Rebecca Bennyworth has asked the elephant in the room question on tax avoidance in a guest post on Jolyn Maugham's blog. That question is a simple one, and is whether or not it is acceptable to incorporate a small business solely to secure tax and national insurance advantages, the benefit of which Rebecca accurately outlines.
I admire Rebecca's courage. First of all as a well known tax lecturer and chair of the ICAEW Tax Faculty (of which I am a member) she will get flack for doing this. Second, the question is hard because the answer is not clear - which is precisely why it does need to be raised.
I have addressed the question before - and proposed reform to address it because in my opinion the status quo is absurd and unsustainable as well as being unjust. But in that case where is the profession, which as Rebecca says routinely advises people to behave in this way and yet in the eyes of many this will be blatant tax avoidance?
I recommend a read of what Rebecca has to say - and of my policy suggestion in which the data is now out of data but the principles remain entirely intact - because it is not just the esoteric that needs to be addressed in the tax avoidance debate, the day to day needs to be considered to, and nothing is more routine than this.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
is setting up a company really that wrong ? i did it as many people prefer to deal with companies , companies have more public records so again i can get business as people can get a d & b report on my business . never done to avoid tax , just to be a business positioned to grow and try to win more work .
I am getting a little bored with you wholly missing the point -I can only presume deliberately
I made clear this was targeted at tax motivated incorporation
Everyone knows when that happens
You say you did not: fine. But if you pay dividends, you’ll have a job proving otherwise
what ? i set up a company as i was trading ? And by default you think i am tax dodging ? you’ve never set up a company ? never paid dividends ? that’s incredible ?
i’ve never paid dividends as my companys are still growing , they are paying me salary as a director ? what am i doing wrong ? i want to be tax happy ? what am I doing that ‘ s so wrong ?
I’m not saying you’re doing something wrong
That’s obvious from what I wrote
but you are saying when i get profitable and pay dividends i am tax dodging ?
Maybe: yes
That’s the question being asked
i’m not – i just set up a company and my tax is paid according to what is due – i don’t engage anyone to do anything special – are dividends special ?
Yes
Definitely
Read what Rebecca Bennyworth wrote, I suggest
dividends are as parliament intended , what’s not tax compliant about that ?
They were never meant to substitute a tax charge on labour
Read what Rebecca said please
Purely as background and information for the debate, the HMRC research report found via https://www.gov.uk/government/publications/reasons-behind-incorporation is an interesting read.
Interesting
Thanks – had not seen it
It got virtually no publicity from HMRC, but ContractorUK ran a piece on it at http://www.contractoruk.com/news/0011772contractors_arent_tax_led_pscs_finds_hmrc.html which draws out a few of the themes.
Richard
Good article by Rebecca Benneyworth and, as you say, brave.
On the subject of the ‘day to day’ of tax avoidance: do you have any views on the continuing existence of the annual exempt amount for capital gains tax?
Bearing in mind that, by its very nature, CGT is a tax that only the rich pay (and even then there are some pretty genersous exemptions before tax is incurred). As a pretty well-paid tax professional, I am not alone among my colleagues in listing one of my life’s ambitions as actually having to pay CGT at some point!
I find it astonishing that – especially in view of all the hoopla over raising the income tax personal allowance to £10,000 – nothing has been done to reduce/remove the CGT allowance (currently £11,000). That’s basically giving the wealthy twice as much personal allowance as normal wage slaves (and don’t even get me started on CGT rates being lower). To put it into some sort of context, the £11k CGT allowance is the equivalent of 1,672 hours’ work at the minimum wage (or 32.5 hours/week if you took no holiday).
That, along with several other concessions that never seem to get any coverage (e.g. normal expenditure out of income, APR for landlords), makes a mockery of the UK tax system as a whole. Complex avoidance is one thing, but most of the time that isn’t even required for the capital-rich to gain massive advantages over what our Chancellor (presumably for different reasons) likes to call ‘hard working families’.
Any thoughts? Thanks again for the work you do.
