Rishi Sunak’s wife, Akshata Murty, is worth at least £750m. On the face of it, their family would stand to gain by £300m if inheritance tax was abolished. However Ms Murty likely is an accidental beneficiary of an obscure loophole, which means her wealth will always be exempt from inheritance tax.
Akshata Murty holds 1.05% of the shares in her father’s IT company, Infosys.1 The company’s current market capitalisation is $74bn which implies – ignoring Ms Murty’s other assets – that she is worth around £750m.
The position for UK domiciled individuals
If a UK domiciled individual held £750m of shares then, when they and their spouse died, their estate would usually have an inheritance tax bill of around £300m.
The position for non-doms
There was a fuss last year about Akshata Murty being a “non-dom” – meaning that she was born abroad and (broadly speaking) regards her permanent long-term home as being in India, not the UK. This enabled Ms Murty to historically claim the “remittance basis”, which means she wasn’t taxed in the UK on her Infosys dividends. However she agreed last year to stop claiming the remittance basis.
You have to actively claim the remittance basis by ticking a box on a tax return, but being a non-dom is not a choice – it’s a matter of law. So it’s likely Ms Murty remains a non-dom.2 That means Ms Murty’s estate wouldn’t be subject to inheritance tax on her Indian shares.
That is a very beneficial result for non-doms and their families but, since the 2017 reforms, it runs out after the non-dom has (broadly speaking) been living in the UK for 15 years. That probably gives Ms Murty around four more years before her estate becomes taxable.3
That means that someone domiciled in India, like Ms Murty, is never5 subject to UK inheritance tax on their non-UK situs property (like Infosys shares), no matter how long they live in the UK.6 The 15-year rule that applies to everyone else doesn’t apply to Indian domiciled individuals. India is unusual in this respect.7
Hence Ms Murty’s estate probably won’t pay £300m of inheritance tax when she dies, no matter how long she stays in the UK,8 and whether the tax is repealed is largely irrelevant to her.910
Why this weird result? Because, in the 1950s, India and the UK both had estate duties, and it was perfectly rational for UK-domiciled individuals to pay only UK estate duty, and Indian-domiciled individuals to pay only Indian estate duty. India abolished its estate duty in the 1970s, making the treaty entirely one-sided – but, combined with the UK deemed domiciled rules years, the result is this valuable loophole11 for UK resident Indian domiciled individuals.
It’s not up to Ms Murty whether to claim the treaty, and she’s not remotely to blame for being a non-dom or having a potential treaty claim. She’s also not the only one who benefits from the treaty – I gather it is commonly used by Indian ex-pats. But the result is inequitable. The handful of treaties that work this way should be amended or repealed12, and the loophole closed.13
See Infosys’s most recent disclosures, page 3, about 2/3 of the way down ↩︎
Domicile is often described as “sticky”. According to HMRC, a change of domicile requires a person to make “profound and extensive changes to his or her lifestyle, habits and intention”. So it would take a positive step for Ms Murty to cease to be a non-dom: for example if she decided the UK was now her permanent home and she was going to spend the rest of her life in the UK. ↩︎
You might think a relatively young couple like the Sunaks wouldn’t be thinking about inheritance tax; but in my experience the very wealthy absolutely do, and from an early age. ↩︎
“Obscure” meaning many personal tax specialists aren’t aware of it (unless they have wealthy Indian clients), and I certainly wasn’t previously aware of it. ↩︎
The consensus view is that this probably overrides the deemed domicile rule, because the deeming is for tax purposes only; it doesn’t change the fact that, as a matter of general law, the person remains domiciled outside the UK. And the definition in the treaty looks to the general law definition, not the tax-specific position. Furthermore, the deemed domiciled rule expressly says that it’s subject to tax treaties. The point is not beyond doubt, but advisers in this area are reasonably confident ↩︎
Provided they do indeed remain a non-dom. If Mrs Murty remained in the UK for say thirty more years then it could be hard for her executors to demonstrate that this was the case – see e.g. the recent Shah case↩︎
There are similar treaties with a number of countries – but most (like Italy and France) impose their own estate taxes. The “loophole” exists when we have treaties with countries that used to have estate taxes, but now don’t, such as India, Pakistan, and Sweden↩︎
Provided of course she remains domiciled in India ↩︎
“Largely” because she presumably has some non-Indian property which would be subject to inheritance tax when her 15 years are up, plus some UK property which is already within the scope of inheritance tax. There are other less tangible ways she might prefer abolition to the current position. First, it means she could become UK domiciled with less dramatic tax consequences. Second, because the Indian treaty exemption doesn’t apply to Mr Sunak, and so if Ms Murty dies first, she’d need her children to inherit (probably via a trust of some kind) rather than passing the £750m to Mr Sunak, and therefore (eventually) guaranteeing a big payday for HMRC. Thanks to Dan Davies for making the last two points. ↩︎
Also note that, if Ms Murty chose, she could set up an “excluded property trust” before her 15 years are up which would in essence preserve much of the benefit of being a non-dom. That would, however, disqualify her from the 1954 treaty. So Indian non-doms face a difficult decision as they approach year 15. Do they solely rely on the treaty, which is straightforward and requires zero structuring and complication, but could be revoked or amended? Or do they put a trust in place, which would require much more care and cost, would survive revocation of the treaty – but of course trust law could change and make such trusts ineffective. ↩︎
Often the word “loophole” is used inappropriately, for example for something (like non-dom status) which reflects an intentional policy stance. However in this case it seems clear the outcome is both unintended and anomalous ↩︎
Or overridden for cases where the treaty creates double non-taxation ↩︎
Final point of detail: if the treaty didn’t apply, it’s possible that Ms Murty’s holding in Infosys would benefit from business relief. The relief is intended to apply to unlisted companies, and so excludes shares listed on a “recognised stock exchange”. Infosys shares are listed on the Bombay Stock Exchange and the National Stock Exchange of India, which are notrecognised stock exchanges. Infosys has also listed ADRs, which are listed on NASDAQ; however it appears that Ms Murty holds actual Infosys shares, and not ADRs. ↩︎
The OECD tax database has data on inheritance tax systems across the world, and we can use that to plot theoretical estate/inheritance tax effective rates in each country. In other words, for estates going from 1x average earnings to 100x average earnings,1 how much tax does the estate pay, as a % of estate value?
In many countries, the tax result differs markedly depending on who inherits, so I’ll focus on children inheriting from two married parents (generally the scenario with the lowest tax).
The point at which inheritance tax first applies is much later in the UK than in most other countries. An average UK estate of £335k isn’t taxed – equivalents in many other countries are.
By the time we get to estate values of 27 x average earnings (£1m in the UK), every country on the chart is charging tax, except the UK and the US (plus of course the countries that don’t have an inheritance tax at all).3
On the other hand, the UK rate is higher than most, and so starts catching up fast. When we reach estates worth 80 x average incomes (£3m in the UK), the UK has one of the highest theoretical effective rates of inheritance tax in the world.
There is a very noteable drop-off in the effective rate for large estates (£9m+). Perhaps for this reason, the UK’s high rate of inheritance tax is not reflected in its tax revenues:
Denmark, The Netherlands and Germany all collect about the same amount of tax as us, but with markedly lower rates.
Why? The most important explanations are likely to be:
The complicated-but-generous £1m UK inheritance tax allowance for children inheriting the family home from a married couple.
The very generous exemptions for agricultural property and business property, which the latest figures show cost around £1.4bn. The original intention was to avoid forced-sales of small businesses and farms. However, the exemptions are widely used as pure tax planning/avoidance, with particular use of woodlands and AIM shares.
The even more generous complete exemption from IHT for foreign property of non-doms, which is supposed to lapse after 15 years, but thanks to standard planning can be made permanent. The cost of this is unknown, because we (and HMRC) know nothing about the foreign assets of non-doms.
So a tax that’s very progressive in theory, turns out to be only progressive for the upper middle class – who are rich enough to get taxed, but not rich enough to avoid it.5. The middle class pay nothing (unlike much of the Continent). The seriously wealthy pay (relatively speaking) considerably less than the upper middle class.
Where does that leave us? A tax with an unfortunate combination of a high rate (which makes it unpopular and motivates avoidance) and poorly targeted/overly-generous exemptions (which enable avoidance).
There are lots of proposalsforreform, but a dramatic change to such a sensitive tax will always be politically difficult.
My proposal is simple. Let’s be more Netherlands. Aim to collect the same amount of tax, and from the same people. Keep the £1m threshold, but simplify it. Make the exemptions less generous, and use the proceeds to greatly reduce the rate – perhaps even to as low as 20%. A fairer and more effective inheritance tax system.
The underlying data is all thanks to the OECD; the code is available here.
Footnotes
Would be better to use wealth centiles in each country, but I can’t find consistent data across the OECD. If anyone can, please drop me a line). ↩︎
Important caveats: this uses OECD data which covers the broad sweep of estate/inheritance taxes but inevitably misses some of the detail. I manually added in the UK residence nil-rate bands… I didn’t go through other countries and investigate/add in all of their quirks. So this may somewhat flatter the UK compared to other countries. The chart also only covers the scenarios where children inherit from a married couple. Other scenarios are hard to model given that many countries have forced heirship rules, where the children more-or-less always inherit. ↩︎
The US is an interesting case. The rate is the same as the UK’s – 40% – but the per-person exemption has always been much higher. $5.5m in the 2010s and $12.9m today, rising with inflation each year until it resets back to $5.5m in 2025 (unless extended). Like the UK, there are many ways to avoid US estate tax – arguably it’s even easier (the use of trusts is extremely common). ↩︎
Note that the HMRC chart s for individual estates, and my chart above for the overall impact on a married couple couple. You therefore can’t directly compare one against the other – i.e. because the spouse exemption means that 30-40% of all deaths result in no inheritance tax, so even if the 40% rate applied perfectly, the HMRC chart would show an effective rate in the 20%s ↩︎
Primarily because a disproportionate amount of their wealth is in their house, which means taking advantage of the various reliefs/exemptions is impracticable ↩︎
If I was a Tory Chancellor, I wouldn’t abolish inheritance tax. I’d fix the ridiculous marginal rates that mean there are hundreds of thousands of 30-somethings paying more than 70% tax on every additional £ they earn.
