless it is going to be a replacement for inheritance tax, or, as I suggested yesterday, a tax for which credit is given against inheritance tax liabilities – on that basis I could see a justification, but not otherwise.

The government would be proud of us (that is the royal us, as in the royal we). We are living up to their marketing of the UK as the high tech centre of the European economy by inventing lots of stuff, or at least trying to.

A hugely impressive 1 in 10 UK resident adults looked into or applied for a patent in the past year, whilst 5% of 11 to 18 year olds did so too. Inventor-in-residence at London’s Science Museum Mark Champkins waxes lyrical on British inventiveness:

“This research shows the recession has sparked a real ‘can do’ attitude amongst ordinary people of all ages who are looking to make some extra cash – and it’s amazing to see that, as a nation, we are turning to science and engineering to make the impossible possible. Breakthroughs using science and technology hold the key to not only transforming individuals’ lives but the state of our country’s future economic growth”.

The research is connected with the Big Bang Young Scientists and Engineers Fair, which is encouraging young inventors and technologists to enter their ideas in the National Science and Engineering Competition, which offers top prizes worth over £50,000.

The government has nailed its colours very firmly to the invention and innovation mast by systematically introducing an extremely generous and flexible system of  enhanced tax relief on research and development expenditure, and even a cash back system on such expenditure for companies not yet paying corporation tax. It will add to this with the advent of the patent box in 2013, which will ultimately allow companies to enjoy a discounted corporation tax of 10% on all their patent-related income.

I was hugely impressed recently by a visit to the Fab Lab in Manchester. Those of us with children of relatively tender years associate Fab Lab with the C-Beebies series featuring a scientist dog and two research assistant pixies (no, I neither smoke or inject those kinds of material). However the Manchester version, pioneered by he Massachusetts Institute of Technology, offers budding North West inventors the chance to design, build and test prototypes using state-of-the-art machinery and technology during the week, and at the weekend throws open its doors for free to all comers interested in prototyping, of whatever age.

Given the dramatic surge in invention and innovation, therefore, I would expect Haydn Ilsley and his merry band at the Fab Lab to be extremely busy at the moment, and long may it continue. Who knows, perhaps Napoleon’s ‘nation of shopkeepers’ may be about to become a nation of inventors.

 

The shifting moral ground on the subject of tax avoidance is an endless fascination to me. So when I was debunking the idea of a wealth tax in a recent post, and expounding the virtues of inheritance tax in covering the same ground, I was led to think about where on the abusive / artificial / aggressive / centre ground / behaviour encouraged by the tax system continuum the standard piece of inheritance tax planning for non-domiciles lay. And it’s a damn good question.

A touch of basic revision first. Every taxpayer is born with a domicile of origin (usually father’s domicile at date of birth), which until taxpayer reaches adulthood is a domicile of dependency, meaning that it changes if and when father’s does. If father is unknown (a friend of mine used to say his mother described his father as ‘some soldiers’ – I think he was joking) then it is mother’s domicile that matters in this respect. At age 18 (or on marriage if earlier) a taxpayer acquires a domicile in his or her own right.

A domicile of origin is quite difficult to change. It requires a cutting of ties (family, social , financial, residential etc.) with the domicile of origin and the acquisition of equivalent ties with one, and one only, new country or state, which becomes the domicile of choice. A domicile of choice, on the other hand, is easy to lose simply by cutting the relevant ties; if no new domicile of choice is acquired, the domicile of origin re-asserts itself even if the taxpayer has nothing to do with the old place any more.

The classic proofs of domicile used to be making a will in the desired jurisdiction (still a good one) and buying a grave plot there, although quite how the modern fashion for cremation has affected that one I am not sure; buying a grave plot as part of a tax planning exercise sounds a little macabre to me.

So if one’s father had a non-UK domicile, and managed to retain it, one has a decent shot at establishing non-UK domicile oneself. I refer to UK domicile, but actually one is domiciled in England and Wales, Scotland or Northern Ireland. In the US, one is domiciled in an individual state. In the balmy innocent days before the introduction of the remittance basis charge ( see below) I spent many a happy hour obtaining HMRC domicile rulings for taxpayers on a no win no fee basis, achieving a number of against-the-odds successes and never in fact having a refusal from HMRC, which is either down to spectacular debating skills or good choice of cases.

