The chancellor has expressed shock after looking at the tax returns of multi-millionaires who have exploited loopholes to legally cut their bills with HM Revenue & Customs.
Although the move could be considered political posturing after a couple of tough weeks for the coalition government over the ‘granny’ and ‘pasty’ tax furores, it does prepare the ground for the anti-avoidance law consultation that was announced in the Budget.
After being shown the anonymous returns by HMRC, George Osborne said that he was convinced millionaires must pay a minimum rate of tax equivalent to about a third of their earnings – a so-called ‘tycoon tax’.
He told The Telegraph: "I was shocked to see that some of the very wealthiest people in the country have organised their tax affairs and, to be fair, it’s within the tax laws, so that they were regularly paying virtually no income tax. And I don’t think that’s right."
Osborne added that he was talking about people right at the top – those with incomes of many millions of pounds a year.
"The general principle is that people should pay income tax and that includes people with the highest incomes," he said. "I’m not allowed to be shown the names of the individuals, but I’ve sat with the most senior people at the Inland Revenue, the people who run some of the high net worth units there. They have given me examples, anonymised examples, and so we are taking action."
Aggressive avoidance schemes
The confidential study undertaken by HMRC revealed that top earners were using "aggressive" avoidance schemes to cut their income tax rate to an average of 10%. It also found that the UK’s 20 biggest tax avoiders used the following three main loopholes, to legally reduce their income tax bills by £145 million between them:
- Writing off business losses in one of their companies against their income tax bill
- Offsetting the cost of business mortgages or borrowing on buy-to-let properties against their income tax bill
- Taking advantage of relief on donations to charity
Anti-poverty campaigner and tax expert Richard Murphy, who warned in 2008 that the scale of tax avoidance was far higher than HMRC calculated, came up with a three-point plan for Osborne.
He said: "The first is re-estimate the issue. I’d suggest that involves talking to the very few people who have been right about it to date, including me. Second, definitions of abuse have to very clearly be redefined. The mantra, too readily accepted by HMRC ‘that it’s legal so it’s acceptable’ has to be confined to the bin. Third, we have to have comprehensive action to tackle this abuse. Now. Nothing less will do."
From next year, the total amount of tax relief that any individual can claim will be limited to 25% of their income or £50,000, whichever is greater. Although such a proposal could lead to restrictions on philanthropic giving, Osborne pledged to protect and encourage the practice.
"I was very clear in the Budget that we are specifically looking at making sure we are still encouraging philanthropy and charitable giving. But that is a specific issue we can deal with," he said.
