Tax Research UK

The FT has reported that:

The Mumbai High Court on Wednesday dismissed a challenge by Vodafone against a $2bn tax [charge]. Vodafone had challenged whether Indian tax authorities had the right to assess the tax on the UK group’s $11bn acquisition of a local mobile company, Hutchison Essar. In February last year, Vodafone bought a 67 per cent stake in Hutchison Essar from Hutchison of Hong Kong. India’s tax department argued that even though Vodafone was the buyer and Hutchison was the seller, the UK group should have withheld an estimated $2bn of capital gains tax on the deal on the government’s behalf.

Vodafone countered by saying the sale of shares took place between foreign companies, which under past practice would normally have exempted the transaction from taxation in India. Under the Hutchison Essar sale, a Dutch company controlled by Vodafone paid the $11bn to a Cayman Island entity run by Hutchison, for another Cayman Island company that indirectly held a controlling stake in the India-based mobile operator.

The substance of this issue is, of course, simple in essence. An asset whose value was created in India by the existence of Indian customers (because no business has value without customers) should, when sold, in the eyes of the Indian tax authorities give rise to a capital gain chargeable in India. It seems an entirely reasonable proposition, and one that Hutchison clearly tried to avoid through the use of an offshore structure, a process in which Vodafone were quite obviously a willing participant or the deal could not have been structured in that way.

India has chosen to strike back. Hutchison has gone, but Vodafone owns a continuing asset within India, and India has therefore say that Vodafone should have ensured that the tax liability was paid by withholding the likely liability from Hutchison and accounting for it to the Indian tax authorities.

There are many nuances to this, I am aware, one of which is whether the relevant legislation was in place to require Vodafone to do this at the time, albeit that it definitely is now. But the point of principle is the issue that concerns me, and that is that India is saying that capital gains can be taxed on the source or arising basis in the jurisdiction where the asset which gives rise to the value is located, whatever the legal form of the entity in which it is wrapped for transactional purposes and where ever that legal form of transfer takes place.

I warmly welcome India’s approach. I sincerely hope it is adopted elsewhere. It would have profound implications of the private equity business and hedge funds, for a start.

Richard Murphy Capital Gains Tax

This is from the States again, but is another article that translates well:

The hoariest of tax chestnuts is that capital gains need to be taxed at a lower rate than labor to encourage capital formation and grow the economy. Because US economic growth depends on the growth of family businesses and entrepreneurs, rather than international corporations whose stock is publicly-traded, lowering capital gains threatens economic growth not enhances it. Low capital gains rates lower the cost of capital for international corporations by raising the price of publicly-traded stocks. Family business owners and entrepreneurs rely on bank financing to start and usually finance growth from their earnings. Under current law, however, grocery store owners, for example, would pay a 35% income tax on any profits from reinvesting in their own businesses, but only a 15% tax if they invested in one of their large public company competitors like Walmart or Target. This shows the failure of the current tax system.

I know that small enterprises in the UK do enjoy the lowest capital gains tax rates, but that rate only applies at the point of sale. Very few small businesses are created with a sale in mind. It is a distortion resulting from the involvement of private equity in this market that has given rise to the notion that every entrepreneur starts their business with an exit route in mind.

Most are unincorporated and pay tax at rates of up to 40%. Capital gains derived from sharedealing are taxed at 18%.

As has been pointed out in the US article noted above, this makes no sense and must mean that capital is misallocated to sharedealing when it would be better used promoting small business.

That’s another good reason why capital gains should be charged at income-tax rates.

Richard Murphy Capital Gains Tax

I have been asked this question yet again today. I have a five step plan:

1) Increase the tax threshold at which tax is paid by £1,000 for everyone. For most people this will reduce their tax liability by £200 - the value that (near enough) the 10p band gave them;

2) Reduce the standard rate band by £1,000. This will increase the tax take for those on higher rate by £200. This will leave them no better or worse off by these changes. That’s fair. This is not meant to effect them, but will save more than £2 billion in tax.

