“More than 9,000 of the richest people in the UK collected more than £1m each in capital gains last year, exploiting a loophole that could result in them paying tax at a rate as low as 10%.
Economists at the Institute for Fiscal Studies (IFS) thinktank said wealthy professionals often chose to form companies and partnerships to be eligible for lower capital gains tax (CGT) rates rather than collect salaries that would be subject to the top rate of income tax.
HMRC data shows 9,000 people paid just £5.1bn in tax on £33.7bn of capital gains income in the latest financial year available. That works out at an average tax rate of 14.8%, lower than than the basic rate income tax of 20% that people pay on salaries of between £12,501 and £50,000.
Andy Summers, a tax expert and assistant professor at the London School of Economics, said that despite recent changes to tax rules, private equity fund managers were still able to receive most of their remuneration in the form of “carried interest”, taxed as capital gains instead of income. Other highly paid professionals can convert their income into gains by retaining profits inside their companies as they approach retirement.
“Capital gains are highly concentrated at the very top of the income distribution; the vast majority of reported gains go to people who received more in one year than a worker on the median wage would earn in their entire lifetime,” he said at an IFS conference in London on Tuesday titled “Inequality and the very rich: what do we need to know?”
Business owners can qualify for entrepreneurs’ relief, under which they can pay just 10% CGT when they sell all or part of a company. The standard CGT rate is 20%. This compares with the 40% income tax rate on salaries of between £50,001 and £150,000.
People recording gains of more than £1m each accounted for 62% of all capital gains receipts in the 2017-18 financial year, the latest available data set.
Mike Brewer, a professor of economics at the University of Essex and expert on inequality, who chaired the debate, said: “Capital gains are not counted as income when the Office of National Statistics, Department for Work and Pensions and Institute for Fiscal Studies estimate income inequality in the UK. This means that our impression of inequality or top income shares is overlooking 9,000 people all with at least £1m of capital gains, with an average capital gain of £3.7m, and a total capital gain of £34bn.” …”
Oh dear …austerity for the rich, that will be interesting!
Owl says: Well, that’s jolly convenient isn’t it!
“The tax office has been “swamped” with 5.7 million pieces of information about overseas bank accounts held by three million British citizens under the terms of a new international treaty, according to tax experts.
However, HM Revenue & Customs (HMRC) does not have enough staff to investigate the information, according to the tax consultancy BDO, so is instead blitzing the people named with speculative letters asking them to send details of their financial affairs.
The information is coming from 100 countries under common reporting standards (CRS) agreed by the international Organisation for Economic Co-operation and Development. The standards are designed to stop tax evasion, or avoidance, by making governments aware of overseas money held by their citizens. HMRC says in its annual report that the agreement has “created an unprecedented increase in the global transparency of offshore tax affairs”.
Richard Morley, a partner at BDO, says, however, that this flow of data is in danger of overwhelming the taxman.
Research by Pinsent Masons, a law firm, found that HMRC’s investigators last year made 540 requests to overseas authorities for information on the highest-net-worth individuals that it believed may be storing tens of millions of pounds abroad to avoid tax.”
Source: Times (pay wall)
“Corporate addition to high debt threatens to destabilise the world economy. Not my words – those of the International Monetary Fund.
A recent report by the IMF says that “in a material economic slowdown scenario, half as severe as the global financial crisis, corporate debt-at-risk could rise to $19 trillion —or nearly 40 percent of total corporate debt in major economies—above  crisis levels.”
In other words, in an economic slowdown, many firms will be unable to cover even their interest expenses with their earnings. Countries most at risk are US, China, Japan, Germany, Britain, France, Italy and Spain.
One study estimated that in 2018 UK s FTSE 100 companies alone had debt of £406bn.
Sinking in debt
Low interest rates have persuaded companies to pile-up debt in the belief that they will be able to use it to maximise shareholder returns. The key to this is tax relief on interest payments.
Ordinary folk don’t get tax relief on interest payments for mortgages or anything else because successive governments argued that such reliefs distort markets and encourage irresponsible behaviour.
However, corporations get tax relief on all interest payments. Currently for every £100 of interest payment, companies get tax relief of 19%, the prevailing rate of corporation tax, which reduces the net cost to £81. The tax subsidy enables companies to report higher profits.