This is complicated, unfair and a disincentive to work; it could also plausibly be holding back growth. Any government serious about fixing the tax system should start here.
UPDATE 20 November 2023 to take account of the uprating of child benefit. And more here on the ghastly mechanics of the High Income Child Benefit Charge. Also please note that the figures in this article are for the UK excluding Scotland – the Scottish rates are higher.
Here’s a speech from the last time a Conservative Chancellor cut taxes:
But 45% isn’t the highest rate. Not even close. There are millions of people paying more than 60%. And hundreds of thousands paying much more – some even over 100%.
The marginal rate
If you want to know your take-home pay, then it’s your effective rate of tax that’s important – total tax you pay, divided by gross wage (more on that here). Earn £50k, you take home about £38k after tax, so your effective tax rate is 24%.
The marginal rate of tax is different and more subtle – it’s the percentage of tax you’ll pay on the next £ you earn. Irrelevant to where you are now, but highly relevant to your future, because it affects your incentive to work more hours/earn more money.1.
The marginal rate of tax in the UK for high earners in theory caps out at 47% (45% income tax and 2% national insurance2) once you get to £125,140k. I’m not terribly convinced this disincentivises anyone to work (and I spent many years working in an environment surrounded by colleagues and clients paying tax at this rate). But people earning much less than £125k can have a considerably higher rate, principally due to four effects:
Child benefit is £1,248 per year for the first child and £827 for the rest. It starts to be phased out by a special tax – the “high income child benefit charge” – if your salary hits £50k, and you get no child benefit at all once the gross salary of the highest earner in the household hits 60k.
The personal allowance – the amount we earn before income tax kicks in – starts to be phased out if your salary hits £100k, and is gone completely by £125k.
Student loan repayments
Government childcare schemes
These phased withdrawals create very high marginal rates.
The 70%+ rates
For a family with three kids, the marginal tax rate for a given salary looks like this:3
That bump between £50k and £60k is a 71% marginal tax rate, meaning that, for every additional £1,000 you earn gross, you take home £290.
Looking at it another way: imagine you’re working a reasonably modest 1,500 hours a year and earning £50k gross, so about £38k take-home. That’s £33/hour before tax, £25/hour after tax.
How would you like to work another 200 hours a year for the same hourly rate? Sounds good. But after-tax you’ll actually be earning £9.57/hour. You may well not think that’s worth your while. And, given that £9.57 is less than the minimum wage, if you need childcare cover then that could easily cost you more than the additional pay.
The bump between £100k and £125k is the withdrawal of the personal allowance, and results in a 62% rate between £100k and £125k. Not quite as dramatic as the 71%, but still well over the psychologically important 50% mark – and that rate lasts for a significant £25k.
An example of how this can play out: you work 1,500 hours a year and earn £99k, gross, about £63k take-home. That’s £66/hour before tax, £42/hour after tax. If you work another 400 hours to hit £125k gross, after-tax you’re earning £26/hour.
Let’s go higher
Because it’s linked to child benefits, those high marginal rates just get bigger the more children you have. I have a friend with six children. Congratulations, Steve, because you can win a marginal tax rate of 96%.
Why stop there? With eight children you get a top marginal rate of 112% – so if you earn £50k gross, your after-tax pay is £38k. If you earn £60k gross, your after-tax pay is £37k. That’s insane. Hopefully, nobody is actually in that position, but a sensible tax system doesn’t create such results, even in theory.
What about student loans?
Student loans are really just a complicated hidden graduate tax.
For someone starting university before 2012, you pay 9% of your salary over £20,184, until the loan is repaid. Of course, the effect on individuals – even those on the same income – will vary widely, depending on how much loan they borrowed, how long they’ve been earning, and how their salary ramped up over time.
We can model it with some simplifying assumptions. Let’s say everyone on the chart is 30 years old, graduated nine years ago, and their salary ramped up in a straight line from £20k to where it is now. The marginal rates then look like this:
I’d be cautious about citing these precise figures, given how dependent they are on the assumptions.4 But, unsurprising, the broad effect is just to raise all the marginal rates by 9%. Graduates with children can therefore easily suffer from marginal rates of 80%. You can have a play with the spreadsheet to look a the various scenarios.
It gets worse
The Government keeps creating generous childcare schemes that are removed suddenly when your wage hits £100,000. That creates a marginal rate that can only be described as “insane”.
This year, the Government created a new childcare support scheme for parents with children under 3. This could be worth £10,000 per child for parents living in London. And it vanishes completely once one parent’s earnings hit £100k. Here’s what that does to the marginal tax rate:5
The 20,000% spike at £100,000 is absolutely not a joke – someone earning £99,999.99 with two children under three in London will lose an immediate £20k if they earn a penny more.6
The practical effect is clearer if we plot gross vs net income:
After-tax income drops calamitously at £100k, and doesn’t recover to where it was until the gross salary hits £145k.
This is ignoring the pre-existing tax-free childcare scheme, which also vanishes at £100k. The amounts are less (usually under c£7k/child) so the curve would look less dramatic. However, as the scheme applies to children under 11, taxpayers feel these effects for many more years.
Why does nobody care?
If a political party went into an election, promising a tax system like the one described in the article, there would be uproar. But instead, we’ve drifted into this disaster over many years, and the topic is absent from almost all political debate. The Conservative Party mostly doesn’t talk about these high marginal rates, perhaps because they’re too embarrassed to admit it’s mostly a system they created. Labour doesn’t talk about it, perhaps because they’re too embarrassed to appear to care about anyone earning £50k (and Brown/Darling were responsible for the personal allowance taper)7.
And if your reaction to this is “I don’t care about people earning £50k or £100k a year”, then you should.
It’s more people than you’d think. After the recent surge of inflation, something like 23% of taxpayers earn £50,000 and 6% earn £100,000. 8
But that’s a snapshot, and also not quite the right measure. A better question is: what proportion of households will at some point have someone in a position to accept a promotion, or work more hours, and break the £50k or £100k barrier? I’m not aware of any figures on this, but I expect the answer is a large percentage, perhaps even a majority.
There’s an obvious impact on all of us if plumbers, doctors, IT contractors etc are turning away work/hours to avoid hitting £50k/£100k.
And a wider economic impact. When we have a workforce capacity crisis, we shouldn’t be creating an incentive for people to turn away work. I’m not an economist, but it seems plausible these effects act as a brake on growth.
And we should also care about fairness, at all levels of income. A marginal rate of 80% is a problem we should fix, whether it hits people earning £10k or people earning £1m.
The human side looks like this, one of many similar messages sent to me:
And:
If we’re looking for ways to fix the tax system, then this should be right at the top of the target list. Regardless of where we sit on the political spectrum.
The solution
One solution is simply to scrap the personal allowance and child benefit tapers (and the marriage allowance to boot). That would, however, be fairly expensive, on the face of it, costing somewhere around £6bn to repeal both.10 Scrapping the childcare hard-stop at £100k, and the student loan repayment rules, would be more expensive still. That said, the widespread awareness of these issues amongst the people affected, and use of salary sacrifice, additional pension contributions, etc, makes me wonder if the actual (dynamic) cost might be materially less.11.
Realistically the most likely source of funding is playing around with rate thresholds, for example reducing the point at which the additional rate kicks in. There are certainly other alternatives; but the important thing is that we really, really, shouldn’t have a tax system that can have a 71% marginal rate, let alone a 20,000% marginal rate.
Oh, and the other lesson: please please, politicians and HM Treasury, don’t introduce any more tapers into the tax system. Thank you.
The caveats
All the calculations are in this spreadsheet. The key assumptions/caveats are:
Income tax/NI as for tax year 2023/24
One earner in a household, who is over 21 and not an apprentice, not a veteran, and under the state pension age
Ignores benefits aside from child benefit (although benefits are notorious for creating very high marginal rates – not, however, an area where I and our team have expertise)
Doesn’t include tapering of pensions annual allowance (starting at £240k)
Doesn’t include effects of the pension annual allowance.
Do please send me any corrections, additions or comments.
Footnotes
Everything interesting happens at the margin. For more on why that is, and some international context, there’s a fascinating paper by the Tax Foundation here↩︎
Note that I’m not including employer’s national insurance here. Employer’s national insurance is absolutely a tax on labour in the long term, because it reduces pay packets in the long term. But it’s not usually included in a calculation of a marginal tax rate, because it’s not economically passed to you in the short term, and so it won’t rationally affect your decision whether or not to work more hours. There’s a good explanation of this point here.↩︎
The Scottish rates are higher – the charts and figures here are for the rest of the UK ↩︎
i.e. because in some cases someone earning £50k will have already repaid their student loan ↩︎
The chart is for a single earner, but if they have a partner, the partner would also need to be earning at least £8,668 (the national minimum wage for 16 hours a week) ↩︎
The 20,000% figure is a consequence of the spreadsheet incrementing the gross salary by £100 in each step. Arguably the true marginal rate is £20,000 divided by 1p, or 200,000,000% – but the concept of marginal rates doesn’t really make much sense when we have discontinuities like this ↩︎
I’d forgotten that detail – thanks to Robert Palache for reminding me ↩︎
Nikhil Woodruff has properly modelled this, and reckons £6.6bn. We can sense-check very approximately as follows: 500,000 taxpayers earn £120k, value of personal allowance is £5k, so approx cost £2.5bn. Child benefit taper envelope: the child benefit taper was expected to bring in £2.5bn of revenue when introduced in 2013. Since then, child benefit has gone up about 10%, and nominal earnings about 30%. Implying costs of around £2.5bn today. The marriage allowance should be small beer by comparison with either figure. ↩︎
Some people respond to this by saying: it’s easy; they can just make a pension contribution to keep their income below £50k/£100k. For the self-employed, or anyone with irregular earnings, that’s not so easy to manage in practice. And people (reasonably) often want to spend their earnings as they like, and not make a huge pension contribution ↩︎
Since our original report, we’ve received numerous reports of clients’ and advisers’ experiences with Property118. This short report explains one new element – the artificial creation of a “director loan” which can be used by landlords to take profits from their business free from income tax.