3) Ensure all capital gains made on disposals of assets held for less than a year are subjected to income tax without offset of the CGT allowance. This might easily raise £1 billion: I suspect rather more since I have shown in the Missing Billions that 17% of all capital disposals are of assets held for less than a year;

4) Deem that all asset sales by a spouse or civil partner who received the asset as a gift from their spouse/partner in the year preceding sale are treated as being disposals by then original owner to stop gains shifting between partners. I suspect this will raise more than £0.5 billion.

5) Ensure that every stock broker in the UK has to automatically supply data on share sales made by a UK resident person to HMRC. At present share sales of little more than £5 billion a year are reported to HMRC, which is implausible when more than £250 billion of shares are held by UK resident individuals. Automatic reporting would massively increase capital gains compliance. I suspect more than enough would be raised to pay for the cut in income tax for all taxpayers now on the basic rate band, costing about £4 billion a year.

It’s radical, simple and progressive. It’s what the Labour Party should be doing. I suspect someone else will propose it.

Richard Murphy Capital Gains Tax, Tax avoidance, Tax compliance, Tax evasion, Tax management

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.

Richard Murphy Accounting, Capital Gains Tax, Tax evasion, Tax management

For those who don’t know today is UK budget day. This is what I want to hear and might hope for:

1) A commitment to introduce a general anti-avoidance principle to tackle tax avoidance;

2) A UK commitment to extending the EU Savings Tax Directive to companies and trusts and an undertaking to make sure our Crown Dependencies and Protectorates comply;

3) An explicit statement that tax evasion, wherever it might be suspected to occur, is always money laundering and should be reported as such in the UK and throughout its Crown Dependencies and Protectorates;

4) The the government’s commitment to alleviating child poverty is intact;

5) That the government is committed to ensuring that tax compliance takes place in tax reporting worldwide;

6) That the UK will supply increased support to the tax administrations of developing countries to ensure they can collect the tax due to them;

7) In support of this objective the UK government is calling for the International Accounting Standards Board to support the introduction of country-by-country accounting by multinational corporations;

That automatic reporting of the sale of all land, shares and other securities to HM Revenue & Customs by all persons registered under the FSA will be introduced to prevent what I believe to massive capital gains tax evasion currently occurring in this country;

9) The transfer of assets between married couples and civil partners less than a year before disposal of an asset will be ignored in future for all capital gains purposes;

10) All gains on the disposal of assets held for less than a year will be subject to income tax henceforth and not capital gains tax.

What I’d like and doubt I’ll hear are:

1) That the domicile rule has been abolished and that the TUC’s approach to this issue is being adopted in its place;

2) That the move on income shifting is being deferred for a year whilst a thorough review of the structures available for use by small business, and of their taxation, is undertaken with radical legislation to promote change that eliminates much of the current tax abuse and at the same time reduces admin and other burdens in this area.

I could add more. That should do for now.

Richard Murphy Capital Gains Tax, Code of Conduct, Economics, Tax Havens, Tax avoidance, Tax compliance, Tax evasion, Tax management

The Independent reports that:

Simon Walker, chief executive of the British Private Equity and Venture Capital Association (BVCA), has warned that growing resentment of government tax changes could cause as many as 100 buyout firms to quit Britain for tax havens abroad.

He said that he was aware of an increased number of approaches from Swiss tax authorities to London-based private equity firms and added:

Just as Lewis Hamilton made his private arrangements on tax, some cantons are now targeting our firms and directors to move their headquarters to Switzerland. With them may go many of the investors they bring to the UK, and that’s not a comfortable thought.

Executives at Bridgepoint, Permira and Cinven also said they were aware of approaches by Swiss cantons to their companies and other private equity firms.

Now let’s be clear why this is just a bluff. First, he could actually only suggest two were really considering moving. That’s not 100. It’s 98 short of 100. Second, Permira is already in Guernsey. In fact the capital gains of all these companies are already in 0% capital gains environments: Switzerland cannot beat that deal. Third, Switzerland does care about the OECD Code of Conduct on Business Taxation. Cutting deals for private equity companies would breach that agreement. Fourth, Switzerland is not the place to do private equity business: these companies would have to stay in London to do their work.

