I mentioned I had written a programme for tax reform in the UK yesterday, and set out then the principles that guided it. These are ways I would tackle tax avoidance at present:
Tackling tax avoidance
A whole raft of reforms could be undertaken quite quickly to tackle tax avoidance activity. These include:
- Compulsory country-by-country reporting
The use of tax havens by multinational companies has been a major source of abuse. International banks have used these places to promote tax evasion. Other companies have undoubtedly use tax havens to avoid tax by artificially relocating profits to these places.
Every company is desperate to avoid having its use of tax havens splashed all over newspapers, and there is one way to stop this. That is to require that every company must report in its accounts its trading that takes place in every single jurisdiction in which it operates, without exception, including tax havens. That way we would know which multinational companies make most use of tax havens. We would also know what level of sales really takes place in each location in which such a comfy trades, how many people are employed there, what profits are recorded in that place and how much tax is, or is not paid in each and every country where it operates.
Only if we have this information will we be able to hold global companies to account for their local behaviour. This holding of these companies to account for what they do is at the heart of creating tax responsibility within the large business community.
There will be almost no cost to this reform: the UK has already committed to require the creation of this information for tax purposes under new regulations being promoted by the OECD. Publishing that information will, therefore, impose no significant additional burden on business.
- Extend scope of the General Anti-Abuse Rule
The UK introduced a General Anti-Abuse Rule (GAAR) in 2013, but like many of the reforms introduced by the Coalition Government this one is a charade. It may sound like something useful, but in practice it is almost toothless.
To make the GAAR work three changes are required:
- It must be possible to apply it to commercial arrangements that are, nonetheless, tax abusive e.g. those of Google, Apple and other IT companies that have structured their affairs to make sure they pay little or no tax in the UK;
- Penalties must be payable if it is shown that an abuse has taken place, which cannot be done under the existing GAAR;
- The absurd requirement that permission from a panel of tax experts drawn from the private sector must be obtained before HMRC can make use of the GAAR must be removed. Our tax authority must not be subject to the control of the tax profession in the exercise of its duties.
- Review allowances and reliefs
Tax reliefs and allowance are always introduced for a reason but we are very bad at subsequently appraising whether the objective for the relief or allowance has been fulfilled, and whether or not it has been subverted in use. Allowances and reliefs are an essential part of any tax system, but are costly in terms of the tax foregone that they represent and many do provide an opportunity for abuse.
The Office for Tax Simplification has suggested the elimination of some minor allowances and reliefs but a more fundamental review is needed, especially in the context of tax abuse. The outcome cannot be predicted, but there are many such allowances that may be largely or wholly ineffective or that are simply inappropriate in a time of austerity and for which, as a result, abolition is overdue. Subsidies for the savings of those who are al;ready wealthy would be an obvious place to start, but other opportunities for reform are likely to exist.
- Align income tax and capital gains tax rates
Tax avoidance happens when someone sees an opportunity to reduce their tax bill in ways not anticipated by the law. That requires two things. The first is a loophole, and the second is a reduced tax rate. Closing loopholes is obviously a way to tackle tax avoidance, but so too is closing tax rate differentials.
One obvious area where significant tax differentials are being created is between income tax and capital gains tax, where much lower rates are applied to capital gains than are to income, giving a massive incentive for people to try to misrepresent their income as capital gains.
There is an obvious way to tackle this abuse, which was adopted by Nigel Lawson when he was Conservative Chancellor of the Exchequer, and that is to require that any taxpayer pays their capital gains tax bill at the same rate that would have been used if the gain have been subject to income tax.
These rates should now be aligned.
- Abolish the domicile rule
As recent publicity has highlighted, the UK's domicile rule is open to considerable abuse. When even the Financial Times says that the time has come to abolish this ancient, and wholly outmoded, rule then it is appropriate for any government to take action.
There are good reasons why the UK may want to provide special arrangements the people who take up short-term residency in this country so that they do not suffer undue taxation, and even double taxation, as a result. We would therefore encourage any government to offer someone coming to the UK the chance to only be taxed on their UK source income for a period of up to 5 years, but after that anyone still living in the UK should be taxed as if they are fully UK resident in exactly the same way as all other people living in this country. The adoption of such an arrangement would allow the domicile rule, and all the abuses that go with it, to be abolished, for good. It should never be the case in the future that the UK can be seen as a tax haven, which the domicile rule has permitted for some of the world's wealthiest people.
- Restrict all tax reliefs to basic rate
Tax reliefs and allowances are of use in any tax system, and could not be done away with. They have a particular role to play in encouraging some behaviour considered socially beneficial. However, some allowances and reliefs are open to abuse, and for this reason a review of all such allowances and reliefs is appropriate, as already not.