Companies do not necessarily use debt to finance investment in productive assets. The UK languishes near the bottom of the major advanced economies league table for investment in productive assets and also lags in research and development expenditure.
British companies appease stock markets by paying almost the highest proportion of their earnings as dividends. BHS famously borrowed £1 billion to pay a dividend of £1.3bn. Carillion used its debt to finance executive pay and dividends. Thomas Cook had at least £1.7bn of debt but that did not stop lavish executive pay and bonuses.
Corporate debt facilitates profiteering and tax avoidance. Water companies have long used ‘intragroup debt‘ to dodge taxes. Typically, they borrow money from an affiliate in a low/no tax jurisdiction. The UK-based company pays interest which qualifies for tax relief and reduces the UK tax liability.
Many a tax haven either does not levy corporation tax or exempts foreign profits from its tax regime. As a result, the affiliate receives the interest payment tax free.
It is important to note that the company is effectively paying interest to another member of the group and no cash leaves the group. The inclusion of interest payments in the paying company’s cost base can also enable it to push up charges to customers, especially if has monopoly rights on supply of goods and services.
Thames Water is an interesting example here. From 2006 to 2017, it was owned by Macquarie Bank and operated through a labyrinth of companies, with some registered in Caymans.
During the period, Thames’ debt increased from £2.4bn to £10bn, mostly from tax haven affiliates, and interest payments swelled the charges for customers. Macquarie and its investors made returns of between 15.5% and 19% a year.
For the period 2007 to 2015, the company’s accounts show that it paid £3.186bn in interest to other entities in the group alone. Tax relief on interest payments reduced UK corporate tax liability. For the years 2007-2016, Thames Water paid about £100,000 in corporation tax.
Private equity entities use debt to secure control of companies and engage in asset-stripping. A good example is the demise of Bernard Mathews, a poultry company.
In 2013, Rutland Partners acquired the company and loaded it with debt, which carried an interest rate of 20%. This debt was secured which meant that in the event of bankruptcy Rutland and its backers would be paid before unsecured creditors.
In 2016, Bernard Matthews’ directors, appointed by Rutland, decided that the business was no longer viable and sought to sell it. However, they only sold the assets of the company which realised enough to pay secured creditors, Rutland and banks.
The big losers were unsecured creditors, which included employee pension scheme, HMRC and suppliers. The purchaser of the assets told the House of Commons Work and Pensions Committee that it offered to buy the whole company, including its liabilities, but the offer was declined by Rutland because by dumping liabilities it collected a higher amount.
What needs to change
There is some recognition that corporate addiction to debt poses a threat to the economy. Following recommendations by the Organisation for Economic Co-operation and Development, the UK has placed some restrictions on the tax relief for interest payments, but that is not enough.
An independent enforcer of company law is needed to ensure that companies maintain adequate capital. Companies need workers on boards to ensure that directors do not squander corporate resources on unwarranted dividends and executive pay.
The insolvency laws need to be reformed to ensure that secured creditors can’t walk away with almost all of the proceeds from the sale of assets and dump liabilities.
And finally, tax relief on debt needs to be abolished altogether.”
“Almost three-quarters of companies who have been given major government contracts have operations based in tax havens, according to a new report.
Value Added, published on Sunday by the thinktank Demos, reveals that 25 of the government’s 34 strategic suppliers – organisations that receive £100m or more in revenue from the government – operate in offshore centres.
According to estimates, they account for about a fifth of total central government procurement spend. Of these, 19 had operations in jurisdictions included on the EU’s “blacklist” or “greylist” of countries that are considered to be non-compliant with EU international standards for “good tax behaviour”, according to the report.
The Labour MP and former chair of the public accounts committee, Margaret Hodge, said it was “perverse that the government continues to pay significant sums of taxpayer money to big corporations that practise tax avoidance on an alarming scale”.
There are claims that aggressive use of tax havens can distort competition.
The Labour peer, Lord Haskel, added: “For too long large international tech companies have failed to pay their fair share of tax while being rewarded with government contracts, leaving British companies at a competitive disadvantage.”
The Demos report states: “Large multinational companies, for example, continue to squeeze their tax contributions ever lower: the OECD estimates that US$100–$240bn (£78bn-£186bn) is lost globally in revenue each year from base erosion and profit shifting by multinational companies.” …”