Non UK-domicile brings with it a number of significant tax advantages. One of these was that a taxpayer’s non-UK income and gains were only taxed here on the remittance basis, i.e. if the taxpayer was careless enough to bring them here. This was bonanza time for offshore banks, as it meant that taxpayers needed income accounts, capital accounts and capital gains accounts to separate their non-UK funds, to demonstrate that they were bringing only capital to the UK when they made remittances.

During the latter stages of the previous Government the press noticed this, and got all upset about it. This resulted in what I still think is the most objectionable pieces of tax legislation that has ever besmirched the UK statute book, and also resulted in me becoming convinced that if George Osborne was the answer, someone had asked the wrong question. For he it was, never let it be forgotten, who suggested that non-domiciles who had been resident in the UK for at least 7 years should have to pay a  flat rate annual tax charge for the right to use the remittance basis. Even more shockingly, Alastair Darling also thought this was a good idea, and promptly stole and implemented it.

Now you are probably thinking that I reckon this is so objectionable because it deprived me of a lucrative source of income from obtaining domicile rulings. Well no actually, I reckon it is objectionable because it does not discriminate between taxpayers with vastly different levels of income; indeed, to put in a slightly more controversial, but I think fair, way, it allows wealthy non-domiciles to buy their way out of the UK tax system. And what, in principle, is the difference between that and what Jimmy Carr did with his Channel Islands trust?

The other major tax advantage of non-UK domicile is an inheritance tax advantage, and it is a massive one. Its relevance to the particular moral issue I am debating is that it is also hard-wired into the brain of every UK taxation practitioner that it is one of the things that every non-domiciled taxpayer does, and thus runs the risk of by-passing our moral sensors in the current climate of anti-avoidance.

For inheritance tax purposes, domicile works in the same way as for income tax, except that any taxpayer who has been resident in the UK for 17 of the past 20 years becomes deemed domiciled for inheritance tax. Thus, apart from ensuring that client does not cut their ties with the domicile of origin, or at least has ties with an alternative candidate for domicile of choice, the tax adviser will, at some point in the client’s first 16 years of residence in the UK advise him or her to set up an offshore trust, usually in a tax haven such as the Channel Islands or Isle of Man.

The trust will have exclusively non-UK resident trustees, and the taxpayer and his family will be able to benefit from it. It will hold all of the taxpayer’s non-UK assets, and if you are feeling ambitious, it might hold some of his or her UK assets as well. Property in a trust set up while the settlor (i.e. creator) is non-domiciled is excluded property for inheritance tax purposes, and remains so even when the settlor subsequently becomes UK domiciled or deemed domiciled. That means it is not treated as part of the settlor’s estate for inheritance tax purposes. Good trick, eh?

But where there’s a good tax trick, in my view there’s now a requirement to consider the moral aspect; is this abusive, artificial or aggressive tax planning? The critical questions being, does it fly in the face of the clear intention of the tax legislation to achieve a perverse result, and does it involve actions that are only commercial because of the tax saving they produce? This is a reasonable summary of what the proposed General Anti-Abuse Rule defines as abusive tax planning. It is also helpful for completeness to consider in this respect the definition of ‘reasonable tax planning’, which is “a reasonable exercise of choices of conduct afforded by the provisions of the (Taxes) Acts”.

It is fair to say that this type of planning has been around for a long time, and has never been a closely-guarded secret, so if HMRC and the government wanted to block it they have had ample opportunity. So it cannot be said that it flies in the face of the clear intention of the legislation; indeed the UK tax system has traditionally treated non-domiciles very favourably, which one assumes is for the purpose of attracting them to live here (particularly the very rich ones), and one might therefore be reasonably entitled to regard the continuing availability of this opportunity as conscious action rather than oversight on the part of the legislature.

