The UK tax landscape contains many examples of tax being used to influence the behaviour of individuals and businesses.
The recent onslaught on “unacceptable” “egregious” and “aggressive” tax avoidance incorporated a strong and prominent PR campaign to ensure that public opinion lined up firmly behind the Government in its fight to close the tax gap – and be seen as being focused on closing the tax gap.
The tax gap, the difference between the tax HMRC estimates it should collect and the amount that is actually collected, currently stands at around £35bn, apparently.
A large proportion of this (over 40 per cent) is due to evasion and crime and public opinion will be pretty much 100 per cent in support of strong and consistent action to stop this by any means possible. But over 20 per cent is attributable to avoidance and legal interpretation and understandably more “persuasion” was anticipated to be needed to get public opinion on side in relation to action to stop this cause of tax loss.
Rich and famous
The campaign has been pretty successful, in no small part due to the public accounts committee investigations led by Margaret Hodge. This has been helped by the appetite of the press to run (sometimes front page) stories on the attempts of the individual and corporate “rich and famous” to (unjustifiably – as presented) avoid paying tax. Jimmy Carr, Alex Ferguson, Chris Moyles, Sven (and many more) have all been named (and shamed). Corporates including Starbucks, Costa, Google and Amazon have all been subjected to scrutiny and admonishment.
Whatever you say, and whatever the legal arguments, this kind of (adverse) publicity related to tax does affect behaviour.
The announcement by Starbucks that it is moving its European HQ to the UK represents a strong example of the influence that public opinion on tax has on commercial decision-making. While other commercial and economic factors were undoubtedly important factors for Starbucks, being seen to be doing what is perceived as “the right thing” was also clearly important. Let’s not forget it also voluntarily paid £20m in corporation tax following the initialpublic accounts committee interview.
Financial planners will also be aware that the same zeitgeist that Starbucks has sensed also influences its decisions on what tax planning strategies to offer its clients. It is no exaggeration to conclude that this new zeitgeist has acted as a gastric band on the public’s appetite for aggressive avoidance schemes.
From a positive standpoint, though, planners will be well aware that their clients and potential clients are interested in information on tax and tax changes and reliable, appropriate strategies to reduce it. The recent Budget proved this with (understandable) consumer uncertainty on much of the tax detail connected with the revolutionary pension changes proposed.
Whenever there is strong interest, relative difficulty, detrimental consequences for “getting it wrong” and/or attractive rewards for “getting it right”, there will be consumer appetite for advice and (relative) willingness to pay for it.
And the greater the tax burden is, the greater (generally speaking) will be the appetite of those affected to (legitimately) avoid paying it.
It has been reported that the number of higher-rate taxpayers has increased by almost 400 per cent over the last 30 years and that more than one million people have become higher-rate taxpayers since the Coalition took power.
This has come about due to the Government’s policy of lowering the threshold above which higher- rate tax is payable, freezing it or increasing it below the rate of inflation. The threshold would have been £50,000 (rather than the £41,865 that it is today) if it had been increased every year by the rate of RPI. This phenomenon, pulling more people into the higher-rate tax “net”, is known as “fiscal drag”.
As a result, there are an estimated 4.4 million people paying higher- rate tax and over 300,000 paying the 45 per cent additional rate. Interestingly, the top 10 per cent of taxpayers account for 59 per cent of the total income tax collected.
Given the inevitable focus of advisers on those individuals who are more likely to have the appetite for advice, these facts are material. Tax is a proven influencer on individuals’ actions – specifically interest in acceptable (non-aggressive) ways to avoid it.
Financial advisers have an excellent opportunity to use these latest
facts to engage with their higher-rate and additional-rate taxpaying clients to carry out a personal financial audit.
They should use this opportunity to identify low-hanging fruit in the form of unused allowances and exemptions for all family members (including children), simple asset and income transfer strategies for couples and tax-effective investments such as pensions, VCT and EIS qualifying investments, Isas and appropriate collectives and insurance-based investments.
None of which would fall into the definition of “aggressive tax avoidance” susceptible to HMRC attack but all of which have the capability of delivering meaningful tax savings which contribute to more retained income or capital.
Advisers should use this latest opportunity to demonstrate their skills as “fiscal drag artists”. To assume that everyone will have already carried out the simple strategies I have referred to is to fail to maximise the opportunity for improving the financial wellbeing of a potentially great number of clients
Tony Wickenden is joint managing director of Technical Connection
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