As importantly, at present almost all tax reliefs and allowances are provided to a person as if they reduce their income, and therefore have different worth depending upon who gets them. So, for example, a person paying basic rate tax gets 20% tax relief on a pension contribution they make, whereas a person paying 40% tax gets double the amount of relief for every pound that they contribute to their pension fund. This makes no sense. We should not be subsidising the tax reliefs and allowances of the better off in the UK more than we are those of the 90% of people in the UK who only pay tax at basic rate. As such, in the interests of equality, and to simplify the tax system, and in the interests of removing the incentives to abuse allowances and reliefs, all such reliefs and allowances should be provided at the basic tax rate (currently 20%), without exception, with enormous resulting saving in cost, administration, and abuse.
- Introduce an Investment Income Surcharge.
There is a massive problem with people converting earned income into unearned income for tax purposes in the UK through the sale of their labour through limited companies and the subsequent payment of dividends. We also have a tax system that is profoundly unjust by taxing unearned income at a much lower rate than earned income because national insurance is not paid on unearned income. Both issues can be tackled by re-introducing an investment income surcharge to the UK so that unearned income above a relatively modest limit is subject to a 15% extra rate of income tax as an equivalent to a national insurance charge. There would have to be an exemption for most pensioners, but not for those on very high incomes. The incentive to avoid tax by the artificial use of limited companies would be significantly reduced as a result.
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While I agree with most of what you have set out above the only part I would disagree with, in part, is around Capital Gains. In my view this is one of the only avenues for regular people to “get ahead” by selling something invested in that happened to increase in value over the tenure of ownership – such as a piece of art. I can see the need for tightening controls and revising the standards around what qualifies for reduced rates under the rules however. Additionally, there is broad – mostly unintentional (I think) – avoidance of CG through the use of sites like eBay where I would surmise that there are many people exceeding the allowable limit of CG.
I would require eBay to report all trading to HMRC
I disagree re CGT
Getting ahead should not be by speculation
Nearly everything that we do for money is part speculation. What career you chose, what pension portfolio you choose, the house you buy etc. I don’t think that making purchases and hoping it will be worth more later is the only or even best means of financial planning but it can be helpful if some doors are closed to a person.
I think that a very narrow view of choice and motivation
I suspect that many, if not most people, speculate on things like future employ-ability when choosing a career, and the same portion probably also hope not to lose money when they purchase a house or chose an investment portfolio. I in no way advocate gaming the system or avoiding tax but as I am one of the people that has barriers to conventional investment due to my citizenship situation, I need to utilise my knowledge and skills to speculate on things like the art market in order to make up the difference. I wanted to have an ISA and a conventional pension but my FA said it was a no win situation as my “home country” would simply tax me on it and I would lose all benefit. So what is the solution for some one like me?
I have to say I do not think most young people think about things very much
Unless brought up to do so
And that would make them sad teenagers
Having been a teacher and uni lecturer I can say most young people think about their financial prospects very much – probably too much. In an ideal world we would all have vocations not jobs and therefore do what we love…I studied what I loved and work in a job I like well enough but at the end of the day it is a job not a vocation. For many of us that is the best we can hope for as academia is not particularly valued (in the marketplace) nowadays.
Are you suggest cgt becomes payable at the individuals top rate or that income tax rates are reduced to 28pc. Some specifics would be useful on some of these things. You don’t mention corporate tax rates either which are lower than cgt and personal tax?
CGT should be payable at top rate of income tax
CT is an issue – I agree
This is not an answer to all issues
Bravo! Every one spot on! Regarding your last point, would a simpler solution be to raise income tax and lower national insurance pro rata? I don’t know the figures, but I suspect that you could lower national insurance by 7%, increase income tax by 5%, raise more revenue and actually help “hard working families”. As opposed to penalising those who work at the expense of pensioners like myself, who sit back and let the money roll in.
Richard
A challenging set of suggestions.
Re changes to the rate of CGT.
Would you reintroduce indexation? If not, what you have is a tax on inflation. Someone holding an asset could be no better off in real terms yet suffer tax when they sell. That would not be fair.
If you do reintroduce indexation, how much extra tax would be raised by higher rates + indexation against lower rates with no indexation? Do you know? If not how can you suggest a radical reform without having an idea of the impact?
Re reliefs and allowances. Unless you tell us which ones you mean, it doesn’t mean much to say ‘reform reliefs and allowances’. Which reliefs and allowances would you scrap? Which would you reform and how? Again, have you costed any of your plans?