But before I sigh too deep a sigh of moral relief, how about ‘actions that are only commercial because of the tax saving they produce’? Rather more worried about that one. Offshore trusts are hideously expensive to set up and administer; there is nothing remotely commercial about setting up an offshore trust, except the inheritance tax saving it produces for a non-domicile. Think we might have to hold up our hands to that one.

So one apiece and going into extra time (this is not how the GAAR will work, but bear with me) with “a reasonable exercise of choices of conduct afforded by the provisions of the (Taxes) Acts”. I think I am quite comfortable with that one; the tax implications of a non-domicile setting up an offshore trust are clearly outlined in the Taxes Acts, and on that basis I think it is a reasonable choice of conduct for a taxpayer. So yippee, we’ve won the moral argument 2-1, so that’s OK then.

Or is it? Morality, like beauty, can be in the eye of the beholder. People used to legally have slaves and send children up chimneys and down mines, and married women used to be regarded in law as incapacitated persons, on the basis that their legal rights rested with their husbands. Appalling from a modern perspective, but often unexceptionable at the time to the majority. Is it enough for the taxation practitioner to say that planning is a bit morally suspect but on balance OK?

I intend to take my lead in this respect from the General Anti-Avoidance Rule, which I consider to be a fair arbiter of what is abusive and what is acceptable. I like the concept of ‘the centre ground of tax planning’ outlined in the consultation document on the GAAR, because I think that’s what I inhabit (don’t we all, I hear you chuckle sceptically). Offshore trust planning for non-domiciles would not fall foul of the GAAR, despite being a course of action only undertaken for tax purposes, because it meets the test of being reasonable tax planning, and I am comfortable with that.

But the moral aspect needs thinking about, because I could write you a strictly factual newspaper article that could make this type of planning sound as abusive as you like, and could potentially inflame public opinion in much the same way as the Jimmy Carr case. The Times had a go at doing precisely that with Sir Chris Hoy, for doing something that no taxation practitioner would bat an eyelid at, and that no reasonable person would object to if it was properly explained to them.

The interesting thing about the GAAR is that it sets out to establish an absolute standard of reasonable tax planning, with no intention that this should vary over time, except of course insofar as tax legislation varies. If I have a concern about this well-intentioned and long-overdue piece of legislation, it is whether that absolute standard is maintainable in the face of changing public, and indeed expert, opinion on what is acceptable tax planning and what is not. There is, as they say, only one way to find out …….

 

 

I am a collector of classic newspaper headlines, probably ever since I saw details, I think in an article by Claude Cockburn, of the Times’ sub-editors’ competition in the 1930s to get the most tasteless headline into the paper. The winner, by common consent, was the truly toe-curling:

“Small earthquake in Chile: not many killed.”

Which comes from the same stable as the vintage Anglocentric classic:

“Fog in Channel: continent cut off.”

Football comes out well in this competition, whether for the truly inspired response to Celtic 1 Inverness Caledonian Thistle 3:

“Super Cally go ballistic, Celtic are atrocious”

To the slightly more subtle, not to say surreal, response to Cologne’s Japanese substitute Okudera’s late equaliser in a European Cup tie against Nottingham Forest (yes children, Nottingham Forest used to play in, and win, the European Cup):

“Forest sunk by Japanese sub”.

I always wanted to know if the Manchester Evening News was inspired or just lucky with:

“Missing dog breeder: new lead”.

But perhaps my all time favourite was the Ormskirk Advertiser’s utterly inconsequential front page lead:

“Man falls off bike in High Street – not hurt”.

I must therefore congratulate the BBC News website, and by extension the House of Commons Public Accounts Committee as the body ultimately responsible, for the following gem:

“Civil service job cuts will harm services, MPs warn”.

Apparently Government departments have failed to find new ways of working that do not threaten the provision of services, following the shedding of 35,000 jobs as a consequence of the 2010 Spending Review, with another 35,000 still due to go. According to Richard Bacon, PAC member and media regular:

“Senior civil servants had gone for the easy, low-hanging fruit”

Which does rather encourage the thought that perhaps the cull should have started with senior civil servants.

