George Osborne: “Workers of the world, unite!”

Remember shares for rights?

I’ll let Osborne jog your memory for you. Here’s an extract from his 2012 Conference Speech:

This idea is particularly suited to new businesses starting up; and small and medium sized firms.
It’s a voluntary three way deal.
You the company: give your employees shares in the business.
You the employee: replace your old rights of unfair dismissal and redundancy with new rights of ownership.
And what will the Government do?
We’ll charge no capital gains tax at all on the profit you make on your shares.
Zero percent capital gains tax for these new employee-owners.
Get shares and become owners of the company you work for.
Owners, workers, and the taxman, all in it together.
Workers of the world unite.

And the deal would be sweetened by tax breaks. The first £2,000 of shares would be free of income tax. And the first £50,000 of shares free of capital gains tax.

It felt, even at the time, rather ugly. Should we be allowing employers to strip fundamental protections from their employees? Here’s the view of Lord (Gus) O’Donnell, speaking in the House of Lords:


You might think it even worse than that. We weren’t just permitting it. We were, through the tax system, incentivising it. To extend Gus O’Donnell’s metaphor, the rest of us, who fund these reliefs through their tax bills, were encouraging and subsidising the slave trade.

And the amount, and likely beneficiaries, of that subsidy was alarming too. As Paul Johnson of the IFS warned at the time:

it has all the hallmarks of another avoidance opportunity.

And although the cost was said to be fiscal washers:


The OBR highlighted that this was only because Treasury was looking at it only over a five year time scale (an oft-resorted to piece of trickery as I noted here). Beyond that timescale, the cost would quickly rise towards £1 billion per annum (real money, even in Treasury terms: by way of illustration about what was expected to be raised by the Mansion Tax):


But nevertheless we shouldn’t worry because:


Now, I raise this because of a chance remark from a friend at a very grand firm indeed who said that he was spending all of his time constructing shares for rights schemes for private equity and MBO clients. But none, he said, for ‘normal’ people.

Let me explain the swizz, and why it’s so valuable.

Forget about the income tax break. £2,000 might be meaningfully valuable to regular folks. But they’re not (as we shall see) the people for whom Shares for Rights was designed for. And it’s not what the OBR was worried about.

There are two other features that enable – you might almost think encourage – the real swizz.

First, the capital gains tax limit isn’t a cap on the amount of relief. It doesn’t give you the first £50,000 of gains tax free (saving you a mere £14,000 in tax). It’s a cap on the value of the shares when you get them.

Second, the shares don’t need to be ‘normal’ shares. They can be so-called ‘sweet equity’: very special shares for the very special people – the ‘value adders’ at the top.

Now. Assume you’re in private equity and you buy a company for £1m. What value might HMRC attribute to special shares which gave you a right to all of the sale proceeds above £1.25m in five years time? Not very much in a world where the Government can borrow over a five year term at an interest rate of only marginally above 1%. Less than £50,000?

Of course, the invariable logic of private equity deals is that you think you’ll be able to obtain high capital growth. Without that belief you don’t transact. If you’re wrong, then of course the capital gains tax break is worth nothing. But if you’re right?

Assume that in five years time you sell the company on for £1.8m. You’ve now got a capital gains tax break on £550,000 worth £154,000.

I’ve simplified my example – but not relevantly so. Here are some other ones from the law firm Bird & Bird. They conclude, tellingly, by asking: “Is this too good to be true?” (I’ll spare you the suspense. The answer is ‘No’. Or what passes for it if you’re a lawyer).

But don’t just take my word (and Bird & Bird’s) that it’s best used by senior management in private equity deals. Look here. Or here. Or here. Or here. Or… well, you get the picture.

Indeed, of course, as Magic Circle firm Linklaters observed, it was never even designed to be used by lower paid employees.


So much for workers of the world uniting. (Although there is a sort of uniting: together the rest of us have to make up the lost tax.)

Oh, and how’s that monitoring going by the way?

