One UK newspaper compared Alistair Darling to Robin Hood last week after he
increased the top income tax rate to 50%.
But, while Robin Hood redistributed wealth with a bow and arrow, Alistair
Darling has to battle against a large number of tax avoidance schemes and tax
The 50% tax rate for people earning more than £150,000 is due to come into
force in April 2010.
Elsewhere in the Budget, the government announced plans for tougher rules to
combat avoidance and a bigger penalty for taxpayers and companies who fail to
disclose tax avoidance schemes.
Tax experts say the obvious way for the rich to avoid the 50% tax rate is to
switch their income to be classified as capital gains, which is taxed at 18%.
The difference between the two tax rates gives wealthy taxpayers a ‘huge
incentive’ to convert income to capital gains, says George Bull, head of tax at
But high earners won’t find it easy to swerve the 50% rate, experts reckon,
as HM Revenue and Customers has blocked a lot of the schemes and will be keeping
a close eye on ones involving capital gains.
Meanwhile, the government has said it is prepared to legislate
retrospectively if it finds a dodgy avoidance scheme, meaning taxpayers and
companies could be liable for schemes operating before any law changes.
Since 2004, HMRC says it has recouped £11bn through the closure of tax
Under current rules – known as ‘Disclosure of Tax Avoidance Schemes’ introduced
in 2004 – the fine for non-disclosure is £5,000.
The taxman is considering how to spot tax avoidance schemes at an earlier
stage by identifying more ‘hallmarks’ of common schemes.
Suspicious signs include keeping the tax scheme arrangements secret from HMRC
and when the promoter of the tax scheme takes a commission based on the amount
of tax they save their customer.
Taxpayers or companies using avoidance schemes are given a reference number
which has to be disclosed on their tax returns. This helps HMRC monitor how
widely certain types of scheme are used.
‘The current rules have been very successful because they are essentially an
early warning system to the Inland Revenue,’ says Nick Parker, regional director
of tax at top 10 accounting firm Tenon.
The other option for City staff outraged at the 50% tax rate is to leave the
country. But, with tax rates rising in other business and financial centres,
such as New York and Dublin, bankers options seem limited.
An HMRC spokeswoman said discussions with tax advisers, business and
professional bodies would focus on income tax and capital gains tax and examine
areas for improvement in anti-avoidance measures. She added that there was no
evidence that people were planning to avoid the 50% income tax rate by
disguising their income as capital gains. ‘The government has a clear record of
blocking tax avoidance if it arises,’ she said.
Does Darwin's theory apply to taxation? Colin ponders...
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