Clearly on a roll with his statements of the bleeding obvious (@ Fawlty Towers c.1976), Mr Bacon proceeded to announce that:

“not doing things that don’t need to be done, working smarter, making it more normal to do things digitally – in other words on the internet (no, he really said that – he is versatile enough to do patronising as well as obvious) – while at the same time protecting people who don’t have access to the internet”.

Among the examples of good practice that Mr Bacon quoted (which to be frank marks him out, to a tax practitioner, as verging on delusional to add to his other qualities) were HMRC’s online services, for “saving money and making it easier for taxpayers”. Shame for those of us who have to try to deal with them by post or telephone, then!

Cutting through the spin, what Mr Bacon is trying to say is that services have suffered as a result of cutting civil service staff numbers without reference to the ‘service’ element of the title (one of my business partners, herself an ex-HMRC employee, is fond of saying that “the civil service is now neither civil nor a service”, which says it all really), and there’s lot’s more where that came from unless those in charge work out how to deliver the following virtuous triangle, delivered at the Autumn 2011 CIOT conference by Sue Walton, HMRC Central Director of Policy, in a talk about the HMRC Spending Review context, with a commendably straight face:

                                                                                MAXIMISE REVENUE FLOWS

 

 

 

 

 

STABILISE AND IMPROVE                                                                                         CREATE SUSTAINABLE              

THE CUSTOMER EXPERIENCE                                                                                  COST REDUCTIONS

Sorry if that looks rubbish on the blog, it looks OK in a Word document!

Having achieved which, presumably senior HMRC staff will proceed to solve world hunger, engender world peace and reconcile Israel and Palestine. Then after lunch ……..

So given that level of realism in political and senior civil service circles, we are probably not that surprised that service standards have slipped dramatically, and wait with dread for the next round of HMRC staff cuts to see how much worse it can get. Meanwhile bears continue to relieve themselves in the woods and the Pope resolutely affirms his Catholicism.

 

The BBC News website tells me that there is an important debate about the fairness of a wealth tax, and offers the views of a KPMG tax partner (anti). To be honest it is news to me that this debate is going on, but as it apparently is I will join in.

Be honest, you were all thinking I was going to say what a fantastic idea a wealth tax is, and the government should introduce one straight away, weren’t you? Well it isn’t and I’m not; it is a terrible idea and one that no-one should touch with a barge pole. And if that was what Nick Clegg was talking about earlier this week then I take back all the nice things I said about him.

Because we already have a wealth tax in the UK, and it is called inheritance tax. It takes the value of everything you have accumulated and paid tax on over your lifetime, knocks off £325,000 and takes 40% of what’s left. There are exemptions, the most important of which are for business and agricultural property, to try to smooth the already tortuous and surprisingly infrequently-trodden path of a successful passage of a business down the generations, but in general inheritance tax is readily recognisable as a wealth tax.

Now it has been suggested that inheritance tax is a voluntary tax, because of the regime of potentially exempt lifetime transfers, which become exempt after 7 years. That presupposes a willingness on the part of taxpayers to divest themselves of large quantities of assets at a time when they have a reasonable expectation of surviving for at least 7 years; if there are many such taxpayers around they are not numbered among our client base, nor would I advise a client to do quite such a rash thing.

Of course the picture may well be different for the extremely wealthy, who for the most part sadly seek their tax planning advice elsewhere than Simpson Burgess Nash, and who can perhaps afford to do without a significant part of their fortune for the latter part of their lives. Even so, they are taking a chance on surviving for 7 years, or potentially surviving for much longer and finding themselves in need of the assets they have given away, to fund care etc. So effective inheritance tax planning by lifetime gift does require a degree of personal financial risk.