It’s an artificial tax avoidance scheme which doesn’t work, and any landlord using it will incur large tax liabilities and penalties. The scheme should have been disclosed to HMRC under the “DOTAS” rules, but wasn’t – Property118 potentially face penalties of up to £1m.
UPDATE 13 October 2023: since we wrote this report we’ve discovered more about the precise details of this scheme, which means that the description and analysis below is both inaccurate and too kind. We’ll keep this here, but our updated full description of the scheme is here.
The sales pitch
Here’s the sales pitch from Property118:
We’ve redacted the figure to protect our source, but it’s a large six figure sum.
Here’s their explanation:
This just one example from the many we’ve received – it’s a standardised structure. Property118 even set out the details themselves here.
What’s going on?
When a company makes a profit, it pays corporation tax. If it then pays the profit to its shareholders as a dividend, they pay tax on that. But if it can use the profit to repay a loan from the shareholders then they don’t pay tax on the loan repayment.
Standard (and legitimate) tax planning on incorporation takes advantage of that. In the standard approach, the landlord sells property to the newly incorporated company in return for (1) shares, (2) assumption of mortgage debt, and (3) a “loan note”1 (or similar) issued by the company to the landlord. Future profits can be used to repay the loan note.
That is uncontroversial, but has the disadvantage that the sale of the property to the company will be subject to capital gains tax.
Property118 think they’ve found a way to avoid the capital gains tax and extract profits by a tax-free loan repayment.
Here’s an example. Let’s take a landlord who owns properties worth £1m and has a mortgage of £500k.
Step 1: Landlord takes out a two week bridge loan of £450k. The money never actually goes to the landlord – it’s held in a solicitor’s client account. The solicitor undertakes to the lender that the money will never leave that account (so the arrangement is risk-free for the lender):
Step 2: Landlord incorporates a new company. The company buys the rental properties, and in return issues £50k of shares to the landlord, and agrees to assume responsibility for the £500k mortgage and the £450k bridge loan (under a “novation”). Note that the £450k advanced under the bridge loan stays with the landlord (in the solicitor’s client account):2
Step 3: Two weeks later, the landlord makes a £450k “director loan” to his company, using the £450k advanced under the bridge loan in step 1 (but the £450k again stays in the solicitor client account – these are just accounting entries):
Step 4: The company immediately uses the £450k to “repay” the bridge loan. “Repay” is in quotes, because the bridge loan money never left the solicitor’s client account:
The outcome of all this:
A £450k “director loan” has been magicked into existence, despite the landlord never having had the £450k, and certainly never having lent any real money to the company. £450k just sat in a solicitor’s client account for two weeks. The only money that really moved was £9,000 – the fees Property118 and the bridge lender received for arranging the structure.
The intended consequences
There are two intended consequences:
The company now magically owes £450k to the landlord under the “director loan”, despite the landlord never having £450k and the company never receiving £450k. The next £450k of profit made by the company can be paid to the landlord as a repayment of the “loan” – and the landlord won’t be taxed on it. That’s saved/avoided up to £177k of tax.3
Incorporation relief applies so there is no capital gains tax because, thanks to the HMRC concession that allows a company can assume liabilities of the business.
The actual consequence – a large CGT hit
When a landlord incorporates their property rental business, an important and legitimate part of the tax planning is ensuring “incorporation relief” applies to prevent an immediate capital gains tax hit on moving the properties into the company.
That requires (amongst other conditions) that the property is sold in consideration for shares in the company, and only for shares.
By concession, HMRC also permit the company to take over business liabilities of the landlord:
In the Property118 scheme, the bridge loan is taken over by the company; but the problem is that it’s not a “business liability” of the landlord. It barely exists at all, and certainly isn’t used for the landlord’s business.
Oh, and HMRC expressly say that this concession can’t be used for tax avoidance:
So incorporation relief isn’t available.
Another consequence – the “director loan” isn’t a loan
This is an artificial tax avoidance structure. The bridge loan is taken immediately prior to incorporation for no purpose other than tax avoidance. Money is then moved in a predetermined circle for no purpose other than tax avoidance, and achieves no result other than tax avoidance. The bridge loan doesn’t even exist for a whole day. Structures of this kind have been repeatedly struck down by the courts over the last 25 years.4
So the question is: despite that artificiality, can the director loan be used to facilitate tax-free profit-extraction in the same way as the “loan note” in the standard version of the structure?
Realistically, the bridge loan did nothing and can be disregarded – but the director loan can still be viewed as part of the consideration for the sale of the property. In other words, if we step back and ignore the silly intermediate steps, the landlord sold the property to the company for consideration comprising: shares, the assumption of the mortgage debt, and another £450k which remains outstanding as a director loan. In this scenario it’s clear CGT incorporation relief fails. But future profits can be paid out on the director loan without suffering income tax. The structure failed to achieve its CGT aim, but did achieve the basic planning aim of the standard structure… in a much more complicated way and at much greater expense for the landlord.
The bridge loan didn’t exist and neither did the director loan. So future profits can’t be paid out on it, and the structure fails completely. This seems a harsh result. Can HMRC really say the director loan exists enough to kill CGT incorporation relief, but not enough to shield future profits from income tax on dividends? HMRC has a history of running such harsh “double tax” arguments when attacking tax avoidance schemes, but not always successfully.
Failure to disclose to HMRC
Most tax avoidance schemes are required to be disclosed to HMRC under the “DOTAS” rules. The idea is that a promoter who comes up with a scheme has to disclose it to HMRC. HMRC will then give them a “scheme reference number”, which they have to give to clients, and those clients have to put on their tax return. It’s the tax equivalent of putting a “kick me” sign on your back, because the inevitable HMRC response will be to challenge the scheme and pursue the taxpayers for the tax.
For this reason, promoters of tax avoidance schemes typically don’t disclose, even though they should. This is often on the basis of tenuous legal and factual arguments, to which the courts have given short shrift6.
We understand that this structure has not been disclosed under DOTAS. In our view, it clearly should have been. The structure has the main purpose of avoiding tax – indeed that’s its sole purpose. Property118 charge a 1% “arrangement fee” for the director loan structure, which is the kind of “premium fee” that triggers disclosure 7 The failure to disclose means Property118 are liable for penalties of up to £1m.
How do Property118 defend the structure?
In the advice note above, they refer to HMRC guidance in their Business Income Manual. Advisers questioning the structure have received the same explanation. However, that guidance relates to when a company can claim an interest deduction for a loan taken by the company to fund a withdrawal of capital by its shareholders. It has nothing to do with creating a “director loan” out of nothing, and nothing to do with circular tax avoidance transactions.
Property118 have also assured advisers that HMRC have accepted the structure in numerous cases. We are highly doubtful that the true nature of the structure was ever explained to HMRC. Any clearance, or enquiry closure, obtained on the basis of incomplete disclosure is worthless.
These two responses are typical of Property118 and other avoidance scheme promoters. Little or no reference is ever made to the law, and certainly never to tax avoidance caselaw. Instead, HMRC guidance is quoted out of context, and clients are assured that nothing has ever gone wrong in the past.
For what it’s worth, we don’t believe Property118 know what they’re doing is improper (or they presumably wouldn’t publish full details of the scheme). Our explanation is incompetence rather than fraud – nobody at Property118, or Cotswold Barristers, has any tax expertise.
What should happen next?
Property118 are entirely unregulated. The only body who can take action against them is HMRC – which should investigate Property118 for failing to disclose schemes that were disclosable under DOTAS. It may well have been unaware of the scheme before now – the nature of the scheme is such that it may have been completely undisclosed on landlords’ tax returns.
We will be referring Cotswold Barristers to the Bar Standards Board for their role promoting the structure.
The bank providing the bridge loan surely knows what’s going on (anti-money laundering rules require it to). Its involvement may breach the Code of Practice on Taxation for Banks, which generally prohibits banks from facilitating tax avoidance schemes.
We would strongly suggest you seek advice from an independent tax professional, in particular a tax lawyer or an accountant who is a member of a regulated tax body (e.g. ACCA, ATT, CIOT, ICAEW, ICAS or STEP). Given the potential for a mortgage default, we would also suggest you urgently seek advice from a solicitor experienced with trusts and mortgages/real estate finance (e.g. a member of STEP).
We would advise against approaching Property118 given the obvious potential for a conflict of interest.
Thanks to accountants and tax advisers across the country for telling us about their experiences with Property118, as well as the clients who contacted us directly. Particular thanks to Q and to A.
