From City AM today:
So asking people to pay the right amount of tax in the right place at the right time is an injustice according to the Institute for Economic Affairs, otherwise known as Margaret Thatcher's favourite think tank?
You really could not make this stuff from the right wing of British politics up.
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Obviously you can make it up.
“You really could not make this stuff from the right wing of British politics up.”
Well, you’re making up what Ryan Bourne is saying.
In the article, his complaint is about Accelerated Payment Notices which are issued when “the right amount of tax at the right time” hasn’t actually been decided by the courts.
If you can quote something from the article where he says paying the right amount of tax is an injustice, please do so, otherwise accept that you’re putting words in his mouth that he isn’t saying.
I didn’t make up a word
I commented on the headline and its implication
And actually, accelerated payment notices are about paying the right amount of tax in the right place at the right time
They’re about beating tax abuse by exploiting the legal system
If the tax proves not to be due it will be repaid\
So, respectfully, you are wrong
“accelerated payment notices are about paying the right amount of tax in the right place at the right time”
Respectfully, you are wrong. APNs are issued during the appeals process. You accept that tax paid under a APN could eventually be repaid.
How then can tax paid under an APN have been “the right amount of tax” if it is repaid?
As for headlines, you frequently comment on here that it is stupid to comment on a headline of one of your blogs without reading the full blog. You are right. It is stupid.
Sure they’re issued during the appeals process
Because the appeals process has been abused to delay payment of tax when there is no realistic chance of the appeal succeeding
Which is precisely why Ryan Bourne was wrong
And which is also precisely why you won’t be commenting here again
There’s a strong risk they’re going to be issued after the appeals process, when the tax has already been paid, if the letter I saw yesterday is anything to go by.
It seems to have been resolved pretty easily (TBC, though), and I hope it’s a one-off glitch; but if the APN big guns get rolled out by mistake, it makes me worry about direct recovery of debts.
Richard
Regarding your comments to the Guardian on Peter Mandelson’s loan, have you heard of s455 tax (formerly s419 tax)?
Ed
Yes
Of course
It’s a rather odd tax charge at best, if levied, and is repayable, as you will know
And I did not say the loan was tax free. It clearly can’t be. There is, at least a benefit in kind charge
My comment was made to highlight the fact that tax avoidance is common in this area and not to provide an overview of tax on all loans, which it clearly does not do
The entire Institute for Economic Affairs is an assault on justice as far as I can see… truly vile people.
Howard – my first instinct on reading your post was that you were being hyperbolic.
But I had a look around the IEA and came across this briefing paper written by Ryan Bourne:
http://www.iea.org.uk/sites/default/files/publications/files/Briefing_Low%20pay%20and%20the%20cost%20of%20living_web_0.pdf
The summary is, without exaggeration, as absurd as it is terrifying.
Richard
S455 is payable at 25% and the outstanding loan remains in the DLA until paid off – presumably out of dividends – of which tax will have been paid at the usual rate. Not quite the sentiment of your comments in the Guardian.
John
My sentiment was that this was an arrangement to withdraw funds from a business with less than expected tax paid
And I think that is the case
If you disagree that is your right but I think a) NIC is avoided and b) considerable deferral is possible
In which case I am happy with my suggestion, having been well aware of s455
HMRC regards s455 as being a placeholder for dividend taxation – they consider that a participator taking cash out of a close company is effectively taking a dividend, so should be taxed on much the same basis. That being so, NI is not in point.
The rate of s455 tax being 25%, rather than the 30%-odd you’d get on an additional rate dividend, is perhaps an issue. But one should note that 25% is already more than some people would pay on a dividend, and is equivalent to higher-rate tax, so to increase the s455 rate above 25% would penalise small businesses.
The net effect of s455 is that tax is paid as if a dividend had been, except that in some circumstances part (a maximum of a sixth) of the tax is deferred.
Plus of course you either have a beneficial loan taxable benefit, or you have interest actually paid by the borrower which is taxable in the company but not deductible for the borrower. Either way there is tax on the interest, which can quite easily mean the loan results in more tax than a dividend would.
