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Tony Wickenden: Tax avoidance noise is a planning opportunity

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A recent edition of the FT carried an interesting article by Gideon Rachman that considered the growing global trend towards higher taxes on the wealthy. The position in France was featured where the increase in the top rate of tax to 75 per cent has been presented by some in power as an “opportunity” for the rich in France to show their patriotism.

The proposed increase in the US top rate from 35 to 39.5 per cent looks positively benign by comparison. And, of course, in the UK, having been first out of the blocks with a higher rate of tax for high earners ( the 50 per cent additional rate applicable to taxable income in a tax year in excess of £150,000), it seems that the “lactic” has kicked in ( well, I thought I might apply at least a little bit of the Olympic language we have all learned over the past couple of brilliant weeks) and we are going backwards with the reduction of the additional rate from 50 to 45 per cent from 6 April next year.

We may be ahead of the curve being entered by the other countries mentioned in that we have identified in the UK that having a higher tax rate on high earners does not necessarily mean that, overall, the “tax take” is increased. As I have said before, there is strong evidence that the higher tax goes (beyond what is perceived to be an “acceptable” level) the more individuals are willing to consider and implement planning to avoid it.

The recent publicity in the Times given to sideways loss relief schemes and assorted other high tax relief-seeking arrangements, and the number of individuals and businesses willing to enter into them, represents strong anecdotal evidence of this. In his review of taxation for the Institute for Fiscal Studies, including its impact on behaviour, Professor Mirrlees gave greater weight to this argument.

Even HMRC, in its report of March 2012, came round to this way of thinking – leading to the reduction, from April next year, of the 50 per cent income tax rate to 45 per cent. Here are some extracts from the executive summary to that report:

“The modelling suggests the underlying behavioural response (to the 50 per cent rate) was greater than estimated.

“Although there is uncertainty around these estimates, sensitivity testing demonstrates that it is difficult to construct a plausible outcome consistent with a yield estimate as high as those original forecasts. The conclusion that can be drawn from the self-assessment data is therefore that the underlying yield from the additional rate is much lower than originally forecast (yielding around £1bn or less) and that it is quite possible that it could be negative.

This conclusion is supported by wider academic literature which generally suggests a greater behavioural response than was included in the Budget 2009 and March Budget 2010 estimates. Evidence from the US suggests the behavioural responses could be even higher, with an even lower yield.

“In particular, other things being equal, high tax rates in the UK make its tax system less competitive and make it a less attractive place to start, finance and grow a business. The longer the additional rate remains in place, the more people are likely to consider it a permanent feature of the UK tax system and the more damaging it would be for competitiveness. This suggests the negative impact on GDP may increase over time and therefore the direct yield (and revenues from other tax bases) might fall over time toward or beyond zero.”

But despite the apparently compelling economic arguments globally, and even with the proposed reduction in our top rate, there is, it seems, a growing backlash against the “extremely wealthy”. Statements that reinforce the importance of this group paying (or overpaying) towards the recovery through higher taxes are being made more frequently by politicians attuned to the popularity of such a view – apart from those who have to pay the increased taxes that is.

The article also picked up on the growing gap between the most wealthy in a population and the least wealthy. In the US, for example, it seems that the proportion of the national income going to the richest 1 per cent of the population tripled from 8 per cent in the 1970s to 24 per cent in 2007.

This kind of disparity (also seen in China) can fuel social unrest too. This being especially so with the relative ease, through the media and technology, of spreading and getting support for potentially popular campaigns.

If you add to this the incredible effect on public opinion that a week of coverage by the Times (and the wider media) of the (so-called egregious) tax avoidance antics of the (largely) rich and famous, you have a pretty compelling argument for the fact that the culture of tax avoidance and even tax planning is changing.

This will not displease the UK Government. In the consultation document on the proposed General Anti-Abuse Rule it states that it aspires to change the culture of tax avoidance in the UK.

If the going is getting tougher for the rich then there really is an opportunity for advisers to get going…on both sides of the (Billy) Ocean.

Amidst all this noise, though, let us not forget that the consultation document on the proposed general anti-abuse rule states that the new provisions will not affect (nor are they designed to affect) the centre ground of tax planning.

As I have said before, there is plenty of (very juicy) low-hanging, tax-saving fruit to be harvested – without giving the Government the pip….so to speak.

Tony Wickenden is joint managing director of Technical Connection

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