Why a loan note and not a loan? Because, conceptually, the company is then giving something (the loan note) as part of the purchase price for the properties. In part because the tax treatment for the company is more certain, as a loan note is clearly a “loan relationship” for tax purposes, and simply leaving money on account may not be ↩︎
As explained in our original report, the transfer of the property is actually effected using a trust rather than a normal legal transfer, to avoid having to obtain the consent of the lender. The mortgage loan isn’t novated, but the company agrees to indemnify the landlord for the payments under the mortgage. The trust causes a number of serious legal and tax complications, not least triggering a mortgage default. However, to keep this example clear, we’ll ignore the trust in this report. ↩︎
The highest marginal rate of tax on dividends is 39.35% ↩︎
We are only aware of one such scheme that wasn’t defeated – SHIPS 2, essentially because the legislation in question was such a mess that the Court of Appeal didn’t feel able to apply a purposive construction. The consequence of that decision was the creation of the GAAR, which doubtless would have kiboshed SHIPS 2 had it existed at the time ↩︎
Our original draft suggested the second scenario was more likely; on reflection we think that would be a harsh result. The CGT element of the structure still fails, but the taxpayer may avoid a double tax disaster ↩︎
See e.g. the Hyrax case, where the tribunal described as “incredible” the evidence of one witness that she wasn’t aware the transaction was involved tax avoidance ↩︎
Although other possible hallmarks are: the standardised tax product hallmark, the employment income hallmark (if there’s a “relevant step”), and/or the financial products hallmark ↩︎
I posted some charts yesterday on how the UK tax system compares to other countries when we look at tax as a % of GDP. One response was to say: “well, I don’t care about tax as a % of GDP… I care about the tax I pay”. Which is fair enough.
How can we fairly compare the tax actual people pay?
Tax wedge
The “tax wedge” is the tax paid by the average single worker divided by the gross wages.1 It’s the best way I know to make a fair (or somewhat fair) comparison of the burden on tax on wages across the world.
I think many people will be surprised, even disbelieving, at where the UK places here.
Clearly there are some very different social models, with Belgium (for example) having a much more expansive welfare state than Chile. So it’s useful to add in that wider context (again from OECD data):
So in general terms, if you’re an average worker, you get what you pay for.
Or, if we want to annoy lots of people, we can point out that there’s no country where the average worker pays less tax than the UK on their wages, but which has higher government spending.
What about VAT?
If we just look at the standard rate of VAT in each country:
On the face of it the UK again looks very average.2
But we can’t just compare the standard rate. Some countries apply the standard rate to almost everything; others have widespread exemptions and special rates.
We can get a sense of this if we plot the rate of VAT against the amount of tax VAT collects, as a % of GDP:3
The chart suggests the UK collects a bit less VAT (as a % of GDP) than you might expect from its rate.4
The bottom line is that there is no evidence that the average Brit is over-taxed by international standards.
The spreadsheets with the data and charts are available here.
Footnotes
In other words, this takes into account the income tax and national insurance/social security paid by the worker him or herself, and also the national insurance/social security paid by the employer (because there is good evidence that in the long run this is economically paid by the employee in the form of reduced wages). ↩︎
There’s no USA on the chart, because the US has no VAT. Many states have sales taxes, but they’re nothing like VAT – the rate is much less (averaging around 5%) and the goods/services covered are much more limited. ↩︎
Bear in mind the usual caveats about comparing different systems in different countries, and (as usual) ignore Ireland, because its reported GDP is distorted by multinational [HQ locations]/[tax avoidance] (delete per your preference). ↩︎
Actually it’s worse than that, because VAT compliance in the UK is pretty good, and so masks what is a very limited VAT base (i.e. wide exemptions/lower rates) by international standards. Rita de la Feria, perhaps the world’s leading VAT academic, has written convincingly on this. ↩︎
We now have the latest OECD tax data, showing tax as a percentage of GDP across the developed world.
The UK looks rather average:
If we order by personal tax (income tax and national insurance etc), we see that UK income tax/NI is a somewhat lower % of GDP than average:
If we order by property/wealth tax, the UK surprisingly raises one of the highest %s of GDP in the world (although we should be careful about comparisons here; please see caveats below):
Corporate tax, the UK raises a bit less than average (although this is before the increase from 19% to 25%, which will put the UK in the top quartile):
Another way to look at the data is each tax as a % of overall tax revenues. Then the UK looks rather unexceptional, raising proportionately a bit less in personal tax than most of the world, but a bit more in property tax.
So many of the loudest voices in the tax debate are wrong. The UK is not horribly over-taxed. Wealth in the UK is not horribly under-taxed. We have a pretty typical tax system. We could tax a bit more, or tax a bit less, and there are certainly plenty of aspects of the system we could and should improve. But the case for revolutionary change often relies upon an inaccurate picture of how things are now.
These figures include all national, state, local taxes.
This is OECD data, and so (whilst I’m not certain) I don’t believe it will pick up the significant recent UK corrections. There may be similar data issues with other countries.
It’s OECD only, so no Singapore (not an OECD member because it’s not a democracy).
“Property/wealth” is a combination of capital gains tax, inheritance tax, stamp duty/land transfer taxes, council tax, and other recurrent and transaction taxes on property. This won’t quite be an apples-to-apples comparison, because property taxes in some countries pay for services which in other countries you pay for privately (e.g. garbage collection).
“NI/SS/payroll” includes employee and employer taxes (because the economic burden ultimately falls on employees). Also includes such things as the UK apprenticeship levy. Comparisons need to be done with care because some countries have greater private pension provision, and others achieve an economically similar result with income-linked state pensions.
Oil/gas taxation is included in “corporate tax”. You could argue it shouldn’t be; the inclusion is less a point of principle, and more because disentangling it from this dataset is hard.
Small countries like The Netherlands, Luxembourg and Ireland (some would say “tax havens”) somewhat distort the data. Their corporate tax looks high; their GDP (particularly in the case of Ireland) is artificially inflated, so the overall level of tax looks low.
Mexico, Colombia and Chile suffer from a large informal economy and so their personal tax revenues are relatively low, and they are disproportionately dependent on corporate tax and indirect taxes.
Plenty of other factors complicating simple comparisons between countries, e.g. US private healthcare provision being economically akin to taxation but not showing in this dataset.
A few countries haven’t provided recent data yet – Australia, I’m looking at you – and so are missing from the first charts. The animated chart replaces missing data with the previous year (to avoid it looking like the country has disappeared).
GDP data is frequently subject to revisions, both corrections and changes in methodology. The OECD has kindly confirmed that the data we use here reflects all these revisions, and so it is appropriate to e.g. compare the 2021 GDP figures with the 1990 GDP figures.
Following our report on Property118, landlords have been getting in contact and asking what they should be doing. Tax Policy Associates doesn’t, and can’t, provide tax advice – but it’s a fair question. Here’s a quick summary of how we see things:
A landlord whose business looked like this in 2015:
Now looks like rather different – after tax, he’s making a loss:
That’s a huge deal for buy-to-let landlords, and it’s understandable that many are desperate for a structure that fixes the problem. There is no such structure.
There are three choices, and only three choices.
Choice 1: incorporate
Instruct a proper tax adviser, incorporate a company, and move the business to that company. The mortgage interest will then be fully deductible against the company’s corporation tax.
There, however, are several important complications:
Your current mortgage lender is very unlikely to agree to carry your existing mortgage over to the new company. You’ll need a new mortgage, and it will almost certainly be more expensive (higher interest and higher fees). This may add up to more than the tax benefit of interest deductibility. Do the math very carefully.
There will almost certainly be stamp duty/SDLT at up to 15% on the transfer to the company (and another 2% if you’re a non-resident).
Some people claim that married couples can retrospectively claim to be a partnership, and escape SDLT on incorporation using the partnership rules. The recent SC Properties case makes clear this has very little likelihood of working, because of the complete lack of evidence of the married couple in question acting like partners in a business partnership :
“For these reasons we have concluded that the Partnership has no legal reality. It existed as a planning idea in the minds of the Appellants’ advisers and Mr Cooke, but had no substance beyond the forms which were completed in order for it to obtain the tax result suggested by the Appellant’s advisers.”
There may be capital gains tax when you transfer the properties to the company. CGT incorporation relief is potentially available, but you have to demonstrate you have a “business”, something that HMRC do not always accept. Be aware that “clever” structures (such as declaring trusts, creating loans, using LLPs etc) risk blowing up incorporation relief, and costing you much more tax than they save.
The company is taxed on its profit, with a deduction for its interest costs. You then have a second level of tax when the company returns that profit to you, as dividends, wages or (in some limited circumstances) as a capital gain. Again, you need to do the math carefully to make sure you fully take this into account.
Choice 2: don’t incorporate
Continue as you are, bearing the cost of the section 24 non-deductible interest.
Your could reduce your leverage, so you don’t make an after-tax loss (but of course you’ll then need to deploy more capital).
Choice 3: sell-up
It may be that neither of the first two options work – section 24 simply makes your rental business uneconomic. That seems to have been Osborne’s intention.
In which case, you may need to sell-up. It’s not an admission of failure – it’s an admission that investors have to adapt when circumstances change.
What is the fourth choice?
There isn’t one.
Trusts, LLPs, offshore arrangements… not only are they very likely to fail when challenged, but the consequence could be much much worse than if you’d done nothing at all. SDLT plus CGT could easily be a six figure sum. And complex structures can easily have complex, and expensive, additional tax consequences.
Whether you’re a multinational executing a £10bn M&A transaction, or a landlord considering incorporating a one-property business, the key tax question is always the same: “how much do I benefit if this goes right, and how much do I lose if this goes wrong?”.
Even if the Property118 structure probably worked (which it doesn’t!) the downside risk of it going wrong is much, much larger than the benefit.
Unsurprising, if HMRC have never been properly told what precisely the scheme is. Typically promoters are careful to only discuss limited aspects of their schemes with HMRC. Rarely, if ever, is the whole structure explained.