The other notable exceptions to this are the non-domiciled. At any point prior to that at which they have been UK-resident for 17 years, or are careless enough to become UK-domiciled prior to that, they can divest themselves of non-UK assets into a trust from which they can benefit personally and place those assets beyond the scope of UK inheritance tax. And of course every well-advised non-domicile with sufficient non-UK assets to make it worthwhile does precisely that, as well as ensuring that they protect their valuable non-domiciled status for as long as possible. I will post separately on where on the avoidance continuum this resides, because that is I think an interesting question.

This ties neatly back into Mike Walker’s comments on a potential wealth tax, and in particular its impact on the non-domiciled, or expatriates as he refers to them. He comes right back to the question of the impact of the tax regime on the residence choices of such taxpayers, who can be taken to have significant international mobility and, it always appears to be assumed, no particular emotional, family, social or other ties to the UK, and again assumes this impact to be potentially decisive in terms of those choices.

I have blogged in the past about the evidence contrary to that assumption, but it would be fair to acknowledge that the tax regime is a factor, if not always the decisive one, in such residence choices. Mike Walker is worried about the impact on the yield from other taxes of expatriates going elsewhere to live, which is fair comment up to a point, although the well-advised wealthy non-domicile will no doubt have most of his or her assets offshore and be paying the remittance basis charge (if resident here for long enough) in order to limit exposure to UK income tax and capital gains tax, so it would be possible to overstate that case.

So the problem in a nutshell is that the only real justification for a wealth tax would be to catch non-domiciles who do not pay UK inheritance tax on their total wealth, but that the perception is that such a wealth tax would drive them away from the UK in droves. And could one justify levying a wealth tax solely on non-domiciles, or perhaps more likely giving a credit for wealth tax paid against inheritance tax liabilities on death, which would be a neater solution?

And then there are the practical problems, which are numerous. It is quite a logistical exercise identifying and valuing all of a taxpayer’s assets on the one-off occasion of their death (I know, I do it on a regular basis); trying to do it at regular intervals for a living taxpayer would be quite an imposition. And if we were to include the non-UK assets of non-UK domiciles, how would we gather the information?

I have always assumed that part of the reason why the non-UK assets, income and gains of non-domiciles fell outside the UK tax net was the sheer practical difficulty of establishing their true size and nature – see the tax case featuring Mohammed Al Fayed for the difficulties facing HMRC in trying to do this, and the far-reaching compromises they were prepared to make to resolve the issue. These problems would of course rear their head equally with a wealth tax.

So realistically a wealth tax is a non-starter. Perhaps the debate we need to have is about the correct balance to strike in the taxation of non-domiciles; the current regime whereby the fabulously rich can effectively buy their way out of the UK tax system for a flat £30,000 or £50,000 annual payment is inherently unsatisfactory, and indeed is arguably legislating for precisely the sort of broad brush approach which got HMRC into such trouble in the Al Fayed case under the old non-domicile regime. So to what extent should we tailor our tax system for the benefit of non-domiciles in order to attract them to reside here? Now that is a question worth debating.

 

One of the great fallacies that underpins a great deal of right-wing fiscal thinking is that increasing taxation on the better off will drive them out of the UK and thus prove counter-productive in revenue raising terms. That this is a fallacy was amply demonstrated by the recent Skandia “Millionaire Monitor” survey, a fascinating, if at times profoundly depressing, insight into the minds and motivations of a sample of millionaires from the UK, Dubai, France, Hong Kong, Italy and Singapore. By far the most interesting question came under the heading of “High Net Worth Mobility” and asked “Please rank the following reasons why you would consider leaving this country”, giving a list of 10 reasons. I couldn’t believe the mind set that the results demonstrated, and neither will you:

Reason for leaving Percentage of millionaires placing reason for leaving first Ranking of reasons for leaving (1 to 10)
     
Other 2.2 10
Economic policies 3.9 9
Employment opportunities 6.6 8
Government policies 7.2 7
Society issues (crime, poverty etc.) 7.7 6
Friends and family overseas 8.8 5
High taxation 10.5 4
High / increasing cost of living 11.0 3
Better standard of living in chosen alternative country 20.4 2
Weather 21.5 1

 

This needs to be read in the context that 44% of the surveyed millionaires were not totally committed to living in the UK, so it is hardly an academic question for a good proportion of them. High taxation comes in fourth, just behind high or increased standard of living. Almost twice as many millionaires cite the similar reason of better standard of living in the chosen alternative country, but more than twice as many cite the main reason for considering leaving the UK.