Not so good. I couldn’t find a figure – although one is given for other types of employee share schemes. And I did find an HMRC document entitled: “Tax allowances and reliefs in force 2013-14 or 2014-15: cost not know” which contains a reference to, yep:

Gains on disposals of exempt employee shareholder shares

So whilst it could be the £1bn predicted by the OBR. It could be more. Much more. It could be the whole amount being saved in 2016-17 by cutting tax credits.

Despite what Treasury promised, we Just. Don’t. Know.

The Tax Gap, Updated

This morning saw the release of new Tax Gap figures for 2013/14. Here are some highlights.

In cash terms the Tax Gap remained static at £34bn but in (the more meaningful) percentage terms it fell from 6.6% to 6.4%.Capture

What can we ascertain from these figures about HMRC’s performance if we dig a little deeper? (This question reflecting, as I observed here, that the Tax Gap is better understood as a performance metric than an anti-austerian’s El Dorado?)

This chart probably sums it up best.


For me, the stand-out trends are these.

First, we are beginning – for the really radical measures will take effect only in the tax year 2014-15 – to see the fruits of the Coalition’s success in tackling personal tax avoidance. One can also see this trend (more starkly still) in the slump in the disclosure to HMRC of tax avoidance schemes (for those interested, I have discussed that slump here).

Second, we also see (in relation to excise duties) the effects of the very substantial cuts to HMRC’s FTE staff (more on this below) in the excise gap figures. The Summer Budget appears to have recognised the deleterious effects of these cuts:


(although the cynic in me notes that no figure was there given as to what that additional resource would look like).

But perhaps the most interesting question is what the future will look like. For we are, it seems to me at least, at an inflection point.

As I noted here, HMRC has sustained very substantial cuts in budget and staffing numbers since 2005-6:


My perception is that the progress – despite these cuts – in closing the tax gap reflects a number of different trends.

First, (see here and here) the Conservative Party is presently culturally better equipped to tackle avoidance and evasion than is Labour. The problems of avoidance and evasion are complex and will not be solved by a purity of moral purpose alone. Likely it is that my colleagues on the left will react to this assertion with outrage. But it is common ground across the left spectrum: see this, for example, which I co-wrote with Richard Murphy. And under Cobyn the problem has become worse not better as I noted here:


My intention is that Labour should react, not with outrage, but by recognising the issue and moving to address it.

Second, a consequence of their expertise is that the Conservatives have been able to alleviate the effects of cutting resource through some radical legislative steps: the General Anti Avoidance Rule, Follower Notices, Accelerated Payment Notices, Direct Recovery of Tax Debts to name but a few. There is much more to do – as the Conservatives rightly recognise – in particular around offshore evasion by wealthy individuals which, in consequence of campaigning work done largely on the Left (to which I have been a modest contributor), has risen up the political agenda.

But legislative steps are an imperfect solution. They are imperfect because they cannot address the resource heavy areas of smuggling, the shadow economy and so on. Technological advances – see this piece from the Telegraph on HMRC CONNECT – can assist but we also need investigators.

Perhaps more profoundly, they are imperfect because they create imbalances in the system. Over time they will erode – indeed, they are already eroding – the reputation HMRC has previously enjoyed for fair dealing. I hear this frequently from business leaders – and it is borne out by my personal experience too. If this situation goes unalleviated – and my conversations with senior HMRC staff suggest it will accelerate rather than diminish – it will cause serious harm to HMRC’s ability to collect tax and to the investment climate. This is a very real concern.

However, third, in the short and medium term, I expect these figures to improve. The tax avoidance figures next year will show the effects of the adoption in the Finance Act 2014 of a slew of radical legislative measures – and there is more to come from further legislation in subsequent Acts. And at some stage soon – although the current data records no such trend – we will see some modest benefits from a growing focus on evasion. Modest, because unless someone is brave enough really to tackle the shadow economy, our scope for improvement is limited.

Some tentative thoughts on a sugar tax

It’s a tough business trying to structure a sin tax.