Responds to all technical queries with confident assertions that HMRC has accepted the structure.
Again, it’s doubtful full details were given to HMRC. But, if the scheme doesn’t work technically, then any HMRC clearance is worthless, and the fact they may have sneaked it past one sleepy inspector doesn’t stop HMRC re-investigating it at any time in the next 20 years.
“Our unique system”, “our proprietary strategy”, “our IP”, etc.
I used to advise the largest businesses in the world, doing deals of many £bn. If I’d told them I planned to use anything “unique” or “proprietary”, I’d have been out the door in seconds.
When it comes to tax, sensible people do what everyone else is doing. Be boring.
Any adviser proudly touting their “unique IP” is accidentally revealing a “hallmark” that means the structure may well be disclosable to HMRC as a tax avoidance scheme.
“We have a KC opinion”
Normal people shouldn’t be doing anything so complicated and uncertain that it requires a KC opinion (I’d certainly never put myself in that position).
The fact a KC opinion was obtained is an alarm bell that something high risk is going on. That’s particularly the case if the KC opinion was obtained by the adviser for the adviser. Then you can’t rely on the KC opinion – if everything goes wrong you can’t sue the KC. Worse still, the fact the adviser obtained the KC opinion may make it harder for you to sue the adviser (as they’ll blame the KC). So a KC opinion can actually make your position worse.
“We’ve glowing testimonials from dozens of clients”
This is how a salesman talks.
No discussion of risks and downsides
Any client – whether an individual or the largest corporation – should ask two important questions of a tax adviser. What’s the result if this goes according to plan? What’s the risk if it doesn’t? And how much will it cost me if it doesn’t?
Many of these structures have a relatively small benefit (tax relief on interest) but risk a massive up-front SDLT and CGT cost. Not worth the gamble even if the odds were 70% in your favour (which they won’t be).
Pressure to go ahead/sign a contract
That’s how a (bad) double glazing salesman behaves.
“We’re fully insured”
That’s great – for them.
Professional indemnity insurance protects an adviser against being successfully sued. It’s useful to a client because it gives you assurance that you will still have someone to sue if the adviser disappears/goes bust. But it doesn’t make it easier to sue them, and it certainly isn’t your insurance..
“Your normal advisers won’t be familiar with these obscure rules”
A common tactic to pull clients away from trusted existing advisers, and often said by people who don’t in fact have any tax qualifications.
Property118 is an unregulated adviser which works in a “joint venture” with a barristers chambers called Cotswold Barristers. They promote a tax avoidance scheme aimed at buy-to-let landlords. But nobody involved appears to have any tax qualifications and in our view the scheme fails spectacularly.
This report explains the scheme, and explains why in our view, and that of the mortgage lenders’ industry body, it is likely to default the landlord’s mortgage. We also set out a detailed analysis of the serious tax problems with the structure. We are going into more technical detail than usual given the widespread promotion of this scheme in the market. Anyone who has entered into these arrangements should seek independent advice.
UPDATE: 16 September. Property118 have responded to this report. Despite having two months’ notice of our findings, their response contains no response to any of the points we’ve made, just assertions that their structure is fully compliant, and that HMRC and lenders have never challenged it. As we note below, we doubt the structure has ever been properly disclosed to HMRC or lenders. Now HMRC and lenders is aware of the structure we expect challenges over the coming months and years.
UPDATE: 22 September. We’ve a further report on another aspect of Property118’s planning.
UPDATE: 5 October. See also our report on Less Tax for Landlords. A different scheme, but with some commonalities; in many senses an even worse scheme than Property118’s.
UPDATE: 24 October. Mark Smith of Cotswold Barristers published a response on the s162 point, but one which does not address the key problem with the structure. We’ve updated the text below.
UPDATE: 9 November. The analysis below is of the structure Property118 intended to implement. Our review of their actual documentation reveals several critical implementation failings which means the actual position of their clients is likely significantly different, and significantly worse. We analyse this here. This means that much of what follows below is likely academic.
UPDATE: July 2024: HMRC have issued a “stop notice” making it a criminal offence for Property118 to continue to promote the structure.
The sales pitch
Most buy-to-let landlords hold their properties personally. So they pay income tax at 40% or 45% on the rental income. Until 2017, their mortgage interest was deductible, meaning a result something like this:
Many landlords view this as unfair, because the £2,400 tax is more than their £2,000 net income (although the purpose of the rules was expressly to discourage buy-to-let mortgages, so this rather punitive outcome is actually the point).
The obvious move is to hold the properties in a company. Corporation tax is less – below 25%, for a small company1 and companies get full tax relief for mortgage interest.2
But it’s not easy for a buy-to-let landlord to move their properties into a company. There can be capital gains tax and stamp duty land tax (SDLT) on the way in. And – most seriously – the mortgage lender won’t allow the existing individual mortgage to move to a company. You could get a new mortgage, but mortgages for companies are significantly more expensive than buy-to-let mortgages. 3
Advisers therefore frequently caution clients that the increased interest cost of moving properties to a company can easily exceed the tax saving. It’s often a mistake to be over-focused on tax savings.
The Property118 solution
Wouldn’t it be wonderful if you had all the tax benefits of moving to a company, but could keep your existing bargain-price mortgage?
Property118 say you can, with what they call the Substantial Incorporation Structure:
The landlord – let’s call him X – sets up a new company (which I’ll call the Company), and sells the properties to it, getting shares in return
But “completion” of the sale is deferred – X remains the registered owner of the properties. A trust is created, with the landlord as trustee, and the company as beneficiary.
This is invisible to the world – and to the mortgage lender. So X doesn’t ask the mortgage lender for consent, or even tell the mortgage lender about it.
Property118 claim that, because the transaction creates a trust, it’s not a breach of X’s mortgage.
They claim that “incorporation relief” applies so there’s no capital gains tax.
Often they say that X and their spouse were in a partnership, so SDLT partnership rules apply and there’s no SDLT to pay either.
X continues to make mortgage payments to the lender but, behind the scenes, the Company agrees to reimburse/indemnify X. The Company claims tax relief for those payments. So – claim Property118 – it’s just as good as if the Company had borrowed itself.
But it’s better – because they say this isn’t just a company – it’s a “Smart Company“. The idea is that the Company issues shares to X’s children which supposedly have no initial value, but will grow in value over time. So future increase in the value of the property portfolio will fall outside X’s inheritance tax estate.
The end result is that, by signing a piece of paper, X gets a dramatically better tax result with no downside:4
What actually happens – the short version
The structure doesn’t work.
The sale likely puts the mortgage into default. The mortgage terms usually require consent for the sale to the Company, and that wasn’t obtained.
We asked UK Finance, the trade association for mortgage lenders, and they said:
“Transferring ownership of a property into a trust without informing your lender and seeking their consent would most likely be a breach of a mortgage’s terms and conditions.”
The tax will also go badly wrong.
Property118 have forgotten that X is still there, still paying £8k to the bank, but now receiving £8k of new income in the form of the indemnity payments. Those indemnity payments are fully taxable, but the bank interest isn’t deductible for him (because X no longer has a property business; he has no basis to claim any tax relief).5
So the structure increases the overall tax bill by 50%.
It gets worse. There is potentially also a large up-front tax hit of a large amount of CGT and SDLT when the structure is established. That could amount to hundreds of thousands of pounds.
And then an ongoing requirement to file an annual tax on enveloped dwellings (ATED) return, which is easily missed – failure to file creates late-filing penalties of £1,600 per year.
In our opinion this structure is a disaster.
We’ve set out the legal analysis of these issues in detail below.6
Is this tax avoidance?
Yes.
The “Substantial Incorporation Structure” has no benefit to the landlord other than (supposedly) saving tax. It will therefore be regarded as tax avoidance by a number of statutory anti-avoidance rules, which will potentially negate the tax benefits (if there are any, which there probably aren’t).
This is by contrast with a normal incorporation, which absolutely does have other benefits for the landlord. In particular, it segregates legal liability: if the landlord is sued by the lender or by a tenant, then if the properties are held in a company, that liability will normally not attach to the landlord personally. A normal incorporation is not usually tax avoidance, even if it has tax benefits.
However, the substantial incorporation structure does not achieve legal segregation. As far as the lender, the tenants, and the world are concerned, the landlord remains personally the owner of the properties and therefore as a legal matter remains personally liable.7
Property118 and Cotswold Barristers
Property118 and Cotswold Barristers often charge fees of over £40,000 to relatively small landlords earning less than £100k/year. They’re set up to get referrals from other websites, paying £2,000 for a click that results in new business – meaning that they’re widely promoted by other firms (for example here).
For £40,000 you could expect to instruct a well-known accounting or law firm, staffed by qualified tax lawyers/accountants.
But neither Property118 nor Cotswold Barristers appear to have any members or employees with tax qualifications or experience. Property118 is entirely unregulated. I had a very confusing exchange of emails with Mark Alexander, head of Property118, in which he didn’t appear to have even heard of the two main tax qualifications: ATT and CTA.8
The head of Cotswold Barristers, Mark Smith9, is a generalist whose practice ranges from business law, to tax, to criminal defence work, to private prosecutions (including one where he was suspended by a month by the Bar Standards Board for acting negligently and “failing to act with reasonable competence“). His profiles in 2017 and 2020 don’t include tax in his areas of practice.
Barristers chambers usually list their members – the members being the whole point of the chambers. Cotswold Barristers is unusual in not doing this. It did at one point – and included as part of its team a fake barrister with a dubious past who was jailed for conning a dying woman out of her life savings. There is no suggestion that Cotswold Barristers was aware of his actions, but Cotswold Barristers does appear to have been responsible for listing him as part of its team.
