Some quick thoughts on Labour’s Avoidance/Evasion announcement

Below is Labour’s Press Release on tackling tax avoidance and evasion. These things are not typically made available to the public – so I have taken the liberty of publishing it below.

Some brief thoughts on the announcement follow:

(1) Labour will tackle the beneficial taxation of private equity carried interests. Whilst this tax break is, perhaps, uglier even than the non-dom remittance basis, these individuals are highly mobile and the behavioural effects of removing this tax break cannot sensibly be considered in isolation from the increase in the top rate of tax, the mansion tax, and removal of the remittance basis of taxation for non-doms

(2) having pointed out that the Tories’ projected £5bn yield from tackling tax avoidance is meaningless if unspecified (actually I was a little blunter) I cannot fail to make that point in this context. That having been said, the carried interest changes are newly announced today. And there are a series of previously announced measures all supporting that £7.5bn target (including the non-doms measure which I continue to think will provide a substantial yield). Perhaps critically, unlike the Tories’ £5bn, Labour’s £7.5bn is not being committed in support of future spending plans: it is a mere target.

Do I think this target is achievable? See (4) below.

(3) measures to improve the accountability of HMRC are long overdue. Indeed, these proposals do not, I would say, go nearly far enough. It is to be hoped that Labour is merely signalling what ground it expects its previously announced enquiry into HMRC practices to cover

(4) the success of measures to tackle the informal economy will be central to Labour’s ability to meet this ambitious target. Both parties know this area to be of critical importance – both the former Financial Secretary to the Treasury David Gauke and the current Shadow Chancellor have tried to raise the profile of this issue. But as to what those measures should look like: neither side has yet advanced workable proposals

(5) It is neither fair – nor accurate – to describe the Tories as having presided over an increase in the tax gap.

​​Labour announces Ten Point Plan to Tackle Tax Avoidance and £7.5 billion target to reduce avoidance and evasion

Labour’s Shadow Chancellor is today setting a tough new target for the Treasury and HMRC to cut tax avoidance and evasion by at least £7.5 billion a year in the next Parliament and a ten point plan to help deliver it.

Ed Balls will give the Treasury and HMRC warning that on the first day of a Labour government there must be:

  • A draft Finance Bill which is an Anti-Tax Avoidance Bill and delivers the legislation needed for the measures set out in Labour’s ten point plan to tackle tax avoidance and evasion;
  • A report from HMRC on all current measures and processes for tackling tax avoidance and evasion, so that Labour’s review of culture and practices at HMRC can make an immediate start.

He will also ask the Bank of England to focus on risks from the informal economy, including avoidance, evasion and the tax gap, in delivering its financial stability objective.

Labour’s immediate review of culture and practices at HMRC will help deliver this reduction of at least £7.5 billion a year in tax avoidance and evasion in the next Parliament – with the ambitious goal of doing so by the middle of the next Parliament. This will reverse increases in the tax gap under the Tories and get it back on a downwards trajectory.

He will also challenge the Tories to back Labour’s plan, which includes Labour’s pledge to abolish the 200 year old non-dom rules and action to tackle tax avoidance by hedge funds.

Measures in Labour’s plan also include changing the so-called  ‘carried interest’ rules which allow private equity managers to pay lower rates of Capital Gains Tax – instead of income tax – even when they are not investing much of their own money.

Both the Chancellor and Chief Executive of HMRC will also have to present an annual report to Parliament, and give evidence to the Treasury Select Committee, on the government’s progress in tackling tax avoidance and evasion.

Labour’s ten point plan sets out a series of measures it will take in order to help raise billions of pounds a year and protect the nation’s finances.

In addition to abolishing the non-dom rules which Labour has said will be used to help get the deficit down, the concrete tax avoidance measures we have set out – including new measures today and Labour’s changes to pension tax relief for the very highest earners – will mean Labour can fully fund our NHS Time to Care Fund, abolish the bedroom tax and cut tuition fees to £6,000. Additional revenues raised over and above this will be used to help get the deficit down.

Ed Balls, Labour’s Shadow Chancellor, said:

“The Tories have spent the last week explaining why they won’t tackle tax avoidance and defending the non-dom loophole.

“They just don’t understand that when working people are paying more in tax it’s a scandal that some people can get away with not paying their fair share.