So what is this problem that we must deal with at all costs to dissuade our footloose millionaires from fleeing these shores, never to return? What aspect of government policy needs to be tweaked to keep our rich friends content in their penthouses and country estates? The weather. Yes, those highly sophisticated captains of industry whom we must at all costs retain as UK residents are most significantly influenced in their lack of desire to stay in the UK by the good old British weather.

So George, you would be better off by a factor of 2 employing planes and chemicals to bombard the rain clouds off the south west coast to make it rain out at sea and improve the UK climate than you would worrying about whether to cut or increase taxes on the better off. Clearly imputing any degree of greater sophistication to our resident millionaires that that of the general population is utterly futile; they are just as shallow as the rest of us. So much for Bernard Jenkin’s comment “If the politics of envy made a country rich, we would be a very rich country.” I don’t envy them Bernard, I feel sorry for them. If the weather is their biggest worry, they clearly haven’t got enough going on in their sad little lives.

Two parting thoughts. The serious one? When will right wing politician stop peddling this rubbish about tweaks to the tax system having a devastating effect on our quota of resident millionaires? And (I hope) the humorous one? Perhaps the Tory politicians who are urging David Cameron to allow the building of a third runway at Heathrow are playing the long game, on the basis that global warming would improve the UK climate and thus attract more millionaires to come or to stay here? I know they always said when there was a Tory leadership election that they were “the most sophisticated electorate in the world” (also perhaps the most big-headed?), but boy that is sophisticated fiscal planning. Shame about the future of the planet though …………..

 

Customs and excise duties do not often feature in this blog, perhaps because I am a non-driving, non-smoking teetotaller (cue old jokes about “Will you live longer?” “No it will just seem like it”). Nonetheless they are a significant revenue-raiser, and at a time when maintenance of tax revenues is particularly vital to the UK’s financial wellbeing, any suggestion of shortcomings in collection of duties is a matter of legitimate concern.

The Public Accounts Committee had a number of criticisms of HMRC, some of which appear to be more valid than others. Of particular concern is an alleged lack of information on both the scale of duty evasion and the returns from HMRC counter-action. In particular, the most recent HMRC estimate of the alcohol’ tax gap’, in September 2011, offered no data on the estimated scale of wine duty fraud, although it suggested an upper estimate of a total £1.2 billion, more than half of this relating to beer and a significantly smaller amount to spirits.

HMRC is also criticised for not making best use of intelligence and technology, for imperfect liaison with the UK Border Force and for having an inadequate understanding of legitimate export markets.

HMRC introduced a new strategy to tackle alcohol smuggling in 2010, and claims this is improving results. The headline claim in the story as it appeared on the BBC News website is actually of least concern to me, which is that there were no more than 6 successful prosecutions for alcohol smuggling in each of the years 2006 to 2010, and that the PAC felt that more alcohol smugglers should be prosecuted. Knowing as I do a fair amount about HMRC’s prosecution strategy when it comes to tax evasion, the figures do not surprise me as much as they appear to have surprised the PAC.

The general prosecution strategy of HMRC is to go for civil settlements in the vast majority of cases (with alcohol smuggling cases this would involve payment of duty, a penalty and interest and confiscation of the smuggled goods), reserving criminal prosecution for particularly high profile cases. That profile might relate to celebrity status, a position of public trust, the scale of the smuggling, falsification of documents, a history of civil settlements for previous smuggling activities or a particular degree of ingenuity or novelty in carrying out the crime.

Criminal prosecution for tax and duty offences is very expensive, time-consuming and notoriously uncertain in outcome (Ken Dodd, Harry Redknapp etc), and is thus reserved by HMRC for cases where they have a strong expectation of winning and the case is likely to be headline news, thus achieving the desired deterrent effect.