The reference to “delegated authority” is strange. The claim that a non-barrister could be bound by Bar professional standards and be subject to the Bar Standards Board has perplexed all of the barristers we’ve spoken to.
We put this to Mark Smith of Cotswold Barristers. He said:
“Barristers must disclose, to the BSB and clients, any associations they have with people or entities in their provision of legal services. This is a code of conduct requirement. This was complied with at the outset of our relationship with Property 118 (P118). It has recently (Jan-Mar 2023) been re-examined by the BSB as part of a routine audit of Cotswold Barristers (CB) following an update of the BSB’s Transparency Rules. We had correspondence with the BSB about this, and they were and are satisfied our association is compliant. We did review the wording relating to ‘delegated authority’ at that point, as it was ambiguous. P118 has since amended this portion of their materials, so it makes it clear their consultants only work under delegation when the client has engaged with CB. Again, so long as it is made clear to the client, and the barrister is ultimately responsible, sub-contracting of work is permitted under the Code of Conduct.”
We don’t see an ambiguity: we think the claim that Property118 are bound by Bar professional standards, and subject to the BSB, is false. We asked Mr Smith to explain this claim, and he did not respond.
We’re writing to the Bar Standards Board to see if they can cast any light on these issues. We are also asking them to look into the wider question of why Cotswold Barristers are giving legal and tax advice that is obviously wrong.
Professional indemnity insurance
Property118 say that their barristers’ professional indemnity insurance means their clients are “shielded from financial risk”:
That’s not at all how professional indemnity insurance works. If the tax structure turns out to be the disaster we think it is, and the client wants to recover their loss, they have to successfully sue the barrister for negligence. That’s never a straightforward undertaking; not least because the barrister would presumably deny causation on the basis that you would have followed Property118’s advice even if Cotswold Barristers hadn’t been involved. And Property118 aren’t regulated, are unlikely to have any insurance, and probably aren’t good for the money (its owner lives in Malta).
The mortgage problem
Property118 say their structure is “fully compliant for mortgage purposes”:
However this appears to rely significantly on not telling lenders that their security has become the subject of a trust:
We asked UK Finance, the representative body for mortgage lenders, what they thought of the structure. They said:
“If someone wishes to transfer ownership of a buy to let property they should contact their lender to discuss whether this is permitted under the terms of any mortgage on the property. Transferring ownership of a property into a trust without informing your lender and seeking their consent would most likely be a breach of a mortgage’s terms and conditions.”
We believe UK Finance are clearly right on this. But even we didn’t agree, we’d suggest that it’s not a good idea to enter into a structure which your lender believes most likely breaches the terms of your mortgage.
Property118 and Cotswold Barristers seem to be in denial. They tell their clients:
The idea a lender can’t require repayment of a mortgage when it is in default is very strange. The 2016 Court of Appeal case they cite concerned whether a lender could require repayment of a mortgage when there was no default. We don’t understand how Property118 can make this claim when their own founder was the claimant in the case.
The problem with the trust
Property118 do seem aware there could be an issue with declaring a trust that shifts beneficial ownership to a company without telling the mortgage lender. They say:
There’s a similar theme on the Property118 website:
Is this an accurate reflection of most mortgage T&Cs?
One of our team undertook a very fast and incomplete review of major mortgage lender BTL T&Cs, carried out in about one hour.11
So the specific claim there are only two lenders with prohibitions is false.
But the larger problem is more basic. This is the key claim made by property118 (highlighted in blue):
The “Barrister-At-Law” will be Mark Smith of Cotswold Barristers. He takes the same approach: “as a matter of law, unless it says specifically in the terms and conditions [that] you can’t do it, then you can”.
This is not how English law security documentation works. The mortgage terms don’t need to have a specific prohibition on declaring a trust. All that’s required – and this is common – is to simply prohibit the sale or transfer of the property, and define “property” so it includes all interests, meaning the beneficial interests that would be transferred by a trust.
Other lenders have a general transfer of ownership prohibition which is drafted broadly enough to capture trusts and sales of beneficial interest. For example, TSB:
After undertaking this review, we spoke to a series of experienced real estate finance lawyers, who act for lenders and borrowers on everything from small domestic conveyancing transactions to the largest commercial real estate transactions. It was their unanimous view that, one way or another, a trust would be prohibited by most and possibly all mortgage T&Cs.
We put this point to Property118 and Cotswold Barristers, and specifically gave one of these mortgage terms as an example. They declined to explain their position as a legal matter, instead asserting that large conveyancing companies agreed with them, and that no bank had ever raised the point. That, again, does not answer the question. The large conveyancing firms are built to handle straightforward conveyancing at scale, not to answer technical queries on unusual trust arrangements. Mortgage lenders will not raise the point unless they become aware of it. Until now, we don’t believe they were. However, we briefed the mortgage lenders’ representative body, UK Finance, on the structure, and their view is now clear:
“Transferring ownership of a property into a trust without informing your lender and seeking their consent would most likely be a breach of a mortgage’s terms and conditions.”
It is therefore reasonably clear that entering into this arrangement without the consent of the lender likely defaults the mortgage.12
Legal and tax analysis – capital gain
X probably has a large latent capital gain in the properties. For example, if X’s acquisition cost of the portfolio was £4m, and X sold it now for current market value of £8m, X would have a £4m capital gain, and pay £1.12m CGT.
But Property118 claim their Substantial Incorporation Structure means that CGT incorporation relief applies.
That would have two very nice outcomes for X. First, there’s no CGT at all to pay on the transfer to the Company. Second, the capital gain is “rolled over” into the shares in the Company, so that any sale of the shares is subject to CGT broadly as if X had held them all along. The latent capital gain of the properties themselves is eliminated – the properties are “rebased” to current market value. So if the Company sold the properties for £8m, there would be zero tax to pay.
However, there is considerable doubt whether incorporation relief will apply.
The legislation requires that “the whole of the assets of the business” move to the Company. And that’s not happening13
The problem here is that legal title in the properties is being left behind. This is not some minor legal formality; legal title over real estate has reality and value to it. You can’t borrow without legal title. You can’t refinance. You can’t sell. In many “bare trust” cases this is a distinction without a difference, because the beneficiary can call for legal title at any time. Here they cannot, because the consent of the mortgage lender would be required. The Company’s inability to acquire legal title is a real constraint on its business – and that demonstrates that it did not in fact acquire the “whole assets of the business”.14
Another way of putting the same point is that there is no transfer of a “business as a going concern”, just an economic transfer under a trust. The “business” is operated by the person with the legal title, as it’s that person who has all the dealings with the tenant, bank, service providers, etc. This “business” isn’t moving at all.
So our view is that incorporation relief likely does not apply.15
(In many cases there will also be doubt as to whether X’s activity as a landlord is enough to constitute a “business”.16)
UPDATE: Mark Smith finally published a specific response to this point on 20 October 2023. He makes the obvious point that capital gains tax normally looks to beneficial ownership, not legal ownership, when considering whether a disposal has been made. But section 162 is not looking at whether a CGT disposal has been made – it uses the terms “whole assets of the business” and “transfers… a business as a going concern”. We read these as factual tests. And, factually, significant elements of the business remain with the landlord. Only the landlord can deal with the lender, the tenants, letting agents, and other contractual parties. The business of the company is very different – it’s just a passive investor. We made this point above; Mr Smith does not attempt to respond to it.
Mr Smith again makes the claim that HMRC have accepted the position. This would only be relevant if the true nature of the structure was disclosed to HMRC, and the s162 point above specifically drawn to HMRC’s attention. We doubt that is the case, but even if it was, it would only provide comfort to the taxpayers specifically covered by that correspondence. HMRC would not be bound for other Property118 clients.
There is therefore, as ever, no substitute for properly considering the legal position.
Legal analysis – SDLT
On the face of it, SDLT17 is due on the transfer of the properties by X to the Company, on the full market value at a marginal rate of up to 15%.18 That’s potentially a huge up-front cost. There’s a relief for partnerships incorporating, but not for individuals incorporating.
In many cases, SDLT would make the Substantial Incorporation Structure uneconomic, with a large up-front tax cost. Here’s the Property118/Cotswold Barristers solution:
It’s to claim that, where a husband and wife run a property rental business together, in fact they’ve always been a partnership, and partnership relief is available. They do this, even in cases where there was no partnership agreement, no partnership tax returns, and no extraneous evidence of any kind that a partnership existed. Technically that does not make it impossible that there was a partnership – it’s a question of fact. But the recent SC Properties case shows just how difficult is to establish a partnership in such circumstances – and the burden of proof is on the taxpayer. It is usual for a married couple to manage their financial affairs together, but that does not normally mean there is a partnership in the legal sense. Relations between spouses are very different from the business relations of partners in a partnership.19
If SDLT were payable (because the properties are not partnership property), then interest and penalties for late filing would be due. Although multiple dwellings relief would usually be available to reduce the SDLT charge, this relief is unavailable if it is not claimed in a return or an amendment to a return. And an SDLT return cannot be amended more than one year after the filing date for the transfer. If any of the properties were occupied by X or his relatives (or not held for a qualifying business purpose) the SDLT rate on that property would be 15%.20
In our view, it will only be in rare cases that this strategy succeeds, and SDLT relief applies – and HMRC guidance suggests that HMRC are likely to contest the point.21
Finally, although no annual tax on enveloped dwelling (ATED) would be payable to the extent that the properties are let out to third parties, ATED relief must be claimed. It is unclear to us if Property 118 advise their clients to file ATED returns (our sources have not seen such advice). Failure to file triggers late-filing penalties of up to £1,600 per return per year. For companies that used these arrangements over five years ago, it might come as quite a shock that they are liable to £8,000 of penalties even though no ATED is due.
