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Tony Wickenden: When tax planning goes too far

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wrote last week about Prime Minister Theresa May’s Plan B if it all goes wrong on the Brexit front. Make no mistake, Brexit is going to be hard. It is just a question of how hard and at what point we have to make a decision on “deal or no deal”?

If the terms are so hard as to be unacceptable, it seems it will be the latter. Plan B could come into play, including, as a key part of the strategy, making the UK into a tax haven.

Seriously, though, the UK as a grey and damp version of Singapore? It does not really cut it for most who think about it. Without going all Nigel Farage, we are better than that, are we not? That said, it is interesting to see how tax is recognised as having the potential to affect behaviour.

The Trump tax plan

Even Donald Trump had tax at the centre of his pre-election list of promises. Take a look at this extract from the Trump tax plan:

“If you are single and earn less than $25,000, or married and jointly earn less than $50,000, you will not owe any income tax. That removes nearly 75 million households – over 50 per cent – from the income tax rolls. They get a new one-page form to send the Internal Revenue Service saying ‘I win’. Those who would otherwise owe income taxes will save an average of nearly $1,000 each.

“All other Americans will get a simpler tax code with four brackets – 0 per cent, 10 per cent, 20 per cent and 25 per cent – instead of the current seven. This new tax code eliminates the marriage penalty and the Alternative Minimum Tax while providing the lowest tax rate since before World War II.”

(It seems, however, that the banding will be a little more complex than that in reality. For example, the top 1 per cent would have a federal tax rate, and keep in mind that all these taxes mentioned are federal; state tax may also apply. That said, there are some states that do not levy all or some of the taxes.)

“No business of any size, from a Fortune 500 to a mom and pop shop, to a freelancer living job to job, will pay more than 15 per cent of their business income in taxes. This lower rate makes corporate inversions unnecessary by making America’s tax rate one of the best in the world.”

“No family will have to pay the death tax. You earned and saved that money for your family, not the government. You paid taxes on it when you earned it.”

Long-term tax solutions

According to US thinktank The Tax Policy Center, effective Federal marginal income tax rates on wages and salaries would be reduced by about 2 percentage points, on average, under Trump’s tax plan comparedwith current law.

The top 0.1 per cent of earners would see a cut of over 7 percentage points, but those with the lowest incomes would see less than a 1 percentage point cut.

That is the sort of regime you would have to compete with if a low rate of tax was your main point of differentiation. It is not really a feasible, long-term source of competitive advantage. It is very easy to copy.

And would you get enough financial volume to make it pay? If you lower the corporation tax rate to, say, 15 per cent, you need to get more businesses paying it and/or paying it on a much wider tax base.

Business success – and UK PLC is no exception – depends on three key factors: price, costs and volume of transactions. If you do not make up for the loss the lower rate (the price in this context) causes, then something is going to suffer, such as public/social services. But implementing it is not rocket science.

“It is not really a feasible, long-term source of competitive advantage. It is very easy to copy.”

Does tax tackle individual behaviour?

Leaving the macro arguments for a while, tax also has the capacity to affect the behaviour of individuals. That is why successive chancellors have rarely left it alone.

Tax relief on pensions, venture capital trust and enterprise investment scheme incentives, and tax freedom for Isas have all been to encourage savings. We have had Life Assurance Premium Relief in the past to encourage investment in life assurance. And targeted and general anti-avoidance rules have been aimed at preventing or putting a stop to certain behaviour the Government considers undesirable.

And it all works to a point. Some even become compelled to seek out tax saving at all costs – but that can sometimes result in going too far. The tax tail wagging the dog is generally something to avoid. So while no one should be overweight in tax saving motivation, it is important to have the desire to minimise it by legitimate means.

Once you have got performance risks and aspirations nailed, doing whatever it is you have planned to do tax-effectively can result in a meaningful outcome for your client. An outcome that is utterly dependent on your knowhow and expertise; not the market. This is something well worth paying for.

Tony Wickenden is joint managing director of Technical Connection. You can find him Tweeting @tecconn

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