Could Tory top rate cuts discourage avoidance?

by Calum Fuller

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11 Oct 2012

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Chancellor of the Exchequer George Osborne

THE TORIES have been quite vocal about tax at their conference this week.

It started with George Osborne (pictured) reiterating his conviction that a 50% top rate would hit the poorest in society hardest, rather than the richest, as he talked up his decision to bring the rate down to 45p. Then he announced the ‘mansion tax' would be placed on a rather ornate shelf, never to be seen again.

That was swiftly followed by Boris Johnson's call for Osborne to go further and cut the top rate down to 40%, branding Britain's tax system "uncompetitive".

Judging by the rhetoric, it would seem that the Tories are heading steadily in that direction.

I have a theory about why they would choose to take such steps while simultaneously claiming that they are asking the rich to "make another contribution".

Aside from their repeated statements that these moves will make Britain more attractive to those who can provide jobs and investment, it could conceivably be a ploy to discourage tax avoiders.

The thinking is that there is a psychological watershed that occurs when a taxpayer starts to pay half – or more – of their money to the taxman, and so they seek to avoid that by engaging in the various avoidance schemes we have heard so much about.

In reducing the top rate, the Tories could be seeking to remove that factor, and therefore reduce the amount of people participating in those schemes, thereby increasing their tax yields.

That, in conjunction with an effective general anti-abuse rule, could well have a potent effect.

How the landscape of the situation evolves over the coming year will be intriguing to observe, whether it be through fewer aggressive tax avoiders – or the poorest benefiting.

Calum Fuller is the tax correspondent for Accountancy Age and Financial Director.

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