According to the Guardian (and I hope they'll forgive me for borrowing this summary) Nick Clegg's proposals on tax can be summarised as:
Nick Clegg wants the government to go "further and faster" in raising the personal tax allowance to £10,000. That was the main message in the speech. The government is committed to raising it to £10,000 by 2015, and it was assumed it would do it in stages over the next three years. The Lib Dems say Clegg is not trailing a policy that has already been agreed, but if George Osborne does decide to move faster on this issue, it will look as if he is bowing to pressure from Clegg. If Osborne ignores Clegg's appeal, the Lib Dems will be able to argue that "bad" Tories are thwarting "good" tax-cutting Lib Dems. In that sense it was a safe speech to make.
All this was briefed last night. But today we heard a bit more about where Clegg would like to find the money to fund tax cuts for middle-income families. Here are some points of interest.
- Clegg said the current tax system was "unfair and out-of-whack".
- He seemed to rule out direct income tax increases for high earners.Citing the OECD, he said increasing marginal tax rates on work would "simply drive many of the rich away to other countries".
- He said the government should be doing more to tackle tax avoidance. The Treasury has already published a report from Graham Aaronson advocating a general anti-abuse rule (GAAR) to restrict tax avoidance and Clegg hinted that the government will adopt this proposal. He also said the government needed to be tougher in other areas too, "not least stamp duty avoidance, particularly on higher end property sales and the transferring of assets and income abroad to avoid UK tax".
- He called for more green taxes.
- And he called for higher taxes on "serious, unearned wealth". He renewed his call for a mansion tax, but his call for the government to be "much more ambitious" in taxing "the eyewateringly lucrative assets so often hoarded at the top" implies that he would consider other wealth taxes like, for example, a tax on land.
Interesting stuff, but there are big problems.
The £10,000 personal allowance will cost well over £10 billion a year to deliver. If restricted to basic rate taxpayers maybe the cost is £11 to £12 billion. It's a useful stimulus - but there's not a shadow of a doubt that a VAT cut to 17.5% would benefit the poorest more and be substantially fairer. It would also reduce inflation, restore the value of earnings and have much higher political impact. So why has he chosen the wrong tax cut? The one he's picked is almost certainly regressive.
Will it give him a benefit? I doubt it: people are worried about pay of course, but I think they're more worried about job security, schools, the NHS, pensions, working till they drop dead, their children's prospects and much more. If people really believe in the cuts agenda (and we're told they do) I think they will wonder why Clegg is now suggesting increasing debt. And candidly, I think they will think they're being bought off. As he's trying to do.
But let's move on from this problem that he's going to make the UK tax system more unfair by pursuing this proposal and look at how he's going to pay for it.
Graham Aaranson's GAAR is very weak - it tackles only the most abusive schemes and few will come in that category. It is a step in the right direction - but it will raise peanuts as drafted and is a gift to the Coalition, but the profession knows it will d little, which is why they have accepted it. So do not expect any real change in behaviour there.
Stamp duty avoidance measures will not raise a billion - and probably less. It's important, but it's no panacea. Tax haven attacks could do much more. I await to see what he proposes. Whatever it is, he's trailing Ed Miliband here now. And that's a gift to Labour, however important it may be as an issue. I could raise that much - but nothing the Coalition would accept will. Clegg is on difficult ground here - but if he wants to call I can tell him how to find the money - no problem at all.
Green taxes are regressive. I'm green and I don't buy green taxes. Green is delivered by grants, legislation and direct market intervention. There is no room for regressive nudges.
And as for taxes on wealth - yes I but that. But is he really going to get a serious inheritance tax in place when Osborne is Chancellor. There's not a hope.
So this is a poorly thought out, regressive tax package that's little more than a bribe that won't boost the economy or relieve the stress of those with profound concerns in the squeezed middle.
Not a good day's work Nick. Sorry, but it's no more than a 2 out of 10.