Because your purpose is somewhat confused. Although we readily think of alcohol and tobacco we might also include amongst sins discouraged by taxation flying, quarrying, landfill and no doubt others too. Usually we tax exclusively to raise revenue but not so with sin taxes. Speaking of air passenger duty John Healy, in 2003 Economic Secretary to the Treasury, said in a written answer:

Air passenger duty was introduced in 1994 as a measure whose principal purpose was to raise revenue from the aviation industry but with the anticipation that there would be environmental benefits through its effect on air traffic volumes.

Are you trying to maximise revenue? Or dissuade commission of the sin? And if dissuade, how much? A little bit, presumably, because if you really wanted to dissuade, you’d ban it.

It’s tempting to say these considerations plague the design of sin taxes. But that would suggest, falsely, an elevated status for design. You either fudge it – no, you usually fudge it – or you take intellectual dignity from looking to raise a particular sum of money to spend on countervailing measures. Take this example from the 2001 Budget:


And they can be regressive, sin taxes. Can, because assertions that they invariably are (see, for example, from the Adam Smith Institute):


should be treated with some caution. It all depends on how they’re structured.

The proportion of your disposable income consumed by tobacco duty, for example, falls sharply as your income rises. But with alcohol, not so much (source: ONS).


Indeed, the percentage of our expenditure – as opposed to our disposable income – we expend on alcohol duty is absolutely static as we rise up the income scale (see Table 3(c)).

These points emerge even more powerfully if you look in cash terms (see Table 14).


So the rich smoke less, but drink more, than the poor. I know I do – and I’m pleased I’m not alone.

You’d want to be careful drawing conclusions from this data. But you might tentatively draw a few.

(1) It’s not taxes that discourage the better off from smoking. Although the disincentivising effect of tobacco duty declines as you rise through the income deciles still the rich smoke less. This lower propensity to smoke must derive from something else.

(2) People drink more as they can afford to (Oscar Wilde was wrong: work isn’t the curse of the drinking classes at all). And this suggests that alcohol duty does suppress consumption at its present level – and would suppress consumption more if raised.

(3) If you were inclined to conclude that the rich smoke less because they’re better educated as to the dangers of smoking you’d then have to answer the question why they drink more. This might drive you to conclude that social fashions play a part too.

Are there any implications for a sugar tax? Some tentative ones.

(1) You might start by noting that alcohol and tobacco have no (legal at any rate) substitute goods. The decision you face is to consume or not to consume. But increasing the price of sugary foods and drinks might more readily cause consumers – especially price sensitive ones – to switch to alternatives.

(2) The data on correlations between obesity and income is more complicated than you might think. Whilst for women obesity seems clearly to be correlated with low income the picture is less clear for men. But where there is a relationship, a sugar tax will be regressive – if it’s set at a level where the poor will pay it. The higher the level at which you set it, the more likely the price sensitive consumer will switch to products not covered by the tax. A sugar tax could easily be like alcohol duty – barely regressive at all.

(3) The mixed picture around alcohol and tobacco duties suggest that factors other than affordability are important too. Changing social mores may well rank high amongst them. Perhaps you would earmark revenues – as with the aggregates levy – to fund measures to achieve that change. And to offset the effect on the poor of price rises on sugary foods – by encouraging thrifty and health eating.

On Targeted Anti-Avoidance Rules

[Readers’ Note: I wouldn’t normally publish a piece (reproduced from the Tax Journal, 15 October 2015) written for the technical reader on this blog. But it touches on an important and broader policy issue. If it assists the non-technical reader, a “Targeted Anti-Avoidance Rule” is a (now very common) statutory rule that (relevantly) says a transaction will attract a favourable tax consequence (or fail to attract an unfavourable one) only where achieving a tax saving is not one of the main object or one of the main objects of that transaction.]