“a person paying 40% tax gets double the amount of relief for every pound that they contribute to their pension fund. This makes no sense.”
It seems to make perfect sense. A person earns a pound before tax and puts a pound into their pension fund. Whether they pay no tax, 20% 40% or 45% the result is the same. One pound earned, one pound in their pension fund.
If your logic held true, it would ‘make no sense’ that a plumber who paid tax at 40% could reduce their tax bill by £40 by putting a £100 advert in the local paper while a plumber who paid 20% tax would ‘only’ reduce their tax bill by £20 if he did the same. Does this, in your view, ‘make no sense’?
And since it’s ‘all reliefs’ have you thought about the impact on charitable donations? If someone earning £100,000 a year gave away their entire income for the year to charity (such things happen) they would have no income and I calculate they woud have a tax bill of about £9,600. I’m not sure this would be good tax law. A tax system has to work in practice not just be full of superficially worthy ideas.
It would be easier to value your ideas if you told us how much extra tax you expect to bring in, and flesh out some of the obvious consequences and anomolies to show you have considered them. Both are prerequisites for anyone who wants their tax reform suggestions taken seriously.
I did not pretend that by itself this was a fully costed exercise
But at least I have not made crass suggestions – like giving all income away so you can’t pay your tax bill
If that is the level of your objection I think we can safely ignore it
Just as we can ignore the fact that you think business expenses are allowances and reliefs
I am sorry – but that’s absurd
Richard
You may think it crass to give away to give away all your income to charity but I have known some wealthy people coming toward the end of their career who have done so. You seem to miss the point. They would not be doing so so that they “couldn’t pay their tax bill”, the point is that currently they would not have a tax bill but under your proposals they would as the tax due would not be fully offset by the tax relief. That is bad tax law.
Again, under the current system one pound paid into your pension results in the same deduction to your tax bil as one pound paid as a trade expense. You claim that for a 40% taxpayer one ‘makes no sense’ while the other is OK. Since the result to the exchequer is the same it is your propsal that ‘makes no sense’.
And what then of a sole trader who employs someone and makes a contribution to his employee’s pension when both are 40% taxpayers? The pension contribution is a business expense. As the sole trader is a 40% taxpayer he will get a 40p in the pound deduction from his tax bill. So the self employed person gets a 40p in the pound deduction to his employee’s pension where if the employee made the same contribuiton he would get only a 20p in the pound deduction. An absurd result.
It may be easier for you to bat away questions by misinterpreting them than to answer them but if you are to have your suggestions taken seriously you should be able to properly answer critic of them.
Alan
Sorry – if they give away all their income that is because they also have considerable wealth
They can pay the tax out of that
Sorry – but this is just crass argument
And I am used to identifying those who put it forward and what they invariably reveal about their motives next
As for the pension point – so what? Stop nit picking and ask the real question. Why should the state subsidise the savings of the wealthiest more than they do everyone else?
That’s the real question.
Richard
p.s. you didn’t answer my question about CGT/indexation.
That’s a very important point.
You may think it important
I don’t
Have you noticed at what rate we now have inflation?
In the 70s and 80s it was an issue
Not now
On CGT, Indexation, yes or no. It’s surely not a difficult question to answer?
You may think inflation doesn’t matter today but to anyone who has owned an asset for more than a handful of years it would be of importance.
There has been an inflationary increase in prices of c25% since 2007, hardly an age ago. If you’ve owned an asset since 2007 which has done no more than keep pace with inflation you are no better off. If sold, would you tax the gain or take into account inflation?
Your curt dismissal of tax injustice if it affects the better off reduces your claim to be interested in fairness and strengthens the case of those who say you just want spite taxation of the wealthy.
As for calling pointing out a massive flaw in your pension proposals ‘nit picking’! I would have thought that a tax advisor of your experience would know that failure to account for ‘nit picking’ by both HMRC and tax avisors is the biggest cause of flawed tax legislation and flawed tax planning. I wonder if you ever tried that on with HMRC if they disallowed a claim to expenses by one of your clients “you’re just nit picking” indeed.
I answered it
No
And the answer on pensions was reasoned on economic and social grounds
It was you who did not reply
Now stop wasting my time
I’m no expert on the finer details of tax.
But it seems to me that that tax avoidance (within the law) and tax evasion (illegal) have become conflated (my favourite word at the moment) with evasion all too often wearing the clothes of avoidance.
Maybe this is why expenses are trying to be passed off as allowances and reliefs? And also why we let big companies forego paying tax as we know it because HMRC offset it against other so-called benefits their businesses bring in such as VAT, employment etc. All we are doing is horse trading one perceived benefit for another. It’s all a bit woolly. And I’m not convinced that lowering taxes at one end of a firms’ operations increases tax income or other offsets at the other; what we actually see a lower tax take.