Legal and tax analysis – taxation of the interest payments
Property118 and Cotswold Barristers say:
They make a slightly different claim in the video below: that the “legal owner continues to make mortgage payments (as nominee of the beneficiary) and claims the payments back from the beneficiary as out of pocket expenses, which are tax free”.
But that is not right at all. X, the legal owner, is not the “agent” or “nominee” of the Company under the loan – X remains the borrower under the loan in their own right. You cannot declare a trust over obligations. What is actually happening is that the Company is making indemnity payments to X, which pays the mortgage lender (and this is the case as a legal matter even if, as I suspect, there are never any cash payments from the Company to X). X therefore remains taxable.
When we look at the actual legal and tax analysis that follows from this, the entire structure falls apart.
Deductibility of interest paymentsfor the Company
Mark Smith says in this video that the payment is “deductible in accordance with normal corporation tax principles”. That’s not correct.
The corporation tax treatment of debt is governed by the loan relationship rules in Part 5 of Corporation Tax Act 2009. For these rules to apply, the Company must have a “loan relationship”, for which it has to be “standing in the position of debtor under a money debt” which must “arise from a transaction for the lending of money“. But the Company doesn’t have a money debt and never borrowed any money – it’s just making indemnity payments. There is only one loan, and that was from the mortgage lender to X – and it’s still there.22
So the Company doesn’t have a loan relationship and will not achieve a deduction under the loan relationship rules.23
It might achieve a deduction under the general rules for a company carrying on a UK property business. That requires the indemnity payments to be recognised in the accounts and for the indemnity payments to be regarded from a tax perspective as income of the property business and not as further consideration for the capital transaction of the original acquisition of the beneficial interest. We don’t think either is a straightforward point. 24
So it cannot be assumed that the Company will achieve a deduction for its indemnity payments. If it doesn’t, we are in a worst-case scenario for X which looks like this:
More than doubling X’s original £2,400 tax bill. Not a good result.
Even if the Company does achieve a deduction, the result is still worse than the original £2,400 of tax:
We put this point to Cotswold Barristers. They asserted that the payment was deductible but were unable to explain how or why.
Taxability of indemnity payments
We can immediately dismiss the explanation in the video – that X is receiving tax-free out-of-pocket expenses. That would be the case if the loan had been entered into by X as trustee for the Company. But it wasn’t – the loan was simply entered into by X and X alone, and the trust can’t change that). The payments X makes to the lender are not trust expenses – they’re X’s personal expenses. And no agreement X signs with the Company can change this – you can’t transfer an obligation, or create a trust over an obligation.
That’s a big problem. X no longer has a property business (because he is a mere trustee). So X has zero basis for claiming a deduction on the interest he pays the bank. But he is now receiving a stream of indemnity payments under a legal obligation. They will be taxable (perhaps as “annual payments“, perhaps as “miscellaneous income“). That creates a large tax charge for X – it’s the worst-case outcome we show above.
We see only one potential counter-argument: to say that the indemnity payments actually form part of the consideration for the original sale,25 and so are capital and not revenue items. If so, and the original sale was exempt from CGT, then there’s no additional tax to pay; but the consequence of this argument is that the Company absolutely won’t get a tax deduction for its indemnity payments (because they must be capital payments too). That results in this, which we think is the best-case outcome of the Substantial Incorporation Structure:
Note that the best-case outcome here (which we’d expect HMRC to resist) is still worse than the original £2,400 tax bill. You’d have been better off doing nothing.
Or, if the original sale was subject to CGT then probably26 each indemnity payment is subject to CGT at 28%, resulting in this bad-but-not-quite-worst-case outcome:
We put this point to Cotswold Barristers. They were unable to explain why the indemnity receipts weren’t taxable, but said that HMRC had never raised the point. We expect that is because the issue has never been properly disclosed to HMRC.
Back in 2019, Mark Smith gave a mystifying explanation in a now-deleted video:
“Finance costs accrue to the beneficiary, the company pays the expense of running the mortgage and it’s deductible on normal corporation tax principles. You don’t even have to change your direct debit or standing order payments, because you are allowed to receive the money for the mortgage repayments from the company as their agent without it being taxable in your hands, as long as at some point it flows through the company books, the company bank account, it’s only taxable by the company. You only receive the money as their agent, you make the payment as the company’s agent. And there’s a fallback position. Even if HMRC tried to tax you on it, you only pay tax at trustee rates, which basically washes out any impact of having to pay tax on it because you get the tax credit back again at 20% basic rate.”
This is gobbledygook. The individual is not the company’s agent when making mortgage payments – the individual entered into the mortgage as principal. The mortgage doesn’t form part of the trust – you can’t declare a trust over an obligation. The trust rate (and associated credit rules) apply to settlements, not bare/simple trusts – they cannot apply to this structure (and if the arrangement was a settlement there would be an array of other consequences, mostly adverse).
Legal and tax analysis – inheritance tax
Cotswold Barristers send clients materials presenting them with extraordinarily large (and unrealistic) inheritance tax calculations. We’ve seen one projecting that a client’s portfolio of under £10m would be worth £200m in ten years’ time, so with a potential inheritance tax bill of £80m. This is, at best, sharp practice and, at worst, misselling.
They say that the advantage of their Smart Company solution is that:
So you say the property portfolio is currently worth £10m, and issue shares which are worth the value of the portfolio minus £10m. Those shares are therefore worth £0 today (you claim), and you can give the shares to your children with no inheritance tax or capital gains consequences. But if the portfolio did become worth £200m in ten years’ time, the shares would be worth £190m. More magic.
The flaw in this is that the shares plainly aren’t actually worth £0 when created. It’s easy to test this: would they sell them to Tax Policy Associates for £1,000? That’s a fantastic deal for them, if the shares are really worth nothing. But obviously, nobody would take up that offer – because there’s a large expected capital appreciation embedded in the value of the shares. And that’s the tax conclusion too: the shares have a large current value equal to the discounted expected capital appreciation. We’re aware of two cases where shares of this kind have been litigated, and the contention that the shares were valueless failed (with, in one case, the Tribunal actually giving the shares a seven-figure value).
That means this structure probably has immediate inheritance tax and capital gains tax consequences (possibly also consequences under the “employment related securities” rules).
A further twist:
Cotswold Barristers and Property118 often advise putting these shares in a discretionary trust. We’ve seen them recommend “Creation of a Discretionary Trust controlled by you via a Letter of Wishes to shelter all future capital growth in the portfolio from Inheritance Tax”.
A “discretionary trust controlled by you” isn’t a trust – it’s a sham.
And another twist:
Part of the idea seems to be that shares are being created for children, so they can receive dividends and pay less tax than the parents (because of their allowances and lower tax rates). But there are specific rules that stop this.
DOTAS
Given that the main (and perhaps sole) purpose of Property118’s scheme is tax avoidance, it seems likely that their structures should be registered with HMRC under DOTAS – the rules requiring disclosure of tax avoidance schemes.
Cotswold Barristers told us that HMRC considered this point in 2021 and did not take it forward.
We would query if Cotswold Barristers made HMRC aware of the size of their fees. A “premium fee” (being a fee which is more than the time value of the work carried out) is one of the hallmarks which can trigger DOTAS.
Another DOTAS “hallmark” is where it is reasonable to expect a promoter would wish an element of the arrangements to be kept confidential from any other promoter. Property118 sent us correspondence refusing to explain elements of their structure, because it was “valuable intellectual property”. That may amount to an (accidental) admission that the confidentiality hallmark applies.
Failure to comply with DOTAS can result in fines of up to £1m.
More strange Property118 advice
The Property118 website has other examples of tax planning that raises alarm bells, because it has no reasonable prospect of success. We’ll mention just two examples:
Capital gains value shifting
The capital gains tax avoidance below ignores the existence of a specific anti-avoidance rule:
An entirely artificial step is used to reduce the capital value of the shares, and then immediately re-inflate it. There are very longstanding rules to counter such “value-shifting” transactions (as well as a plethora of other statutory rules, plus common law anti-avoidance principles).
The structure as presented in our view has no reasonable prospect of success.
UPDATE 22 September: after this report was published we found more details of this scheme, and it turns out to be rather different from the description above, and much worse. We’ve written a short analysis of this here.
SDLT avoidance
This page suggests that SDLT can be reduced when acquiring a “house in multiple occupation” (HMO), i.e. where many people have separate bedrooms but there is one front door and usually one living room. The idea is that “multiple dwellings relief” applies.
That is, however, wrong – MDR applies only where there are separate dwellings, and a bedroom is not a dwelling. That was fairly obvious when the page was written in 2020. It is more obvious now, as an Upper Tier Tribunal has ruled on the point.27
What if you’ve entered into a Property118 scheme?
We would strongly suggest you seek advice from an independent tax professional, in particular a tax lawyer or an accountant who is a member of a regulated tax body (e.g. ACCA, ATT, CIOT, ICAEW, ICAS or STEP). Given the potential for a mortgage default, we would also suggest you urgently seek advice from a solicitor experienced with trusts and mortgages/real estate finance (e.g. a member of STEP).
We would advise against approaching Property118 given the obvious potential for a conflict of interest.
Property118 and Cotswold Barristers’ response to this article
It is common practice to give the subject of a report or investigation 24 hours to respond. The response we received from Property118 was unusual in several respects. We set it out below in full.
The initial response was a request from the CEO of Cotswold Barristers to join a recorded Zoom call: “Why won’t you come on video and ask your questions? The public deserve to make their own assessment”.
Property118 then failed to respond to any of the technical questions we asked.