I think it’s a reasonable balance at the moment (my feeling when talking to clients is that the tax is going to be much the same either way, so they should do the sensible economic thing – this is pretty much my touchstone for sensible tax rules), and am quite glad that HMRC concluded the same in their recent consultation about reforming it.
So, in other word’s its tax avoidance to extract a reward from a small company
As I said
Thanks for agreeing
What? Sorry, I don’t follow you – I have no idea how you reached that conclusion from what I wrote.
Section 455 means the tax consequences of taking cash out of a company are (roughly) the same, whether you do it as a loan or as a dividend.
The decision about which to do can therefore be made without thinking about the tax, and tax doesn’t distort the commercial position.
There is no avoidance where the tax is paid either way.
I really can’t see how “You pay the same tax either way” can be read as “there is tax avoidance”. The closest I can get to is that if s455 didn’t exist there would be more scope for tax avoidance – but as it does, we’re not in that hypothetical world.
If I buy goods in the UK, I pay VAT on them. If I buy them from the US, I pay import VAT on them. Either way I pay the tax. Buying from the US therefore does not constitute tax avoidance.
So a) tax is avoided in the form of NIC
And b) tax is avoided by deferring when the higher rate tax might be due
If you don’t call that tax avoidance I call you blind
Tax is paid at an overall lower rate and quite probably late
That’s the goal of tax avoidance in a nutshell
a) Only if you say that dividends rather than salary are invariably taken solely to avoid NI, rather than say because the company’s made a big profit, or realised some cash that it doesn’t need, or doesn’t in fact employ you in the first place because you’re an investor.
b) You could make s455 more complicated than it is to catch higher-rate taxpayers, yes. Or, given that it’s only deferral not an absolute tax saving anyway, you could accept that a close approximation which makes life an awful lot simpler without losing any tax is actually a good thing. Which in fact HMRC accepted when they carried out a consultation exercise recently and concluded that the current system was working pretty well.
Andrew
Stop being disingenuous
Richard
Disingenuous? How?
You’re the one claiming that doing something taxable is tax avoidance.
You say that taking a loan is “an arrangement to withdraw funds from a business with less than expected tax paid”, but I consider that it suffers the expected tax. You seem to be ignoring the fact that taking a loan is a different economic position from declaring a dividend – similar in some ways, but then the tax is similar. Not to mention that s455 tax can often exceed the tax due on a dividend.
If you consider that a loan is unacceptable, what would you recommend? That participators be barred from taking loans? That the s455 tax be increased (which would take it above dividend rates, for basic and higher rate taxpayers)?
Or is it that dividends are objectionabe in themselves, so participators should be barred from taking dividends? Or should NI be levied on dividends? Or dividends be taxed at normal IT rates (but what about the underlying CT, in that case?)?
There’s little point in complaining about a situation unless you have a better suggestion. I’ve given you five there: do you like any of them, or have you a better idea?
I would consider loans to be salary
And I would charge an investment income surcharge on all dividends from all companies
And I consider arguing that denying that making a payment that reduces a tax bill and defers when it might be paid is tax avoidance is disingenuous
I am entirely comfortable with my suggestion
It’s you who is making the excuses
Thank you, that’s nice and clear.
A few questions, if I may:
– If loans are taxed as salary, what happens when they are repaid? I note that HMRC are on record as taking the position that there is no such thing as negative salary, although the courts have disagreed.
– If (as would seem logical) there is a reduction of taxable salary when a loan is repaid, what happens to a person whose taxable salary is reduced to nil by a repayment? Do they miss out on their NI stamp for the year?
– If loans are taxable as salary, then would taking a loan in instalments be tax avoidance? It could reduce the marginal rates of tax and NI.
– Dividend rates currently mean that the same overall tax charge is due on dividends as on other income, when you combine income tax on the recipient with corporation tax in the payer. Adding a surcharge would increase the tax on dividends above that for other income, such as interest, rent and salary (although the last would have NI too, of course). Is that your intention?
– If dividends are subject to a surcharge, then the tax on company profits taken as dividends could easily exceed the total of tax and Class 4 NI on the profits of a sole trader, partner, or member of an LLP. Is this your intention? I suspect it might be, as I think you’ve said that limited liability should be paid for in tax.
