The taxman has given tax advisers its clearest signal yet that it will “bear
down on those who bend or break the rules.”
HMRC said it would crack down on those who help clients avoid the new 50% top
rate of income tax, which comes into effect next year, by the use of schemes
converting income into capital.
Dave Hartnett, permanent secretary for tax, said HMRC had become aware of
some advisers “dusting off old schemes” that convert income into capital gains
to benefit from the lower capital gains tax (CGT) rate, currently at 18%.
He added that “one or two are causing us concern – there’s a lot of noise
[that] advisers are looking at schemes involving tax-beneficial loans to
employees, rather than remuneration, or the award of nil-value shares.”
The issue was first raised in a speech at the International Bar Association
in Madrid last week, where Hartnett fired a warning shot at tax advisers “who
see policy and rule changes that the government make to address the financial
crisis… as providing scope and opportunity to bend the rules further.”
Taking the UK as an example, he told the conference that the new top rate of
income tax at 50% “which has not yet taken effect, is forecast by some to
produce only 30% of the sum that arithmetically would be due” because “some tax
advisers in my country have again become alchemists – turning lead into gold, or
rather, turning income into capital, which… is taxed at 32 percentage points
below the new 50% rate.”
The huge disparity between the incoming top rate of income tax and the rate
for CGT could potentially be a cause for concern for any new government if
Labour – who introduced the 18% rate in April 2008 – were to lose next year’s
Would a newly-elected government look to reduce or abolish the disparity?
There is some historical precedent for this.
Nigel Lawson, chancellor of the exchequer for the Conservative administration
in the 1980s, equated the top rate of income, which was then 40%, to the top
rate of CGT to prevent tax accountants and tax lawyers coming up with ever more
elaborate schemes to convert one to the other.
Stephen Herring, senior tax partner at BDO, observes that while CGT does not
collect so much revenue for the Treasury “one might be able to findv£1bn out of
it if they did somethingvpretty dramatic.”
Hartnett cautioned that HMRC would not hesitate to ask ministers to change
the law in relation to turning income into capital arrangements if necessary.
IN OUR VIEW
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