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Graham Aaranson’s GAAR is worse than “very weak”. In fact it is not as strong as the latest version of the Ramsay principle applied by a panel of seven justices of the Supreme Court in HMRC v Tower MCashback LLP1 & Anor [2011] UKSC 19. So Graham Aaranson’s GAAR would not add anything to the existing judicial armoury but will in fact reverse the modest advance made by the Supreme Court in that case for a number of reasons.
First of all, some background.
Graham Aaronson
According to his website, “His client base comprises virtually all of the multinationals with operations in the UK. Instructions are often direct from the largest companies as well as through all of the big 4 accountancy firms and most of the major law firms.” In other words, the supposed target of a GAAR.
Advisory Committee
The composition of the advisory committee he set up to work with him on the study is also significant. John Bartlett (Group Head of Tax, BP Plc). Professor Judith Freedman, Professor of Taxation Law, Oxford University, and Director of Legal Research, Oxford University Centre for Business Taxation (which was “founded using generous funding from companies from the Hundred Group” of Finance Directors of the UK FTSE-100). Professor John Tiley, Emeritus Professor of the Law of Taxation, founding Director of the Centre for Tax Law, Cambridge University, (which was “established in 2000, with support from the Chartered Institute of Taxation, the International Fiscal Association Congress Trustees and KPMG”). Sir Launcelot Henderson (Judge of the Chancery Division of the High Court of Justice). Howard Nowlan (Formerly Tax Partner at Slaughter & May, and part time Judge of the First Tier Tax Tribunal); and Lord Hoffmann (who as a Law Lord did everything he could to (in his words) “kill off” the Ramsay principle).
Representative Bodies
Aaronson consulted “ten representative bodies who have an interest in the proper administration of tax laws in the UK” namely: the Tax Committee of the Confederation of British Industries; the Tax Committee of the Institute of Chartered Accountants in England and Wales; the Tax Committee of the Institute of Chartered Accountants of Scotland; the Tax Committee of the Law Society; the Tax Committee of the City of London Law Society; the Chartered Institute of Taxation; the Tax Committee of the Trades Union Congress; the Tax Directorate of the Institute of Directors; the Revenue Bar Association; and the Law Society of Scotland
The rule recommended “reflects the views expressed by members of the Advisory Committee and takes account of the points raised by the representative bodies.”
Proposed GAAR
It is fair to say that the group would never recommend a proposal that could harm the multi-billion pounds tax avoidance industry that benefits the biggest companies and their advisers.
Thus unsurprisingly, My Aaronson (with whom the rest of the group agreed) “concluded that introducing a broad spectrum general anti-avoidance rule would not be beneficial for the UK tax system” but that “introducing a moderate rule which does not apply to responsible tax planning, and is instead targeted at abusive arrangements, would be beneficial for the UK tax system.” In fact, the proposed rule is significantly narrower than those that exist elsewhere.
According to him, “In many overseas GAARs, and indeed in many of the UK’s specific anti-avoidance rules, the approach has been to target arrangements which have the sole or main purpose of achieving a tax advantage. … I do not consider this to be the right approach for a GAAR that is suitable for the UK tax regime.”
Advisory Panel to usurp the roles of HMRC and the Courts
Furthermore, he recommends “an advisory panel [with a majority of non-HMRC members] who would advise HMRC whether there are reasonable grounds for invoking the GAAR in the case of any particular arrangement.” Inevitably, such a panel would be dominated by the tax avoidance industry.
Burden of Proof on HMRC
Then the bizarrely, the burden of proof is placed on HMRC. In the words of Aaronson: “5.23 There will, of course, be cases where it is arguable, but not clear, that an arrangement can be regarded as a reasonable exercise of choices made available by the tax rules. In such cases I consider that the appropriate principle is to give the taxpayer the benefit of the doubt. This would be achieved by placing on HMRC the burden of demonstrating that the arrangement can not reasonably be regarded as a reasonable exercise of choice.”