Let’s ignore this as a bluff, because that is what it is.

Richard Murphy Capital Gains Tax, Private equity, Tax Havens

This is the text of the Chancellor’s statement on capital gains tax, to be made today:

CAPITAL GAINS TAX

CHANCELLOR ALISTAIR DARLING’S STATEMENT

24 JANUARY 2008

With your permission, Mr Speaker, I would like to make a short statement on capital gains tax reform.

Mr Speaker, following discussion, I am today announcing the introduction of a new capital gains tax entrepreneur’s relief. This will complement the new regime which I set out at the Pre-Budget Report last year.

The reformed regime, and the new entrepreneurs’ relief, will come into effect in April.

The entrepreneurs’ relief will provide a special 10 per cent tax rate for the first £1 million of qualifying gains.

Gains made on different occasions will qualify for the 10 per cent rate up to a cumulative lifetime total of £1 million of gains. Gains in excess of this will be taxed at 18 per cent.

The special 10 per cent rate will be available on the disposal of all or part of a trading business carried on by an individual either alone or in partnership.

It will also be available to individuals disposing of shares in a trading company, provided that the individual is an officer or employee of the company and takes a minimum 5 per cent stake in the business.

This measure will benefit the owners of small businesses when they choose to sell their business. And it will also benefit business angels and other business investors who take a 5 per cent or greater stake in the company concerned.

Mr Speaker, as a result of the reforms I have announced, entrepreneurs and material business investors will keep 90 per cent of the first £1 million of gains that they make.

And they, and everyone else, remain entitled to make gains of up to £9,200 a year without paying any capital gains tax. This annual exemption will rise again in April.

We estimate that next year, around 80,000 business owners and investors will make disposals eligible for the entrepreneurs’ relief.

In approximately 90 per cent of these cases we expect the individual’s entire gain to be taxed at the special 10 per cent rate.

In the other cases people will pay 10 per cent on the first £1 million of gains, and the standard 18 per cent rate on the excess.

The proposal remains in line with the Government’s objective of keeping the tax system as simple as possible. And it is very much in accordance with representations from small business.

Mr Speaker, I estimate that the proposal will have a cost of around £200 million a year.

HM Revenue & Customs are today issuing further information about the scope of the new relief, along with draft legislation and supporting materials related to the capital gains tax proposals announced at the Pre-Budget Report.

These documents have been deposited in the Libraries of both Houses and are available on HMRC’s website.

Mr Speaker, as with other aspects of the tax regime, I am determined that we do as much as possible to encourage entrepreneurship in this country and, in future Budgets will seek to do more.

I will therefore keep the £1 million lifetime limit for the entrepreneurs’ relief under review.

I can confirm that we have retained the full range of reliefs for people investing in smaller, unquoted companies, including the Enterprise Investment Scheme and Venture Capital Trusts. Rollover relief also remains available to people wishing to reinvest in another businesses.

Taken together these include generous income tax reliefs and capital gains tax reliefs and exemptions which have helped thousands of businesses.

We have also retained a number of tax advantaged share schemes which include, Save As You Earn Schemes, Company Share Options Plans and Enterprise Management Incentives.

Mr Speaker, in December 2007 the Treasury and HM Revenue & Customs issued a consultation document that included legislation designed to prevent individuals from disguising income streams as a capital return in order to avoid tax.

I will set out the Government’s next steps on measures to prevent abuse of the tax rules when the consultation process has concluded.

I want to be satisfied that only genuine investors benefit from the reformed capital gains tax regime.

Mr Speaker I have also received representations from the life insurance industry. This is a complex area and there are no clear answers but we are ready to hear further representations.

Mr Speaker, the UK business environment remains one of the best in the world. I am determined to keep it that way.

My announcement today, with measures to simplify the regime, will ensure that this continues to be the case.

I commend this statement to the House.