This is reflected in the comments of HMRC chief executive Lin Homer:

“HMRC’s performance in tackling alcohol fraud is measured by the combined impact of both civil and criminal proceedings on alcohol duty evasion – which increased significantly when the strategy was introduced. Prosecutions are a strong deterrent and HMRC continues to investigate cases criminally where this will maximise impact on the fraud”.

I assume Ms Homer means that the impact increased rather than the incidence of evasion!

I fear that the bottom line here is, as so often, cuts in HMRC staffing, which have been, and continue to be, both deep and concentrated unduly on the upper end of the pay and experience scale. Expecting HMRC to simultaneously increase tax revenue, cut costs and improve ‘customer experience’ – how I hate being referred to as a ‘customer’ of HMRC; a true customer has a choice of suppliers – comes under the heading of a pious hope; you can hope all you like but it isn’t going to happen. I suspect all they are managing at the moment is the cost cutting bit, whereas some judicious deployment of resources on anti-avoidance and anti-evasion activity would. I suspect, prove to be much more  effective overall. Some discrimination in pruning is always advisable, my gardening friends tell me, and that certainly applies to HMRC.

We have an electoral system that encourages short-termist government; I suppose that is one of the penalties that goes along with the blessings of being a democracy. Having to submit to the whims of the voters every four or five years does, however, militate against long-term strategic thinking, so when a party leader exhibits some of the latter, it is sufficiently rare that one tends to sit up and take notice.

Denis Healey, ever one to turn a memorable phrase, threatened in the 1970s to “squeeze the rich until the pips squeak”. Fantastic old Labour rhetoric, matched by a 98% top rate of income tax. Nick Clegg is so much more polite about it; indeed he does a pretty good job of making the rich feel good about the prospect of paying more tax when he says:

“.. is there a time limited contribution you can ask in some way or another from people of considerable wealth so they feel they are making a contribution to the national effort?”

If you think that sounds faintly Churchillian, then how about:

“What we are embarked on is in some senses a longer economic war rather than a short economic battle”.

Mr Clegg is of course so right; the ills of the UK economy cannot be cured overnight; it will be the work of a generation. He expands on his theme as follows:

“If you are going to ask people for more sacrifices over a longer period of time, a longer period of belt tightening as a country, then we just have to make sure that people see it is being done as fairly and as progressively as possible. While I am proud of some of the things we have done as a government I actually think we need to really hard-wire fairness into what we do in the next phases of fiscal restraint. If we don’t do that I don’t think the process will be either socially or politically sustainable or acceptable.”

And that is the moral background against which aggressive and artificial tax avoidance has become unacceptable. There is a sense that we are all in this mess together, and that it will take all of our efforts to get out. It is no time for selfishness or for ignoring the public good; in that sense the wartime analogy is particularly apt. It is this aspect that the apologists for aggressive tax avoidance miss when they defend the right of the taxpayer to minimise his or her tax liability within the letter of the law; we simply can’t afford the luxury of allowing everyone to do that.

Often dismissed unfairly in the media as a political lightweight, Nick Clegg may in fact have taken the bravest and most difficult political decision of the century (and beyond) by putting his own and his party’s political future on the line in the interests of the country by entering into a coalition with fairly odd bedfellows, at a time when there was little political credit to be gained by being in government and an awful lot to lose. As I said at the time, the appropriate response to the election result and the economic crisis would have been a government of national unity, which would have spared Mr Clegg and his party the martyrdom which possibly awaits them at the next election. In my view the situation is desperate enough to call for this, but maybe the coalition was as close to that as we were realistically going to get. But how much better it would be to have Labour’s financial brains on the inside helping to find the long-term solution rather than sniping from the outside.

I see him alongside such politicians as William Hague and John Smith, who were in the wrong place at the wrong time for their own political ambitions, and had much more to offer than circumstances allowed them to. Any politician who takes a long-term strategic view on tax issues deserves an audience on novelty value alone, but Mr Clegg’s thoughts are much more valuable than that, as they help to clarify the critical nature of the next few years, and the importance of a collective approach to resolving the current economic crisis. Let us hope the British public is listening.