All very good points with which I have a lot of sympathy
Richard, how come people like you and the Tax Justice Network and truly independent academics like Prem Sikka were not invited to join the Advisory Committee? The system is rigged from tax policy-making by the Treasury to tax administration by HMRC. That was why VAT and NIC were increased to pay for cuts in Corporation Tax and the country didn’t even notice.
Come on – we speak our minds!
Would be interested to see you elaborate on the burden of proof issue – why should the person making the allegation but have the burden the proof placed upon him?
Placing the burden of proof on the taxpayer in anti-avoidance matters merely allows the revenue authorities to take a scatter gun approach to things they don’t like but are unable to show how it doesn’t fall within the law. That simply cannot be rights. If revenue think they have a case, let them prove it.
The burden of proof always rests on the taxpayer in tax cases – they are making the claims
And they certify their tax is right
The OECD defines tax avoidance as “an arrangement of a taxpayer’s affairs that is intended to reduce his liability and that although the arrangement could be strictly legal it is usually in contradiction with the intent of the law it purports to follow”.
Similarly, in Willoughby – CIR v Willoughby [1997] 4 All ER 65 at page 73, Lord Nolan explained that, “The hall mark of tax avoidance is that the taxpayer reduces his liability to tax without incurring the economic consequences that Parliament intended to be suffered by any taxpayer qualifying for such reduction in his tax liability. The hall mark of tax mitigation, on the other hand, is that the taxpayer takes advantage of a fiscally attractive option afforded to him by the legislation, and genuinely suffers the economic consequences that Parliament intended to be suffered by those taking advantage of the option.”
In other words tax avoidance is, as the name implies, a claim by the taxpayer that he has successfully avoided the tax Parliament thought it had imposed. Therefore the burden of prove lies squarely on the taxpayer to prove that the intention of Parliament has been so defeated. That has always been the law.
But here is what Aaronson has recommended for the UK — the worst of both worlds, if you like:
“5.13 In many overseas GAARs, and indeed in many of the UK’s specific anti-avoidance rules, the approach has been to target arrangements which have the sole or main purpose of achieving a tax advantage. There are many variants in the language, but the underlying concept is the same: if one of the objects of the arrangement is to achieve a tax advantage, then for that very reason the tax advantage should be denied.
5.14 I do not consider this to be the right approach for a GAAR that is suitable for the UK tax regime. The insuperable problem is that the UK tax rules offer, and indeed in many instances positively encourage, the opportunity for taxpayers to reduce their tax liability. Taking advantage of this can be described as a form of tax avoidance, but clearly it is not something to be criticised and therefore it should not be counteracted by a GAAR. Obvious examples are arrangements designed to access capital allowances for investment in plant, or enhanced reliefs for scientific research expenditure, or tax incentives given for investment in enterprise zones. There are myriad other more subtle instances where there are different tax regimes for different, but not very distant, types of transactions (e.g. loan relationships, repos, derivatives etc.).
5.15 The conclusion reached is that to identify the sort of abusive scheme which the GAAR is intended to deter or counteract it is necessary to adopt a more pragmatic and objective initial approach. The starting point should be to see whether the arrangement is abnormal, in the sense of having abnormal features specifically designed to achieve a tax advantageous result. If an arrangement has such an abnormal feature or features then it becomes in effect “short listed” for consideration as a potential target for the GAAR. Conversely, if there is no such feature then it is immediately dismissed from consideration.
5.16 Placing an arrangement on this notional shortlist is a preliminary step. This leads to the critical stage of determining whether the arrangement does in fact fall within the GAAR’s intended target area.
5.17 At first blush one might think this could be achieved by asking whether the arrangement is designed to achieve a tax result which Parliament, or the legislation, did not intend. The insuperable problem here, though, is the established principle of statutory interpretation in the UK which holds that the intention of Parliament can be discerned only from the language of the legislation itself. Ex hypothesi the GAAR is designed to deal with cases where the language of the legislation would, under normal principles of interpretation, indeed achieve a favourable tax result (e.g as in the SHIPS 2 scheme). So this question could never be answered in the affirmative.
