Capital gains tax evasion

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I want to reiterate something Michael Meacher said in the House of Commons last night, based on research I have done. He said:

It is probably little known that although United Kingdom-based individuals hold some £284 billion in shares or UK-based unit or investment trusts, the total declared disposal value of quoted shares in 2004-05-the last year for which we have figures-was only £5.8 billion, or just 2 per cent. of their shareholdings.

It is inconceivable that, on average, their portfolios are changed in total once every 50 years. In fact, it is known that the average market holding at that time was only 14 months.

The data on share holdings came from the ESRC and related to 2004 to ensure data compatibility. The data sources used are all noted.

The chance that individuals trade their portfolios every 50 years and represent 19.2% of a market that on average trades the whole portfolio every fourteen months is remote in the extreme. There are several possible explanations for this data disparity:

1) Tax evasion. People are not declaring their share sales.

2) Tax avoidance. People are arranging their share sales to be within the generous capital gains allowance limits, or are transferring gains to their partner's to achieve the same goal.

3) The data is wrong.

The last is the least likely option: it all stacks with well publicised information.

This leaves the first two options. Option 2 is undoubtedly important, and I would strongly recommend action to prevent capital gains shifting between partners to exploit already generous allowances.

The most likely option by far though is that gains are not being reported. I think this very likely. I have seen this time and again on tax investigations, through neglect (in most cases) and in the belief that gains would never be discovered in at least one case. Whilst there is no automatic reporting of share disposal transactions I think this will continue. All academic research suggests compliance rates are low whenever automatic reporting does not occur.

If that reporting were to occur then I believe that the rate of reported disposals would increase tenfold (still meaning that on average individuals only trade their portfolios once every five years). All day trades would also be caught. In that case I suspect the tax yield, even at 18% would be several billion a year. If gains on disposals of assets held for less than a year were subject to income tax as being trading income, which I think appropriate, the yield would be somewhat higher.

Since anyone who sells shares for a client must be able to identify them, and to ask for a national insurance number is easy and, for example, required for an ISA, then I think declaring this information to HMRC should be easy to arrange, and tax compliance would sky rocket as a result. And the amount recovered would be considerably greater than the cost of benefit fraud, on which considerable attention is focused to much less effect.

Will it be in next year's budget as a requirement of all brokers dealing in UK securities and derivative contracts? I hope so.


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