Budget figures only add up with £250m from 'disguised remuneration'

THE “FISCALLY NEUTRAL” Budget owes a lot to tax generated through its disguised remuneration legislation – £750m a year, to be exact. To put the policy in context, the revenue generated by the other tax avoidance measures ann­ounced in the Budget collectively amount to £575m a year by 2015/16. This is important money for the Exchequer.

The legislation targets Employee Benefit Trusts (EBTs) – trust funds that provided non-repayable tax free loans – and the unapproved Employer Funded Retirement Benefit Scheme (EFRBS) pension schemes. It was first mooted in a consultation document on the 2011 Finance Bill,  released in December 2010. But the estimate in that document was £500m. So what explains this discrepancy?

The £750m in the Budget document is based on unpublished data from HMRC that suggests that Exchequer losses in 2008/09 were in the region of £1.1bn. This is assumed to grow by 5% a year until the current year, then in line with the Office for Budget Responsibility’s forecasts for econ­omic growth.

It then takes into account behavioural changes, incl­uding the intended consequence of collecting unpaid PAYE revenue. There will be other behavioural differences – such as the use of share schemes instead of EBTs and EFRBS. There is also likely to be a consequential impact on corporation tax, it adds. All this reduces the yield by between 50% and 60%, taking us to the £750m figure.

The methodology behind the original figure of £500m is unclear and the December consultation does state that the final costing will be subject to approval by the OBR.

The Treasury said that this discrepancy could be explained by improved information and intelligence on the usage and take-up of EBTs and EFRBs, and minor changes to the economic forecast. But the data cited in the Budget is based on figures from 2008/09 and minor changes cannot explain a 50% increase. So what can?

One explanation could be that the scope of the legislation has grown since its initial formation. Following the December consultation, the profession was concerned about how wide ranging it was. According to the Treasury’s document, it was only meant to abolish EBTs and EFRBS, which were used by an estimated 5,000 employers, with 50,000 employees indirectly benefiting from them.

Although the legislation successfully tackled this, there was collateral damage on the way – deferred remuneration schemes, salary sacrifice arrangements and certain pension plans that had no tax avoidance elements to them (see box).

This wider scope could account for the extra £250m. Once the government realised that the original legislation could incorporate more schemes than had been intended, it could have revised the figure accordingly. But this does not sit well with ministers’ commitment to transparency and a fair tax system.

The alternative explanation is perhaps even more damning – that the fiscally neutral Budget is predicated on estimates that are hopeful rather than considered.
The government would likely point to the disclaimer in the original document. But the figure ratified by the OBR was a 50% increase on the original estimate. If the Treasury officials were so out originally, it at least calls into question their competence, especially as they drafted the legislation.

The more likely explanation is that both estimates were based on guesswork. This is not a stick to beat the government with in itself, as it is impossible to predict behavioural change and, by its very nature, tax avoidance is not transparent. But tax avoidance revenue is a significant pillar in the government’s forecast, and disguised remuneration is the predominant material in the pillar. If this is wrong, it will leave the Exchequer in a weak position and, crucially, could bring into question other estimates in the Budget.

Either way, the case of the appearing £250m is one that could have serious implications for businesses, individuals and the taxman himself.

(Picture © Prime Minsiter’s Office/Crown Copyright)