5.18 Variants of this approach have been examined in an attempt to avoid the paradox created by that principle of statutory interpretation: for example, using criteria such as whether the tax result which the arrangement seeks to achieve is a result which is inconsistent with the “scheme of the legislation”, or with the intention of the legislation “viewed as a whole”, or “having regard to the wider context”. The insuperable problem here is that the very essence of conventional purposive interpretation is to have regard to the context in which the particular provisions are set19.
5.19 I have reached the conclusion that the better approach is to identify what it is that makes the centre ground of responsible tax planning unobjectionable; and to use this as the way to exclude from the shortlist of abnormal transactions those which come within that centre ground.
5.20 I consider that the reasoning developed by the Court of Final Appeal in Hong Kong, dealing with its GAAR20, leads to the best approach for the UK. That approach is to recognise that tax rules may give taxpayers a number of reasonable choices as to the sort of transactions which they may carry out and, depending on the choice, the tax result which could be achieved. Ribeiro PJ expressed the principle in this way —
“….the statutory purpose of section 61A is not to attack arrangements made to secure benefits which are legislatively intended to be available to the taxpayer.”21
5.21 Because of the established principle of statutory interpretation in the UK, which requires the legislative “intention” to be established solely from the wording of the legislation, the language needs to be modified. Accordingly, I have modified it so as to refer to arrangements made to secure tax benefits which can be regarded as a reasonable response to choices afforded by the legislation.
5.22 This then is the approach which I consider most appropriate for a UK GAAR, and it is adopted in the illustrative draft GAAR appended to this Report.
Reducing uncertainty
5.23 There will, of course, be cases where it is arguable, but not clear, that an arrangement can be regarded as a reasonable exercise of choices made available by the tax rules. In such cases I consider that the appropriate principle is to give the taxpayer the benefit of the doubt. This would be achieved by placing on HMRC the burden of demonstrating that the arrangement can not reasonably be regarded as a reasonable exercise of choice.
5.24 Doing this should substantially reduce the scope for doubt as to whether an arrangement falls within the intended target area of the GAAR.
5.25 As previously noted, there is already considerable uncertainty in identifying the limit of effective tax avoidance; and no legislative or other framework will ever remove it entirely. However, it is important to reduce the scope of uncertainty as far as possible. To this end it would be desirable for there to be some mechanism to enable doubts to be addressed as quickly as possible. An effective mechanism for achieving this could be an advisory panel who would advise HMRC whether there are reasonable grounds for invoking the GAAR in the case of any particular arrangement. I envisage an advisory panel with a majority of non-HMRC members, which would receive written representations from the taxpayer as well as from HMRC.
Not so!
There are a vast number of countries that a have a GAAR where the burden of proof in GAAR matters rests on the revenue authorities. South Africa and the Netherlands are immediate examples that spring to mind.
Anyway, as you said Richard, it depends on who is making the claims – in this case the claim is being made by the revenue that the taxpayer is indulging in tax avoidance – so let them prove it.
And I absolutely disagree – let the taxpaye prove the honesty of their motive (which in reality I what they will have to do)
I do know much about South Africa, but in the Netherlands, the statutory general anti-avoidance doctrine of richtige heffing has (since 1984) been abandoned for the more flexible judicial doctrine of fraus legis.
So, at the end of the day, the judges know best and are best suited to tackle tax avoidance when the will is there. Lord Denning did this in his judgments but was the lonly voice. Lord Templeman, Lord Diplock, Lord Scarman and others did their best in formulating the Ramsay principle but the likes of Lord Hoffmann (who was part of the group that came up with this GAAR) reversed the judicial progress made in the Ramsay principle, which has been more effective than the Australian and Canadian GAARs.
