Wednesday, 29 January 2014

50p Tax

If you ask me the problem with the UK's tax system is not so much a 40p or 45p or even a 50p tax rate, but the fact that so many people (and companies) in the UK are involved in aggressive tax avoidance schemes.

Now as a matter of principle I object to a 50p tax rate, because I think it's ridiculous for any government to take more than half of what a person earns - and a 50p tax rate does exactly that once you add on National Insurance costs.

To my mind penal rates of income tax are a disincentive for people to make money and it would be much better if the government focused on taxing unearned income - which would be much fairer and more progressive all round.  

So, speaking personally, I think that the Government's total tax take should never exceed 50% of what someone earns and that the real focus of attention should be on elaborate tax avoidance measures - which is where the big money is lost in the UK.

All of this is back in the news again because Labour's shadow chancellor, Ed Balls, has announced that his party will put the top tax rate back up to 50p, if they win the next election.

Which is really odd because the People's Party was not remotely interested in raising tax rates - until the dying days of the last Labour Government when it finally introduced a new 50p rate in April 2010.     

Yet this move came after 13-years in office when Labour had an overall majority in the Westminster Parliament, yet this belated 'deathbed conversion' had much more to do with politics than economics and, of course,  the fact that the May 2010 general election was just round the corner.

The Institute for Fiscal Studies (IFS) has poured cold water on Labour's plans and their best guesstimate is that a 50p tax rate (which is supposed to be a temporary measure) will not raise significant funds.

Which brings me back to my first point - UK tax policy ought to be about tackling aggressive tax avoidance and taxing unearned income because that is where the real problems lie.  

Tax Avoidance (27 January 2014)

Why is it that people who are already extremely wealthy find it so difficult to pay their fare share of tax?

Even someone like Sir Alex Ferguson, who is wheeled out regularly to support the Labour Party, seems to favour elaborate tax avoidance schemes - according to this report from the Times newspaper.

Only this time HM Revenue & Customs won its High Court battle to stop stop wealthy investors from claiming £404,000 in tax relief - from funds worth only £173,000.  

Ferguson and Eriksson lose film tax relief battle

Sir Alex Ferguson is a member of a film investment scheme that sought £117 million in tax reliefAndrew Yates/ Getty Images

By Alexi Mostrous Special Correspondent

Sven-Göran Eriksson, the former England manager, and Sir Alex Ferguson, the ex-Manchester United manager, are among hundreds of wealthy investors facing a gloomy Christmas after Revenue & Customs again defeated their claims to £117 million in tax relief.

The 289 members of Eclipse 35, a controversial film investment scheme, sought the tax relief as part of a complex £1 billion deal to license distribution rights to two Disney productions called Enchanted and Underdog.

Yesterday a High Court judge confirmed an earlier ruling that the scheme was not “a trade”, depriving its members of the possibility of claiming tax relief. If Eclipse 35 had worked, members could have enjoyed an average of £404,000 in tax relief on a personal investment of £173,000.

Mr Justice Sales agreed with tax judges last year who ruled that Eclipse 35 did not have “any capability whatsoever to be part of any strategic or day-to-day planning for the marketing or release of the two films”.

He also found that the main income streams from the films involved “no prospect of loss or gain”, an important aspect of a trade.

The Eclipse members put up £50 million of their own cash which, together with £790 million in loans from Barclays Bank, were used to buy distribution rights. Disney agreed to lease back the rights in return for an annual payment over 20 years. Members argued that tax relief was claimable on the large interest payments arising on the Barclays loan.

Last year, the Revenue signalled that it might try to tax payments coming back to investors from Disney, meaning that they could receive tax bills significantly greater than the relief they might have received.

Many corporations have distanced themselves from investment schemes such as Eclipse 35, citing an increasing intolerance of anything seen to be tax avoidance.

“If Eclipse came up again, would we help fund it?” said a source at Barclays, which financed Eclipse 35 in 2007, last July. “No.”

Last year, Dave Hartnett, the former head of the Revenue, said that his department would increase legal action against film investment schemes. “I think we’ll clean up on film schemes over the next few years,” he said.

Eclipse 35 was set up by Future Capital Partners (FCP), which received £44 million in fees. Disney was paid £6 million. FCP denies that it promotes tax avoidance schemes and says it commercial operations for profit.

An FCP spokesman said: “We are naturally disappointed as we consider that Eclipse 35 is a commercial, trading, film business, which we expect to generate at least £474 million of UK taxable net profits over its life — over one and a half times the amount of tax relief that was claimed.”