We might, rather loosely, divide reliefs in our tax system into two types: those designed to shape our tax system – by improving progressivity, ensuring the ‘correct’ calculation of profits, and so on – and those through which the Government of the day seeks to encourage certain types of behaviour in order to advance its policy objectives. Come to think of it, there’s a third type too: those through which the Government of yesterday sought to deliver its policy objectives, and which no-one has bothered to remove. But I’ll park that whine for another day.

What I want to focus on here is that second type. Government spends – perhaps more accurately it relinquishes in taxable receipts but the result is the same – north of £100bn on tax expenditures.  And it does this because it hopes, though the provision of those reliefs, to change the way in which people behave. It must do, mustn’t it, because otherwise it’s wasting that money.

Now let’s add another element to the mix: Targeted Anti-Avoidance Rules. What function do they perform in relation to tax expenditures? The answer, clearly, is that they switch the relief on or off according to whether the relief is being accessed for good or bad reasons.

So far so good.

But what happens if the TAAR switch gets stuck at ‘off’? That’s no rhetorical question, as the Lloyds Leasing saga (see [2015] UKFTT 0401 for the latest episode) shows.

I’m not going to set out here the backstory. Stripped to its essentials, Lloyds Leasing arose in the context of capital allowances, a form of tax expenditure designed to encourage capital investment, and involved the question whether the main, or one of the main, objects of capital investment undertaken by the taxpayer was to obtain a capital allowance.

Now, even outside a tax expenditure context, main object tests are not amenable of fine analysis. I can understand how a draftsman might sensibly ask a court to identify the main object of a transaction. But “the main, or one of the main, objects”? How do you make sense of a formulation predicated on a three-tiered causative hierarchy (main object, one of the main objects, and not one of the main objects) and how is a court sensibly to distinguish between the second and third tiers?

That’s a rhetorical question, by the way, and a good thing for you, Dear Reader, because although Judges, having no alternative, strive hard for a semblance of sensible analysis what we end up with, is cakes, icing on cakes, cherries on the icing, and now (thank you, Llloyds Leasing) “headroom… above the icing on the cake”.

But profound though these difficulties are when TAARs are used to regulate liabilities to tax they are as nothing compared to the difficulties when TAARS are used to regulate the availability of tax expenditures.

We have tax expenditures type reliefs because we want to alter the way in which taxpayers behave. This must be so; there is no other reason why Government would incur the expenditure. But if a taxpayer responds to the incentive, and changes her behaviour, how does she then contend that obtaining that relief was not one of her main objects?

This was the question in Lloyds Leasing. Before the Court of Appeal, Jonathan Peacock QC contended, unsurprisingly, that you can’t construe the main object test in such a way as to “emasculate” the availability of the relief. You had to read it in light of the fact that the relief was designed to incentivise action. Speaking, obiter, Rimer LJ doubted this: he said it amounted to “an unwarranted suggestion that the ordinary interpretation and application of the inquiry mandated by [the main object test in] s 123(4) must in some manner be diluted.”

Even approached as a matter of pure linguistic construction, I don’t think this can be right. To denude the question posed by subsection (4) (do you have a tax reduction main object?) of its statutory context (behave in this way and you’ll get a tax reduction) is to misapprehend the interpretative exercise facing a judge. But the point emerges even more forcefully if you judge the quality of that reasoning by the outcome it produces.

And, fortunately for us (although unfortunately for Lloyds Leasing), we are able to do that. Because the matter then went back to the First-tier Tribunal, Mr Peacock QC ran the point again, the FTT roundly rejected it, and we were able to see the outcome it produced.

At [84]-[85] the FTT appeared to regard the fact that the transaction would not have been entered into without capital allowances as somehow antithetical to the availability of those allowances. But the very purpose – the only purpose – of having a tax expenditure relief is to cause people to alter their behaviour. Yet applying the main object test in such a way denies them the relief if they do. And if, you might well ask, they would behave in such a manner absent the tax expenditure, what on earth is the general body of taxpayers doing funding the relief? (Don’t worry. That’s a rhetorical question too.)

