In the last couple of weeks, Ed Balls, Shadow Chancellor of the Exchequer, announced that a future Labour government would reintroduce the 50 per cent top rate of tax for those earning more than £150,000 a year.
The announcement has received a good deal of publicity. With Labour currently three points ahead of the Conservatives in the opinion polls (albeit with that lead falling in recent months) and a general election due in May 2015, this is a development that needs to be taken quite seriously.
As might be expected, the move to raise taxation on high earners has been criticised by business groups. From an economic standpoint, and given what happened when the 50 per cent rate was last in force, (between 2010/11 and 2012/13) there are likely to be serious questions asked over how much the increased rate of tax will actually raise.
In terms of numbers, there are not that many additional rate taxpayers. HMRC estimates that the number has increased from 236,000 in 2010/11 to 287,000 in the current tax year, representing about 1 per cent of all income tax payers. However, that top 1 per cent does pay 27.5 per cent of the total amount of income tax due.
The fact is that the intention to have a 50 per cent top rate of income tax is very much a political matter and a very clear differentiator between Labour and the Conservatives, although whether it will be a crucial one remains to be seen.
In any event, it seems sensible for advisers to consider carefully all the permissible and available means of reducing income tax liability for their clients.
There are a number of strategies advisers and their clients can consider. Salary sacrifice/pensions contributions will continue to look particularly attractive, maximising contributions into Isas, growth-oriented investments where gains can be realised within the capital gains tax annual exemption and the deferment qualities of UK and offshore bonds are some of the more obvious ones.
Probably the biggest UK tax story in 2013 was the fight against tax avoidance. We had the introduction of the general anti-abuse rule in the Finance Act 2013 and a media campaign of ‘naming and shaming’ tax avoiders, although there was nothing illegal about what many were doing.
Things have gone slightly quieter at the start of 2014 but there is still plenty going on in the fight against tax avoidance.
In January this year, HMRC published a consultation document entitled Raising the Stakes on Tax Avoidance.The aims of this document are to:
- Force high-risk promoters of avoidance schemes to provide details of their products to HMRC
- Ensure that users of high-risk promoters’ schemes appreciate the risks they are running and understand the consequences
- Raise the standard of reasonable excuse and reasonable care for high-risk promoters and the users of their avoidance schemes
- Encourage users of avoidance schemes to settle their tax affairs after similar cases have lost in court
- Amend the Disclosure of Tax Avoidance Schemes regime to make sure the right information gets to HMRC at the right time.
At the same time, HMRC published another consultation document called Tackling Marketed Tax Avoidance.
This consultation sets out the Government’s next steps to tackle another specific problem in the system, which is disputed tax.
Currently, when an avoidance scheme is challenged in court, the tax system allows taxpayers to hold on to the disputed tax, no matter how small their chances of success might be.
The taxpayers and scheme promoters are therefore incentivised to sit back and delay as long as possible. Despite evidence that in the vast majority of cases, when the dispute is resolved, tax is due.
The proposals to tackle high risk promoters were one step in addressing these behaviours. In the Autumn Statement 2013, the Chancellor announced another new measure to require taxpayers to pay the tax they owe if they have used the same avoidance scheme (or a similar scheme) as one which a court or tribunal has already ruled against. If they continue the dispute in the face of the evidence they risk a penalty.
However, the Government feels there is more that could be done on this issue and this consultation sets out some of the possible options.
Finally, there will be changes from 6 April 2014 about how partnerships and LLPs can legitimately be used in relation to tax saving. There is some concern over ‘manipulated profits’ and the avoidance of NIC in certain situations.
It has been suggested that the GAAR provisions could also be used in this respect.
It seems that tax avoidance is still very much at the front of the Government’s mind. As well as considering the possible implications of the reintroduction of the 50 per cent tax rate advisers should also be recommending tried and tested solutions when talking to high net worth clients.
Brian Murphy is financial planning manager at Axa Wealth