The bit about the amnesty most people are ignoring

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I said recently I didn't often quite the Telegraph, but I'm going to again. It has a neat little table on the consequences of the UK tax amnesty for a person holding £100,000 offshore, deposited at the rate of £10,000 a year over 10 years. They say that tax on the interest would be £12,827, the penalty would be £1,283 and the interest due would be £3,323 - a total of £17,433.

The trouble with this calculation is it's highly likely to be wrong. What this article, and almost none of the others that provide any reasonable comment are saying is that the amnesty does not only require payment of tax on the offshore interest not declared, it also requires payment of tax on the money held offshore if that has not already been declared.

Some of the money held offshore will have been taxed already. A lot will not have been. Suppose that the £10,000 arrived in the Channel Islands out of diverted fee income from a business (easy to arrange as the Channel Islands are part of the UK banking system). In this, common scenario it's likely that the following taxes will have been evaded:

1) VAT. This is likely to have been due at 17.5%. Out of £100,000 that's £14,893. Add 10% penalty. That's £1.489. Then add interest at the same proportionate rate as for income tax. That's 25.9%. That comes to £3,857. The total is £20,239.

2) Now suppose the income was not subject to income tax before going to the Channel Islands. Out of the £100,000 a total of £14,893 is VAT, leaving £85,107 of income subject to income tax. If this were just subject to income tax that sum due would be £34,042. The penalty would be £3,404, and the interest is £8,817. A total of £46,263.

3) But let's assume a limited company was, more likely, running the business. Now this sum paid to the Channel Islands for the benefit of the director is subject to PAYE. So, NIC is due at 12.3% out of the gross sum of £85,107. That's about £9,657. Add interest and penalties and it comes to £13,123.

4) The income tax due in this case would be less - let's assume 40% on £85,107 less £9,657 i.e. £75,450. The tax is £30,180. The penalty is £3,018 and the interest £7,816. That's a total of £41,014.

Let's now, totally plausibly, add the Telegraph's total figure to scenarios 1, 3 and 4. The total tax, interest and penalty due is now £91,809. The amount now in the account according to the Telegraph would be £132,068. Just over £40,000 will be left after the tax is paid.

This is why offshore is so pernicious. This is why it must be stopped. This is why the windfall from this will be so high. And this is why much heavier penalties must be charged for those who do not come forward now. The penalty in this scenario is just over £6.700. It has to be five times that, at least, after the event to persuade people to pay up now. If that were the case another £27,000 would be due. Most of the offshore account would be wiped out. And so it should be.