So it’s no surprise that the UK tax avoidance industry and their puppet govt finally gave tacit approval to a GAAR just when the current crop of justices of the Supreme Court had put down the marker on tax avoidance in the Tower MCashback case.
As I said before, Aaronson’s GAAR is a thinly-disguised to stop the judges in their tracks and complete the take-over of tax policy making and administration by big business.
Ivan – if you read Aaronsons report properly, you will se that the proposed GAAR doesn’t affect the judicial discretion in avoidance matters – it adds to those instances where a judge is likely to rule in favour of an avoidance scheme.
But it should change the judicial discretion – it should tell the judge what to do – as I argued re Vodafone last night
I agree with you that Clegg’s speech is poorly thought out , but, as is usual for a Coalition politician, he is playing to the gallery. I have just read chapter 13 of Peter Oborne’s ‘The Triumph of the Political Class’ (sorry to mention it again) entitled Manipulative Populism in which he refers to the ‘creation of the illusion of action’ (p304). This surely describes what the politicians have been doing for years in response to a number of populist media campaigns actually designed to distract attention away from the real issues in society such as widening inequality, tax justice etc. Frankly, I am totally disenchanted with anything that man says and of course he will only be allowed to pursue a policy which meets with the approval of his masters (the Tories). Both Clegg and Cameron have jumped on the bandwagon started by Ed Miliband who is being vilified by the press because he dares to highlight the injustices in our society. Unfortunately Labour has to appeal to an electorate brainwashed by this rightwing propaganda. The example of the SNP in Scotland might provide a better election strategy for Labour rather than an attempt to be a paler version of the Tories.
Good summary, Richard – I think overall this is pretty lame stuff from Clegg. It’s better than what we’d get from George Osborne on the same subject, but not much better.
I think there’s scope for a 60% top rate of income tax – say, over £250,000 – and the left should push for that.
Taxes on unearned wealth – good in principle but we’d need to see the detail of Clegg’s plans to see if it’s any good.
I think green taxes can play a role as part of an overall package but they would have to go hand in hand with more generous transfers to the worst off, otherwise the distributional impacts are pretty awful.
Agree with you completely on VAT. One of the biggest ConDem lies – which the 2 Eds should be nailing every week – is that this govt has somehow “taken poor people out of tax”. In fact, the very poorest are paying more than ever before, due to the VAT hike.
Clegg seems to have a very limited definition of avoidance. And the issue of increased HMRC staffing to tackle avoidance and evasion – which is absolutely vital – wasn’t even mentioned!
What this speech does do (unfortunately) is reinforce the idea of the Lib Dems as an “internal opposition” within govt. Personally I feel they are for the most part pretty useless at stopping the worst of the Tory excesses (in fact sometimes they encourage them) but the media misreports the whole situation most of the time.
AGREED!
[…] – Richard Murphy at Tax Research UK says Clegg’s proposals amount to “a poorly thought… […]
“The burden of proof always rests on the taxpayer in tax cases — they are making the claims”
Sometimes but not always, and certainly not often enough to support your assertion.
Generically sufficiently to justify such a claim in a blog reply
Interesting points. I would question the analysis of dropping VAT vs Increase allowance to 10,000. If we are to look at someone earning 12k a year (in a very back of fag packet type of way, ignoring more complex NI)
CURRENTLY
——————-
Tax allowance 2011/12 7,425
Taxable income 4,525 @ 20%
Net income from taxable amount 3,620
Tax Paid 905
Total expendible income 11095
IF IT WERE RAISED
—————————
Tax Allowance 10,000
Taxable income 2,000 @ 20%
Net income from taxable amount 1,600
Tax paid 400
Total Expendable income 11600
——————————-
In all that is a 505 increase on take home pay. The reason why I question the VAT point is that someone who is earning 12k a year is not going to have the same VAT burden as someone on 30k or 40k. Their main sources of expenditure is Rent (VAT free), Most food (Zero rate), Energy (5% rate). It will be even more pronounced where the person has a child because of the reduced and zero rates on certain child items.