– Follow-up question: there is no additional tax when you convert a partnership into an LLP, so if there is a dividend surcharge then LLPs would have a tax advantage over companies. What if any equivalent changes should be made to the taxation of LLPs compared to partnerships to take account of the benefit of limited liability?
Go read
http://www.taxresearch.org.uk/Documents/TRLLPSmallBusinessTax8-08.pdf
Thanks, an interesting read. You do seem to have identified some of the issues around profit splitting in a very small company – though I doubt your analysis would apply terribly well to a larger company with individuals who are not married owner-managers, or where profit is reinvested.
I notice that it doesn’t address the question of loans, though. So it doesn’t really help with most of my questions.
A loan is a salary advance
They should be made illegal
Questions answered?
Well, if loans are illegal, you can’t repay them, so that’s clear.
Remarkably harsh, though – it would scupper a lot of people with railway season tickets, for example. I don’t think that sort of rule would be helpful.
The other question was whether LLPs should be taxed the same as partnerships, given the advantage of limited liability.
No director needs a season ticket loan
Of £400,000
Shall we get real?
And yes, LLPs should be taxed that way – it’s the price of not being able to defer tax on any income
And society has decided based on evidence that limited liability pays
So you’re only talking about loans to directors being illegal? You should have made that clear.
At what point does an employee (to whom you can make a loan) become a director (to whom you can’t)? A non-shareholder director of a reasonably large company is for all intents and purposes indistinguishable from a senior employee, for example. Should they be caught?
Equally, a senior person in a small company could have shares and have effective control over a part of the company, but not be a director. Should they be caught?
Or is it in fact the shareholding that you’re interested in, not the directorship, so s455 should be recast as a non-tax provision that says that loans to participators are illegal?
With the LLPs: my point is that a normal partnership pays exactly the same tax as an LLP, but doesn’t have limited liability. If the taxation of LLPs is correct, should there be a tax break for non-LLP partnerships? Or should all partnerships be converted into LLPs, in the way that you suggest small companies should?
Andrew
I did not offer draft legislation and I would happily define these if I did
I suspect I would bar all director loans and shareholder loans to anyone with 5% or more capital on a connected basis
As for LLPs, any partnership can become one. They just forego privacy if they do. What point are you trying to make? a) There is a break for non-LLPs b) There is no further comment needed
The point with LLPs is that you’ve said that limited liability is an advantage that should be paid for in increased tax, at least when obtained through a company.
There is no increased tax with an LLP, which appears inconsistent.
If you’re saying that the price of limited liability for an LLP is increased disclosure, then fair enough – although I’d note that you suggest companies should pay both that price *and* some extra tax.
Andrew
Do your live your life by pedantry alone, or is there more to it than that?
I have explained a differential and still you ask for more
It is very tedious when you have never yet discovered a flaw in my logic and nor that I can recall have I ever learned a thing
Richard
I make a living by understanding sets of rules so I can apply them to real-life situations.
You are proposing a set of rules. I would like to understand how it works. Where it’s not clear, or there is an apparent inconsistency, I ask for clarification.
However, given that a couple of comments ago you said “I suspect that I’d…”, I have probably been assuming that you’ve given this more thought than you actually have. If you haven’t yet thought it through in detail, then asking you for that detail is indeed a waste of time – my apologies.
Hello Richard
First time posting still learning the schools of economics, theory each one offers and tools. One thing is becoming clear that we should use every tool on offer in any direction required. Internet is a wonderful resource along with some books for reference.
What truly shocking about this headline is how tax avoidance not on the lips of the public so bit confused about this headline.
Closing tax loopholes should be done but also feel that when it comes to penalties things should become harsher. With import tariffs on companies selling services or goods. Could even ban a company from trading at all within the UK or government contracts. Financial regulation of accounting firms should also be looked at with any firms helping also suffering from penalties.
Curious on what changes you would do to penalties.
I agree that it is not just the taxpayer but the vendor of a tax scheme that should suffer penalties