Offsetting is upsetting.
What I do know about taxation is that it pays a for the common good and that tax avoidance helps certain people avoid their obligations to that common good that they use and enjoy and even exploit form personal gain.
I therefore see Richard’s ideas above as a great stepping off point. Good work.
Thanks
It was called Murphyism by someone yesterday
Slightly scarily
if your ideas ever gained legal status, would they be called ‘Murphy’s Law”? even more scarey
Very!
I think these ideas are excellent, as is the awarding of the Fair Tax Mark, which the next government should do more to promote.
Would a Business Rate Surcharge, payable to HMRC, work, imposed on all tax avoiding companies like Amazon? Would a surcharge of £20 m for each of their warehouses do any good? Similar treatment for all firms refusing to pay living wage? Drastic measures needed if culture is to change!
Amazon is solved by the GAAR reform
1. Doesn’t do anything about tax avoidance. I’ve seen country by country reporting by a couple of the banks, but it tells us nothing about avoidance – certainly nothing actionable by HMRC.
2. Fine – but avoidance is by definition within the law. You’d need to challenege the law in court, as *abusive* is not a legal definition. Seems like a field day for well paid lawyers to me.
3. Fine – but this is mostly about raising taxes on the more wealthy rather than avoidance.
4. Fine again, except I’m guessing you want that capital to be taxed at higher rates, forgetting that for most investments that capital has already been subject to income tax.
5. Not sure this is very clever. Trying to tax people on their worldwide income is what the US does – and it simply doesn’t work very well. It looks to me like you are trying to bring in a passport tax by the back door.
6. See 3. above – this is about raising tax for the most part, rather than avoidance.
7. Isn’t this what you do with your LLP? I assume you pay yourself a dividend form the LLP rather than draw a salary?
Seems to me that really what you want is not so much about tax avoidance, as to soaking the well-off. The UK already takes a very large part of GDP in taxes, and you are saying it should take a hell of a lot more? So the state can spend it instead of the people. It hasn’t worked in France, where all the socialist tax rises have been an utter failure, and are now being reversed, so why would it ever work here? At best all that is going to happen is a massive reduction in GDP – which makes us all poorer.
You reveal
a) You do not known what CBC is
b) You don’t known about the GAAR we have
c) You have no clue how LLPs are taxed
Etc etc
Learn something about tax because I will delete nonsense of this sort
6. looks overcooked. Reliefs and allowances aren’t just tax giveaways but usually reflect expenditure necessarily incurred. For example, a self-employed consultant earning £70,000 a year gross but incurring costs of £20,000 in travel, accommodation, book-keeping etc. would end up paying £4,000 more income tax than somebody else earning a straight £50,000 salary.
Those are not allowances or reliefs
They are expenses offset before taxable income is determined
No one has suggested otherwise
It is refreshing to see a commentator arguing so openly for a substantially increased burden of taxation. The main parties still seem to be sticking to wholly unrealistic plans to reduce public expenditure. Tax will need to go up. So, the details.
OK, so you would make a distinction between tax reliefs (which will be restricted to the basic rate) and business expenses (which will remain fully deductible).
What would you do about a partnership (or LLP) that employs staff? Under your proposals, a well-paid employee would only get 20% income tax relief if they made a pension contribution themselves out of their post-tax salary. But if employee costs remain fully deductible expenses for the partnership, the (even better paid) partners would get 45% income tax relief if they make a pension contribution for the benefit of their employee due to the increased business expense.
Would you treat pension contributions by employers as taxable remuneration for the employee? If so, what about increases in pension entitlements under defined benefit schemes? Given different earnings levels, the deduction for the employer might not be matched by additional tax for the employee in any event.
On capital gains tax, the ancestor of the current 18% and 28% rates was taper relief, which replaced indexation in 1998. At the time, Gordon Brown said “We must do more to increase the quantity and quality of long-term investment. The capital gains tax regime that we inherited rewards the short-term speculator as much as the committed long-term investor.” Was he wrong?
Some more history here: http://www.parliament.uk/briefing-papers/sn00860.pdf
Aren’t you aware that this has happened for years with CT rates higher than employee allowance for most staff?
Your next issue is?
Regarding anti-avoidance legislation, you appear to being denying the taxpayer from chosing a operating structure that is more tax efficient than an alternative one – notwithstanding that both have commercial and legal substance
No I do not – not if both have real substance and are real alternatives clearly provided for in law