So really any form of VAT cut is not going to assist lower income families as much as a raising of the taxable allowance. It would be better to give them that 500 a year to spend on what they need. Also I don’t see why it would cost 10bn to administer. Do you mean it would cost the revenue’s total tax receipts 10bn or it would actually cost 10bn to collect?
Most of those who are poor in the UK have little taxable income – many have none
They benefit from a VAT cut and not at all from an income tax cut
Hence my claim
I have just used a low income example. That (if they are in full time employment) is almost exactly a minimum wage rate, but again the vast majority of the poor as you rightly point out have a tiny tax liability. Out of the money they are left with 90% will go on goods that already have a reduced or zero rate of VAT anyway, 5% or 0% respectively. So a cut to the 20% rate will only impact on about 5-10% of their purchases, and a 2.5% drop to 17.5% in what they pay will amount to a tiny amount of money.
If someone has the 11k expendable as in the first example and after they have bought the goods I have pointed out they have say 10% left to spend on full VAT rate goods (ie, what they may view as luxuries) then that means they have 1,100 to spend which would mean a drop of 2.5% would save them about £37.50 a year on full rated goods.
I would rather give them £500 to ease the burden.
higher incomes will always work best
But there’s no doubt Vat cuts help the poorest most
It is absurd that anyone on as low a salary as £10,000 should pay income tax at all. Raising the PA from £8,105 to £10,000 will save them (10,000-8,105)x 20% = £379. That is a real increase in their take home pay. Don’t forget that as recently as 2009-10 we were taxing the incomes of people on £6,500! How this went on for so long is ridiculous (though I suspect it was to keep the civil servants who taxed with one hand and gave it back in some form of tax credit in a job – what a completely unnecessary tier of bureaucracy that is). In fact I can see good arguments for raising the PA to as high as £15k, or whatever a “living wage” is. After all, if there is some hypothetical “living wage” then why on earth tax people who earn less than it?
I sincerely doubt that anyone earning £10,000 or less is paying £379 p.a. in VAT. Most goods that poor people rely on are either food, transport, rent and clothes – all of which are EX or ZR.
When the last government reduced VAT from 17.5% to 15% it was generally regarded to have been a complete waste of money – VAT receipts fell and it certainly didn’t boost consumption. If you consider that the effect of a VAT reduction on a big ticket item such as a big screen which previously cost £500 might be to knock a tenner off the price you can see that such measures are little more than peeing into the wind. And of course there is no guarantee that retailers will pass on a VAT cut – many of them didn’t, and you can’t force them to, whereas a cut in income tax is guaranteed to be received.
Sorry – but your understanding of the indirect taxes paid by the poorest is way out – they have the highest effective tax rates in the Uk precisely because they do pay so many such taxes
That is why reasoned policy suggests cutting such taxes is much more important for their well being
Sorry to say it – but your rant nis misguided
The best policy does not involve tax at all: raise the minimum wage.
Agreed
i wonder whether you have seen this:
http://www.telegraph.co.uk/finance/personalfinance/consumertips/tax/9043087/Paying-cash-in-hand-is-diddling-the-country-says-HMRCs-Dave-Hartnett.html
i wonder if you added up all the cash being “diddled” how it would compare to the tax lost through expensive dinners with large corporations?
I will be discussing it on Radio 4 tonight at 10pm
I will be discussing this on Radio 4 tonight about 10.30pm
[…] – Richard Murphy at Tax Research UK says Clegg’s proposals amount to “a poorly thought… […]
What is your view of Sarkozy’s “Social VAT” plan? i.e. cut employer social security payments and increase VAT.
It have been tried in other countries (e.g. Germany and Denmark) and supposedly improved competitiveness.
I agree that VAT is regressive and impacts be very poorest hardest.
The measure is counter-productive
It may marginally increase the number of jobs, but hits those remaining without work very hard
The answer is to tackle wealth, both corporate and personal