The point is made again at [87]-[88]. The FTT found that the fact that Lloyds Leasing sought tax advice to ensure that the capital allowances would be available and “structur[ed] the transactions in such a way that (as it thought) they would indeed be available” was somehow inimical to its entitlement to those allowances. But Government has defined the types of behaviour it wishes to encourage and has encouraged people to bring their behaviour within that definition by providing tax reliefs to those that do. Having so behaved, why should they not get the relief?

I could go on.

The problem with this approach is, of course, and even leaving aside the fact that it strips intellectual and moral dignity from witnesses asked to affect before the FTT an indifference to the very tax relief the draftsman used to encourage them, is that it fixes the tax relief switch permanently to the off position. One consequence of this will be a reduction in the cost attached to tax expenditures – but if they are to switched off, that’s properly a decision for the legislator not for the courts.

And that’s the rub: by reasoning thus the courts strip from Parliament a critical tool for shaping behaviour.

The Credit Crunch? Labour’s fault, says Shadow Treasury Minister

Tax expertise runs thin in the Labour Party at the best of times. The Party almost coped under Ed Miliband. But the staffers he brought in have all moved on. And the relationships John Wrathmell (Miliband’s widely admired Head of Economic Policy) worked so hard to develop – have withered or died. Even Richard Murphy – who seemed to many likely to occupy a place at the heart of the Opposition – has no role and appears disenchanted with the project. To my knowledge there is now no one – at all – in the Shadow Team expert in the revenue raising side of Government finances.

So when I learned that Rob Marris, MP for Wolverhampton South West, was to take the tax brief as Shadow Financial Secretary to the Treasury, I was interested to see how he performed.

The Committee stage of the Summer Budget Finance Bill concluded on Thursday. During discussions David Gauke (Marris’ opposite number) pointed out that the position Marris was taking was different to that Ed Balls had previously taken. He then added gently:

I am not sure that Ed Balls is a particular hero of the hon. Member for Wolverhampton South West.

Not gently enough. Marris needed no further invitation:


Yep. You read that right. Labour was responsible for the credit crunch. To which Gauke responded – well, wouldn’t you have? – with:

Again, I think we can find some consensus.

I suppose it’s too much to expect that Marris might also have mentioned (of many examples) this Cameron speech from 2006:


which showed that Labour and Ed Balls was on the right side – not right enough, but even so – of the debate around appropriate levels of regulation.

But then, if the real enemy is Labour’s record in Government, why would you?

The Savings from Tax Credits

Is it right to say that closing the deficit requires that we tackle tax credits, a measure which on any view will hit the poorest hardest?

Here’s the section in the Summer Budget Red Book which identified the savings from – freezing, limiting entitlement to, increasing the taper rate of and reducing income thresholds for – tax credits.


If you add up the final column (which shows the savings for 2020-21) excluding the benefit cap (a separate measure) you reach a figure of £9.735bn. Obviously that number takes in also some measures not connected with tax credits but as the savings are not dis-aggregated between these different measures I’ll assume against myself that everything under these headings relates to tax credits.

How else might that £9.735bn be funded?

Here are some other measures. These are also taken from the same Summer Budget (and again the last column relates to 2020-21). Where necessary, I’ve added a little narrative.


The Conservatives pledged in their Manifesto to increase the personal allowance to £12,500. Were they to do that the IFS estimated (see page 14) the cost in 2020-21 to be £4bn. Let’s assume they deliver on this Manifesto pledge.

Of this Manifesto Pledge, the IFS observed (although the emphasis is mine):

In part because so many people do not pay income tax, and in part because the biggest gainers are two-earner couples where both can benefit from the higher allowance, increases in the personal allowance benefit those in the middle and upper-middle parts of the income distribution the most.


Again, the Conservatives pledged in their Manifesto to increase the higher rate threshold to £50,000. Were they to do that the IFS estimated (see page 15) the cost in 2020-21 to be £1.9bn. Let’s assume they deliver on this Manifesto pledge. (And it’s worth noting that this yearthe higher rate of income tax will be paid only by the 5 million highest earners in the country: see table 2.5 for 2015-16).