Cotswold Barristers responded, but leant very heavily on the claim that their approach has been accepted by HMRC and other accounting firms. We are sceptical that full disclosure was ever made to HMRC; if you approach HMRC for a clearance but don’t mention all the facts, or all the technical issues relevant to the clearance, then any clearance you get cannot be relied upon.28 And HMRC clearances can never be relied upon where there is tax avoidance.
The final response was a vague legal threat: “Your continued blackmail is noted and our response to any damages caused to our businesses by your future actions will be dealt with accordingly.”
In the interests of transparency, we set out the correspondence in full below. The thumbnails should expand when you click on them. Alternatively, the correspondence can be downloaded as a PDF here.
Our original query:
The initial response from Property118, including HMRC correspondence29, customer testimonials, a complaint about the timescale and a vague legal threat:
The clerk/CEO of Cotswolds Chambers responded by suggesting a recorded Zoom call, because that’s “what the public would expect in 2023”:
We then received a letter from Mark Smith. This responds to our queries about the unusual relationship between Property118 and Cotswolds Barristers by referring to a recent BSB audit (discussed further above). Mr Smith responds to our CGT incorporation relief criticism by misunderstanding the s28 deeming rule; otherwise there is little in the way of technical content. For the most part, the response is “no one else has complained“:
We asked for a specific response to the technical points we had made:
Smith asks for two weeks to respond to our email. When we say that’s not realistic, and these are points they should already know the answers to, Mark Alexander sends a somewhat intemperate response:
Then a more detailed response, with a long list of people he works with (names redacted out of fairness to the individuals):
And finally a vague legal threat and accusation of blackmail:
Many thanks to G and S for bringing this to our attention. Thanks to J, T, F and BM for their help with the mortgage aspects, as well as UK Finance. Thanks to E for trust law expertise, T for insurance law input, H, S and O for the barrister conduct issues, A and Sean Randall for the specialist SDLT input, and C for advice on the direct tax/indemnity point. Thanks to Pete Miller, who wrote on the incorporation relief point three months ago, and independently reached the same conclusion as us. Pete and Sean also kindly reviewed a draft of this report, and provided invaluable feedback. J kindly provided some technical corrections after the initial version of this report was published. And thanks to Ray McCann (former senior HMRC inspector and past President of the Chartered Institute of Taxation).
We rely upon the goodwill and expertise of a large number of tax professionals, only some of whom we can name. As ever, Tax Policy Associates takes sole responsibility for the contents of this report.
The rate is 19% for profits under £50,000, with a “catch-up rate” of 26.5% on profits up to £250,000, so that the overall effective rate smoothly transitions into the full rate of 25% ↩︎
Obviously you will want to get the money out at some point, but being able to defer and roll up low-taxed income is valuable in itself ↩︎
Because a landlord can walk away from a company in a way that they cannot walk away from a personal mortgage ↩︎
We have established this is their structure from published information on the Property118 and Cotswold Barristers websites (e.g. this brochure, and here, here, here, and here) as well as copies of their advice we received from our sources. ↩︎
This is perhaps the most likely of a number of possibilities, all discussed further below ↩︎
In the interests of concision, we don’t go into one somewhat difficult point: the effect of a sale when that sale is prohibited by another contract (the mortgage). The Don King v Warren case is general authority for the proposition that such a sale will still be effective in equity, and we expect that will be the case here. However the issues are not straightforward; and if we’re wrong, and the sale is not effective in equity, then essentially nothing has happened from a tax perspective, and it’s as if the transaction never happened. No tax benefit, but also none of the unfortunate results we go into below. ↩︎
the landlord may be able to recover from the company under the indemnity, but if the companies’ assets are insufficient, the landlord will remain on the hook. There are, therefore, no liability advantages from the substantial incorporation structure, compared to, if the landlord just held the properties personally. ↩︎
In an earlier (and unrelated) LinkedIn discussion, Mark Smith, head of Cotswold Barristers, hadn’t heard of the term “tax set” – i.e. he was unaware that there were specialist tax barristers’ chambers. ↩︎
Not to be confused with Mark Smith, the respected extradition barrister. ↩︎
This is from a document they sent to a client a few months ago ↩︎
Caveat: our team only had English expertise; the law is different in Scotland and Northern Ireland and therefore none of the analysis in this section applies to it; however given that Property118’s English lawyers get the English law position wrong, it would be optimistic to assume that they have the Scots and Northern Irish position right ↩︎
The original version of this report also discussed the potential for the trust to invalidate the buildings insurance of freehold property, which would be another mortgage default. Our was undertaken by insurance specialists but has been questioned by others with expertise in insurance law. This report is intended to reflect a consensus view of relevant experts, and therefore (given there is at least some doubt as to the position) we have removed that text. The general point about mortgage defaults (for both freehold and leasehold property) remains, and it is this point that UK Finance are referring to. ↩︎
An additional problem is that the liabilities of the business are not being transferred; rather they are being covered by an indemnity from the Company, and that means the consideration does not just consist of shares (which s162 requires). On the face of it, that prevents incorporation relief applying. There is an HMRC concession that HMRC do not take this point (ESC D32). That is very convenient (and necessary) for the Substantial Incorporation structure. But two important niggles: (1) there is no technical basis for ESC D32 and therefore, following the Wilkinson case, it’s unclear how HMRC can continue to apply it, and (2) a taxpayer engaged in tax avoidance cannot rely upon any HMRC concession or published practice (a point HMRC go out of their way to stress in their guidance). ↩︎
Similar issues may arise with other assets of the business which are staying put as a legal matter but (presumably) purportedly being assigned in equity: e.g. buildings insurance policies, tenancy agreements, letting agent agreements, the right to recovery of . The legal title that is being left behind is an asset, and not a valueless one. A business that only has equitable title to the core elements of its business is not the same as a normal business. A landlord is also subject to a large number of regulatory requirements around deposit protection, fire safety, etc – and these obligations will remain with the landlord as legal owner. ↩︎
Cotswold Barristers’ response was that there was a deemed CGT disposal of legal and beneficial title day one, and so the whole assets of the company were deemed to be transferred. We don’t think that’s defensible. Section 28 is a rule which sets the time of a disposal for CGT purposes. It is not some wider deeming rule which deems an asset to have been actually transferred on a different date. Incorporation relief refers to “transfer” (the legal/commercial concept) and not “disposal” (the CGT concept). This is therefore a misreading of section 28. The courts havealways held that deeming rules should be restricted to their statutory purpose.) UPDATE: Property118’s own KC ended up agreeing with us on this point ↩︎
or the equivalent devolved taxes if one or more of the properties is in Scotland or Wales ↩︎
That’s including the 3% surcharge for purchases of dwellings by companies. In some cases we would also need to add the 2% increased rate for non-resident transactions. ↩︎
Section 2(1) of the Partnership Act 1890 is clear that joint ownership is not enough, and sharing profits is not enough. It’s the relationship between the parties that is key. This is something that Smith and Property118 appear to overlook. ↩︎
Plus the 2% increased rates for non-resident transactions, if applicable). ↩︎
There may be other potential attacks on the “retrospective partnership” strategy using anti-avoidance legislation and principles ↩︎
The obvious way to test the loan relationship point is to ask whether the Company can be sued by the mortgage lender; the obvious answer is that it cannot. Note that whether there is a “loan relationship” or not is a legal test, not an accounting test – even if the accounts here show the Company as party to a loan, it won’t have a loan relationship ↩︎
One correspondent raised a plausible argument to the contrary: condition C in s330A CTA 2009 applies on the basis that there was a “transaction which [had] the effect of transferring to the company all or part of the risk or reward” of the mortgage (this is not an argument Property118 has made; there is no evidence they are aware of any of the provisions of the loan relationships rules). We are, however, doubtful that an indemnity has that effect – it is cashflows which are (economically) transferred, not risk/reward. An indemnity is economically and legally distinct from defeasance. Financing cost indemnities are often seen on commercial transactions, and the idea s330A applies to such arrangements would be novel. It is, furthermore, unclear if X would benefit even if s330A applied. It seems likely that the main purposes of the arrangement are to enable the Company to obtain a tax advantage; on that bass, s455C would apply to deny the deduction ↩︎
A better argument Property118 could make is that the company doesn’t need a deduction for the indemnity payment, because under the trust it’s only entitled to the net rent (after mortgage payments are made). That, however, is contrary to the nature of a bare trust – see e.g. the HMRC guidance here↩︎
Property118’s actual implementation is unclear. We have seen some documentation which states that the indemnity payments are consideration (which we expect is the intended outcome). However we have also seen a legal advice note from Mark Smith in which he says that the consideration is the issue of shares equal to the market value of the property (i.e. with no deduction for the debt) – we do not know if this was a on-off mistake, or reflects a general confusion as to the legal character of the transaction ↩︎
“Probably” because we think the uncertainty as to how long the mortgage will remain in place probably makes the stream of indemnity payments “unascertainable future consideration”, charged to CGT when each payment is made. But there’s a risk that, at least in some cases, it’s not unascertainable (for example, if the mortgage doesn’t have long to run). In that case, the stream of indemnity payments would have to be calculated and added to the original disposal consideration, with no discount applied – potentially a really bad result ↩︎
There is also a technical problem with the claim on this page, which Sean Randall (an experienced SDLT adviser and Chair of the Stamp Taxes Practitioners Group) explained here – with an unconvincing response from Property118. ↩︎
The Sunday Times has a remarkable story that Lord Sugar tried to avoid tax by leaving the UK for Australia. The idea was that he’d cease to be UK resident, and so would escape £186m of tax on some very large UK dividends.
Somehow neither Sugar, his team, or his advisers ever thought to do a simple Google search:
Which would have led them to this:
So the answer as to why Lord Sugar failed to become a tax exile is easy. The CRGA means that, as a member of the House of Lords, he would have been UK tax resident whether he lived in Basingstoke, