The cut George Osborne announced on Monday in child benefit for any family where one parent has a higher rate tax liability must be seen as a massive boost for the tax avoidance industry in the UK — spreading its reach to those on income scales normally largely immune to its charms.
As I have pointed out, for a family caught by the change the parent of two children with income of just over the limit faces an effective 100% tax rate on all income in a rage from about £44,000 to £47,000. That is a gift to the tax abusers.
What will they do? Here are some ideas:
Shift investment income between spouses
Investment income will now be shifted to the spouse with lower tax rates. This is often bad for family cohesion — especially in the case of divorce. It is also contrary to the economic reality of many family's situation. But it will pay, so people will do it.
Shift income in self employment
There have been numerous attempts to crack down in income shifting in self employment — from attacks on ‘wife’s wages’ to the Arctic Systems case and any number of steps in between. You can be sure that this new measure will encourage vast amounts of income shifting in self employment.
Extra pension contributions
These will reduce income and so be incredibly effective in taking income below the higher rate tax band. They can be back dated.
Gift aid contributions
These also reduce income — and can be backdated — so creating tax saving possibilities.
Salary sacrifice schemes
Buying more holiday, pension, and the like suddenly becomes so attractive if child benefit is retained.
Bonus deferral
Even if child benefit is kept for one more year deferring a bonus will be well worthwhile.
Reducing hours
Why not? It will pay handsomely!
I could go on — but you get my drift.
Schemes will already be under construction; whole marketing programmes will be under consideration.
And all this will reduce tax yield in all likelihood by more than the child benefit saved.
This really is a government that cannot think about simple things.
But then, George Osborne and David Cameron have never done a day’s real work, have they? No wonder they can’t organise the proverbial in a brewery.
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Sorry but this really is a weak attack.
You could argue exactly the same things will happen if you raise the higher rate of tax by 2p, as you suggested this morning. You could even go as far as saying this is an argument for never raising the 40p/50p tax rates.
Besides, these are things which are regarded as basic “tax planning” even now.
There is no way that HMRC will ever attack a lower-earning spouse holding bank accounts and shares. Similary, extra gift aid payments and pension contributions in no way can be described as tax avoidance. Nor can working less hours. Salary sacrifice schemes are certainly not tax avoidance. Deferring a bonus won’t work if the recipient is already entitled to it – as you well know.
None of these can be described as tax avoidance. This is particularly disappointing as it appeared there was some agreement as to the definitions that Roger Rabbit offered earlier.
Shifting income is an inevitable consequence of independent taxation and has happened ever since it was introduced.
Pension contributions/gift aid contributions/salary sacrifice – are you seriously saying these are tax avoidance?
To be honest, these are things that any decent accountant will be telling a client just above the 40% band to do now – before these child benefit changes take effect.
Reducing hours – I thought this was something only supply-siders talked about!
Your whole argument can be summed in two words: Laffer Curve. What delicious irony!
@Andrew Symonds
The article was aimed at those not aware of the distinction
All of these things are legitimate
But some income shifting is definitely avoidance
Some is considered evasion
@Harry Lyons
Fatuous as ever
And yes – 100% tax is the one point bar 0% where Laffer works
Whoopee!
But a Tory government delivered it
Which proves nothing about Laffer
But a lot about their incompetence
As you make clear, the cutting of child benefit for higher rate tax payers has nothing to do with reducing the deficit … and perhaps if it had been more difficult to ‘evade’ Osborne might have thought twice.
This is surely Blair-type triangulation. An attempt to stitch up the LP, a ‘faux’ demonstration to the country that ‘we are all in this together’, and more significantly the ‘blind’ to cover the horrendous consequences of the capping benefits to the unemployed at less than the average wage, regardless of circumstances. Unfortunately for them, the incompetence/slapdashness evidenced by Cameron/Osborne in their election strategy is also evidenced by the introduction of this cut, and seems to have frightened their membership. I dread to think what Oct. 20th will bring.
I think it would be clear to the courts that the primary motive would not be to avoid tax but to obtain a benefit from a continuing entitledment to capital allowances.
You are wrong in relation to pension contributions since we now have anti-forestalling measures.
I agree in principal with the concept of taxing child benefit for higher tax payers. I am not in favour of universal benefits (they are not progressive). Whenever a tax/benefit has a cutoff point of £1 to generate a tax/benefit of thousands encourages creative accounting as a small change in income can have a disproportionate tax effect. (stamp duty is another tax which has this quality)
2 things should be changed to make this tax more effective.
As it is a family benefit it chould be treated for combined income. This would also benefit one parent families on reasonable incomes.
There should also be a taper effect – say £1 benefit lost for every £2 above the threshold. If you are worried about the loss of tax then start the threshold earlier.
This being simple and fair would take away alot of the criticism (except for the inevitable “why should I pay more tax” complaint”
[…] Richard Murphy in his Tax Research UK blog points out it is a “massive boost to the tax avoidance industry”. Before explaining several ways […]
Should you not declare an interest, Richard, with two young children.
This story is a nothing. How many people will it affect at the 100%+ level?
It is only attracting attention because a lot of people in the media are higher rate taxpayers with a non-working spouse and kids. Same with house prices – most journalists are homeowners which is the only reason there appears to be a national obsession with house prices.
@Mike Statham
Sure: omission
My household will lose
But I already voluntarily pay tax so am not exactly an example of those complaining