I can live with this. It accords pretty much with my own suggestions. Pity this wasn’t done earlier.

Richard Murphy Capital Gains Tax, Tax management

PWC’s weekly tax newsletter includes the headline:

PwC’s family business survey notes hunger for simpler UK tax rules and lower rates

If you can work your way through the password minefield the story is here.

And the story is wrong: entirely wrong. It’s political misinformation, yet again.

The evidence is simple to find. The Chancellor delivered simpler tax rules and lower tax rates for many on Capital Gains Tax in the Pre-Budget Report and the result was, as Accountancy Age reported from the CBI conference:

CBI warns Darling of tax ‘rage’ over CGT

You can’t reconcile these two positions.

I believe the evidence on the ground. People don’t want tax simplification, and they probably don’t want real tax cuts either.

Richard Murphy CBI, Capital Gains Tax, Ethics, PWC

I was at the ICAEW’s Philip Hardman lecture last night. I admit, it’s a bash usually worth attending and this year was no exception.

The lecture was Mike Truman, editor of Taxation magazine and at least once or twice commentator on this blog or issues it raises.

Mike’s theme was simple. It was “can a fair tax system ever be simple”. To his credit Mike never once mentioned flat taxes. Better still, he addressed his subject with a considerable social conscience on display, and on several occasions it would have been hard to spot the difference between what he said and the content of the Tax Justice Network Code of Conduct on Taxation.

Take this as an example. Mike argued that tax requires horizontal and vertical equity, That means people on the same income are taxed the same and people on higher incomes are taxed proportionately more than those on lower income, Quite right too.

Then he argued in favour of the latest Capital Gains Tax reforms by Chancellor Alastair Darling because a) they abolished the distinction between business and other assets and b) gave no tax incentives hold assets for the long time when economic rationality should indicate they should be sold.

I buy that argument but I attach a condition, which I sought to present to Mike as a question, which time did not allow. If you want horizontal and vertical equity and you don’t want to differentiate the tax treatment of disposals dependent on time held or type of asset isn’t there a massive tax simplification that is readily available, which is to charge all capital gains to income tax?

I put the point to Mike afterwards, and he agreed with my point. Indeed, he said the suggestion had been in his draft. But he’d thought it might cause too much indigestion over the dinner that followed.

Have courage Mike, say I. Indigestion is temporary. Tax justice is for keeps!

Richard Murphy Capital Gains Tax, Ethics, Flat tax, Tax Justice Network, Tax management

Brendan Barber, the TUC General Secretary, has written a piece for the Guardian on Capital Gains Tax.

He has made some adept comments, including:

There has long been a boilerplate complaint from business that the British government’s tax regime is too complicated. Comparisons are made between the number of pages in the standard tax manuals of 1997 and their size today.

In the recent pre-budget report, the chancellor acted on some of these complaints. At a stroke he simplified the capital gains tax regime and has based it around a single - and internationally low - rate of 18%. Business, however, has not cheered him to the rooftops. It seems that people are only interested in simplicity if it results in a lower tax bill. Complexity is OK after all, Britain’s business leaders have been busy telling Alistair Darling. If those tax manuals are lovingly describing our favourite loopholes, make them longer, goes the request.

Too true. He was also kind enough to say:

But while the chancellor is right to try to simplify the tax regime and close some of the loopholes that have drastically cut the bills of people who could easily afford to pay a bit more, it does not mean that there is no room for improvement. This is why we at the TUC are urging a series of changes that go with the grain of government thinking and are built round a central rate of 18%. These are largely based on proposals that we asked Richard Murphy of Tax Research UK to develop for us.

I’m delighted to have helped. It’s good to see major organisations with a concern for social justice realising that tax is a issue they must tackle in the interests of the people of this country.

And I’m delighted that Brendan confirms:

Of course we would want the chancellor to go much further in taxing the super-rich by closing the non-domicile loophole and using the proceeds to help end child poverty, and we will be sending that message loud and clear in the run-up to the budget.

Quite right.

Richard Murphy Capital Gains Tax