This measure hardly requires explanation. But HMRC’s latest inheritance tax release shows that (in 2012-13 the latest year for which the figure is given) Inheritance Tax was paid by only 17,917 estates.


At 20%, we have the lowest rate of corporation tax in the G20, alongside Russia and Turkey. The case for decreasing it to 18% is not easy to see. More on this for those interested here.

Add those sums together and you arrive at £9.3bn – within fiscal spitting distance of the £9.735bn figure above.

If you’re a stickler, I’ll take you back to the 2014 Autumn Statement (the final column here relates to 2019-20 but, again, ignore this difference).


As I showed here, the benefits of this measure go disproportionately to buy to let landlords.

And voila. You’re over the top.

Of course there’s an ideological decision being made as to how the deficit should be closed.

A Short Monograph in favour of the Taxation of Dead Cats


Copyright: Boris Johnson, 2013.


Here are some dead cats frequently cast onto your dining table by misbehaving businesses.

We comply with the law in all jurisdictions in which we operate. Unpacked, this merely means: “because it’s lawful, we do it.” Tax avoidance – even in its most egregious forms – is lawful. If it isn’t lawful, it doesn’t avoid tax. But that doesn’t mean it’s not morally questionable. If I avoid tax, I increase the burden on those who pay theirs. If I am a business and I avoid tax I can undermine those businesses who don’t avoid it. And the allegation that behaviour is not moral is not answered by the response: “it’s lawful”. If you don’t believe me, try it on the spouse you’ve been unfaithful to.

Look at all the other taxes we pay. Yep. You pay them because the law obliges you to. The lipstick applied to this pig is the technical terminology of TTC or Total Tax Contribution. It is absolutely true that businesses are wealth generators and make a critical contribution to our society. Out of economic self interest (it’s called the profit motive, Ladies and Gentleman), they employ staff who also pay tax, generate economic activity for other business who also pay tax, and so on. They also pay other taxes. But none of this stuff – important though it is – gives them a free moral pass when it comes to the moral imperative to pay their share of this tax too.

If MPs don’t like it they should change the law. This ignores the limited scope that our domestic Parliament, bound by a web of international tax treaties and EU law, has unilaterally to improve the law. Think Global Climate Change Summits with whistles. And whatever you’ve read, no Government is a fan of tax avoidance. It reduces its ability to achieve its real political goals: for this Government, for example, perhaps reducing the headline rate of income tax. On a whim (we’re strange creatures us tax lawyers) I traced back as far as a 1959 Manifesto political parties promising to “change the tax system to deal with the tax-dodgers”. Every Government ever has tried: the fact that none of them has succeeded might tell you something.


But why do I say we should tax these Dead Cats? And how should we tax them?

They add to the moral failing of tax avoidance a further moral failing of attempting to dissemble the first moral failing away. So when you see it, call it out. Tax it reputationally. #DeadCat


I don’t want to kid you.

Not all behaviour that avoids tax has a moral dimension. No one sensible could say that moral obloquy attaches to someone who avoids capital gains tax by buying shares through an ISA. Nor is there any principal – legal or moral – that obliges us to transact in ways that maximise the tax we have to pay. And there are many, many cases where it’s difficult to work out whether what we’re doing is consistent with what Parliament could have intended.

But none of this has as its consequence that – as some assert – there is no moral component to taxation. There is.


There is more work to be done in this field.

Recent Government initiatives have looked beyond the hard yards of purely legal solutions to these issues. They have sought to focus on the wide open spaces – identified by a number of thinkers in the field, including me – of risk management: both reputational risks for businesses and financial risks for Government. How can Government raise the reputational risks for businesses that engage in ‘bad’ tax behaviour? How can it keep at Gas Mark 9 the temperature under tax avoiders? How can it increase the pre-tax cost attached to behaviours that focus on improving post-tax returns? And how can it reduce the risks to public finances?

Thankfully, there is more to come.