I see some merit to a small CGT allowance to reduce admin – say £2,000
Beyond that I would have no more and would take gains as income
Can certainly see the merit in that; I think a radical simplification of the various rates applied would help hard pressed (but normal) taxpayers no end too. For example – you have a salary of, say £45k, plus savings income of £250 and dividend income of £750. Straight away that’s two different kinds of grossing. Bonkers – especially if you then end up paying an accountant to help you.
Would you also be in favour of making all tax returns public? I reckon that might well be the original and definitive example of sunlight being the best disinfectant.
I agree: dividend tax rates are crazy
Bring back the old imputation system
I’d have ACT too….
Now, as to public tax returns ….. I’m not convinced as yet. I cannot see that working in the UK as yet, but I could be persuaded
One problem is that only 9 million at most do them
Should everyone?
Richard
If you took gains as income, would you re-instate any indexation allowance?
Otherwise you’re to some extent taxing inflation as if it were income. An asset that does no more than keep its value in line with inflation is at the moment a taxable item when sold. Hardly seems fair that someone who is no better off pays tax.
Reference incorporation; you have in the past yourself incorporated companies. Did you pay yourself dividends? Was that tax motivated?
I have discussed this many times
Pre 2003 or 2004 I never thought about this issue to be honest: it was just ‘normal’
I did have companies and did pay dividends
Since then I did have a company that paid dividends as any salary was so small (because so were profits) that dividends were an admin saving when NI could have been due
Now I would not do such a scheme
I changed my mind. It’s what you do when you think about things
Not sure there is any need – assume thode not filing one are on PAYE anyway. And if those putting through complex schemes want to put it all through PAYE instead, they are welcome.
Good points Tom, the “tax apartheid” that you have highlighted is one symptom of an economic system that favours “capital” over “labour”. Neo classical economics and produced the UK’s current “rentier economy”.
All that was sensible about classical economics seems to have been forgotten by most mainstream economists!
The manipulation of income through incorporation can also be used to obtain tax credits. I understand from people working at HMRC that this is not an uncommon issue.Not sure what the solution is though.
I think the last Government almost positively encouraged incorporation and it is wholly up to the Government to correct the situation. Perhaps an additional rate tax on dividends from close companies (would also put an additional rate on rents); I remember the £8.7 million to Emma Harrison (A4E) a couple of years back. I would like to see some of the over-burden of taxation/NIC shifted away from employees to owners/capital.
I don’t expect to see the current government doing anything to change the situation, unfortunately neither do I have any expectations of Ed Balls (perhaps too many Labour MPs also taking advantage with media work etc)
I have long proposed a 15% investment income surcharge on all investment income – including that of pensioners over national average wage but not on pensions themselves
You ask the question about whether everyone should do a tax return. I believe the answer to this has to be YES. There are a number of reasons.
Firstly, it must help in the fight against evasion. Providing a further moment of choice for evaders will see some do the right thing. Also, having a tax return for HMRC to enquire into must give more chance of ultimate compliance happening.
Secondly, having everyone complete a tax return will perform the intangible service of making tax compliance a matter of conversation. “Have you done your tax return” will, in the months leading up to the deadline, be as natural a conversation as “Did you see United lose last night”. It would also reconnect the nation to the concept of tax being a part of what it means to be a citizen.
Of course it would need resourcing at HMRC’s end, but that’s nothing new.
Agreed
One of the replies to this letter asks why earned income is taxed more heavily than unearned income. Good question.
Plus is it really right to suggest that this kind of -ahem – “help” is morally ambiguous?
How come we can find excuses for this kind of cheating yet none for benefit fraud?
Getting back to the original topic , yes I do think that limited companies should be taxed and NI’d more favourably. I do have a long answer but like a lot of SMEs I do have to get back to work soon to earn enough to pay the tax. But the short answer is that the big IF to have deserve that status is that the requirements to incorporate should be more onerous e.g more formation capital, better record keeping and proper supervision by HMRC.
Agreed