“The Tories can claim they’ll raise money from tackling tax avoidance, but the amount of uncollected tax has gone up under this government. And when push comes to shove they refuse to close the loopholes or take the tough action that will make a difference.

“It will take a Labour government to call time on this lax approach and launch an assault on tax avoidance.

“We will set tough targets for HMRC to reduce tax avoidance and evasion by at least £7.5bn a year. Our ten point plan will take the tough action needed to help us get there and we will start on day one of the next Labour government.

“We will close the loopholes the Tories won’t act on, increase transparency, toughen up penalties and abolish the non-dom rules. And our first Budget will make sure that, following an immediate review of HMRC, it has all the powers and resources it needs to come down hard on tax avoidance and evasion.

“Working people who are paying more in tax want everyone to pay their fair share. And there shouldn’t be one rule for a few and another rule for everybody else. The Tories should back Labour’s plan and stop defending the indefensible.”

Editor’s notes

Labour’s Ten Point Plan to Tackle Tax Avoidance:

  1. Abolish the non-dom rules so that wealthy people are not able to use loopholes to avoid paying tax like the rest of us, while introducing a temporary residence rule for those genuinely in the UK for a short period of time, such as university students.
  2. Re-write the rules which allow private equity managers to get away with paying less tax than ordinary working people even when they have not been investing their own money
  3. Close loopholes used by hedge funds to avoid stamp duty
  4. Force the UK’s Overseas Territories and Crown Dependencies to produce publicly available registries of beneficial ownership
  5. Increase penalties for tax avoidance including new penalties for those who are caught by the General Anti-Abuse Rule
  6. Close loopholes like the Eurobonds loophole which allow some large companies to move profits out of the UK and avoid Corporation Tax
  7. Scrap the “Shares for Rights” scheme, which the OBR has warned could enable avoidance and cost £1bn
  8. Tackle disguised self-employment by introducing strict deeming criteria
  9. Tackle the use of dormant companies to avoid tax by requiring them to report more frequently
  10. Make country-by-country reporting information publicly available

Labour’s £7.5bn target for cutting tax avoidance and evasion

Under the last Labour government the tax gap was falling by £1.5bn a year on average between 2005-06 and 2009-10. But under the Tories it has been increasing by an average of £1bn a year.

The next Labour government will set a target to not only get back to avoidance and evasion falling at £1.5bn a year, but reverse the increases under the Tories as well.

That will mean cutting tax avoidance and evasion by £7.5bn a year – with the ambitious goal of doing so by the middle of the next Parliament.

9 thoughts on “Some quick thoughts on Labour’s Avoidance/Evasion announcement

  1. Can you explain how Labour are going to enforce a fine for legal tax avoidance?

  2. Have you actually read the post? It’s not mentioned.
    But both Labour and the Tories propose to levy penalties on tax avoidance behaviour which works – albeit is then counteracted by the GAAR.

  3. Some quick thoughts from myself.
    The review by itself is hardly likely to raise any large amounts quickly – it’s not a tap. It will take time to review, change legislation and recruit to a different level. Skilled people may be in short supply, so will Labour break the pay limits imposed by the Coalition?
    And there has been one year when HMRC Tax Gap has gone up, but it has been lower than when Labour was in office. Ironically, if avoidance is defined in wider terms, that alone might raise the Tax Gap!
    1. We’ve been around the houses on this. It probably is a return to Resident/Not Ordinarily Resident. And new ways of disguising beneficial entitlement…
    5. There’s already up to 200% in penalties. How much higher is needed? Instead, why not just go for Anti Avoidance Rule and even a clearance system, maybe funded by applicants?
    8. If it were that easy to address self-employment it would have happened ages ago. Do people think these deeming rules are achievable? Why not review whole basis of employment/self employment?
    9. Nobody has proved dormancy causes big tax losses, just pure speculation. And will need more reporting to be checked, so more staff.
    10 What extra info will CbC give HMRC that lets them deliver more tax?
    So I’m tempted to say some positve things but suspect this is strongly Election material, with little positve antecedents.