George Osborne was quick to warn of the risks of business fleeing the shores of the UK if Nick Clegg’s suggestion of a temporary additional tax on the rich came to pass. But what evidence or justification is there or such fears and concerns?

One of the great fallacies that underpins a great deal of right-wing fiscal thinking is that increasing taxation on the better off will drive them out of the UK and thus prove counter-productive in revenue raising terms. That this is a fallacy was amply demonstrated by the recent Skandia “Millionaire Monitor” survey, a fascinating, if at times profoundly depressing, insight into the minds and motivations of a sample of millionaires from the UK, Dubai, France, Hong Kong, Italy and Singapore. By far the most interesting question came under the heading of “High Net Worth Mobility” and asked “Please rank the following reasons why you would consider leaving this country”, giving a list of 10 reasons. I couldn’t believe the mind set that the results demonstrated, and neither will you:

Reason for leaving Percentage of millionaires placing reason for leaving first Ranking of reasons for leaving (1 to 10)
     
Other 2.2 10
Economic policies 3.9 9
Employment opportunities 6.6 8
Government policies 7.2 7
Society issues (crime, poverty etc.) 7.7 6
Friends and family overseas 8.8 5
High taxation 10.5 4
High / increasing cost of living 11.0 3
Better standard of living in chosen alternative country 20.4 2
Weather 21.5 1

 

This needs to be read in the context that 44% of the surveyed millionaires were not totally committed to living in the UK, so it is hardly an academic question for a good proportion of them. High taxation comes in fourth, just behind high or increased standard of living. Almost twice as many millionaires cite the similar reason of better standard of living in the chosen alternative country, but more than twice as many cite the main reason for considering leaving the UK.

So what is this problem that we must deal with at all costs to dissuade our footloose millionaires from fleeing these shores, never to return? What aspect of government policy needs to be tweaked to keep our rich friends content in their penthouses and country estates? The weather. Yes, those highly sophisticated captains of industry whom we must at all costs retain as UK residents are most significantly influenced in their lack of desire to stay in the UK by the good old British weather.

So George, you would be better off by a factor of 2 employing planes and chemicals to bombard the rain clouds off the south west coast to make it rain out at sea and improve the UK climate than you would worrying about whether to cut or increase taxes on the better off. Clearly imputing any degree of greater sophistication to our resident millionaires that that of the general population is utterly futile; they are just as shallow as the rest of us. So much for Bernard Jenkin’s comment “If the politics of envy made a country rich, we would be a very rich country.” I don’t envy them Bernard, I feel sorry for them. If the weather is their biggest worry, they clearly haven’t got enough going on in their sad little lives.

Two parting thoughts. The serious one? When will right wing politician stop peddling this rubbish about tweaks to the tax system having a devastating effect on our quota of resident millionaires? And (I hope) the humorous one? Perhaps the Tory politicians who are urging David Cameron to allow the building of a third runway at Heathrow are playing the long game, on the basis that global warming would improve the UK climate and thus attract more millionaires to come or to stay here? I know they always said when there was a Tory leadership election that they were “the most sophisticated electorate in the world” (also perhaps the most big-headed?), but boy that is sophisticated fiscal planning. Shame about the future of the planet though …………..

 

I blogged a little while ago about the International Development Committee recommending that the UK concentrate more efforts on helping developing countries to administer their tax systems more effectively. However, the less well-publicised aspect of the IDC’s comments related to the impact of UK anti-avoidance legislation on the tax systems of developing countries.

The IDC focused in this respect on the revised Controlled Foreign Company (CFC) rules. Designed to discourage UK-owned corporations from using tax havens to shelter profits, the revised version restricts its scope to companies operating in the UK. The charity Action Aid has suggested that, by encouraging those operating in developing countries to use tax havens, this legislation could cost developing countries up to £4 billion in tax revenues. The IDC has urged HMRC to produce its own figures in this respect, on the basis that such a result would undermine the UK government’s attempts to make developing countries less dependent on aid.