  4. In a random order:

    Getting rid of exempt employee shareholder status makes sense. It is a stupid idea that has been implemented in around 300 – 400 companies and almost all of these will be in situations where there is a hope that the share price will increase and the individuals don’t care about asking their boss to consider giving them unpaid time off to go on a training course. How much tax will this save? Very little at grant (say 350 companies x 3 people x £2,000 x 40%), not even £1m. How much will it save on exit? No idea. Not many will grow the share price enough to make any money. Most will have been eligible for ER. So if one-third exit for £1m (which is probably on the high side) then it would be roughly 350 x 1/3 x 3 x £1,000,000 x 10% to 28%). So with those guesses that would save around £70m. Not quite the £1,000m that Ed Balls has previously spent about 10 times.

    Carried Interest? I can’t see any way of it being changed so that it is taxed on anything other than a cash basis (i.e. taxing a carried interest on an accruals basis is just silly). The individuals with existing carry will know how big their gains are before they are realised and so then it will be a very easy decision to make about leaving the UK before it is realised (or a new fund is set up). I will leave it to people like the BVCA to say what they expect will happen to their industry.

    Disguised self-employment will be hard to deal with. I think the salaried members rules have helped that in the context of partnerships (but change the mechanical nature of Condition C as it’s easy for high earners to use that to get around it). But you need to find a way to deal with PSCs as wel. If you could, my way around it would be to get rid of the hidden national insurance subsidy on the self-employed. Economically, why should the self-employed pay no employer’s NIC on their profits? And it’s easy to change, just increase the marginal class 4 NIC rate from 2% to 9% (9% = roughly 13.8% less tax relief + 2%). If there are circumstances where this is not right (say where the business is taking risks that are good for the economy) then give a non-hidden subsidy for that. This could save around £3bn per year. Then why not also add a PAYE-like rule? Drawings are subject to PAYE unless they have already been taxed as trading income?

    The issue then is PSCs. Someone of £50/£60k per year can save £6,000 to £7,000 a year with a PSC. I’d love to have a PSC. Yes, we all know that IR35 ‘should’ catch ,many of these but HMRC does little to check them and so it is a risk that people insure against. But designing a better version of IR35 is quite hard and enforcing it is even harder. If you don’t deal with this at the same time then it is almost pointless tackling disguised self-employment.

    I think penalties for GAAR makes a great deal of sense. I told someone that what they were doing was likely to be caught by GAAR. They then smiled, thought for a while, made a few random statements that made no commercial sense, and did it anyway.

    I think that Labour is understating the behavioural implications of increasing the additional rate though. My experience is that when the highest marginal rate was 42%, ‘normal’ highly paid people did not really want to do anything to avoid it. When it was announced it was going up to 47%, they listened quite carefully but found their own problems. When it was announced it was going up to 52% they listened very carefully, found their own problems and then solved them. My experience is that when people keep less than half of what they earn, their attitude flips.

    In terms of people leaving the UK because of the 50% rate, I know one person (“I am only a small billionaire”) who left the UK because of this and is now back. Not much evidence I know but I think the best you will be able to hope for is anecdotes.

  5. If history is any guide, these policies would only extract more tax from the “little people” such as former employees who have been pushed into self-employment, while those who are the ostensible targets would find ways around (including emigration and transfer of assets to a non-resident spouse).

    The most productive action for a future Labour Chancellor would be to turn a deaf ear to all those lobby groups who want tax breaks for themselves. How many billions have been lost to HMRC through film schemes and other wangles which Gordon Brown so enjoyed announcing in his budgets?

  6. Do Labour (as the Opposition) actually have the right to demand HMRC have legislation ready on day 1? Seems like a waste of everybody’s time, given that there next to no chance of any party winning a majority and in a coalition things can get watered down.

    I’m not sure exactly how HMRC are supposed to prepare legislation for something as vague as repealing all loopholes “like the Eurobonds loophole”. (Although, on reflection, based on recent efforts I suspect it will just read “All sections which it could be reasonably said are reasonably similar to the quoted Eurobond in terms of their unreasonableness are hereby repealed” and explain what that is supposed to mean in 400 pages of supplementary guidance).

  7. “9.Tackle the use of dormant companies to avoid tax by requiring them to report more frequently”

    And dormant companies are used to avoid tax how exactly?

    Someone plans to trade under the tax radar so sets up a company at Companies House (who then inform HMRC who then write to the company founders).

    I mean is there the slightest bit of evidence that this is happening?

    That alarmist rumours without any foundation or rational have found their way into Labour’s tax plans is not reassuring.

Comments are closed.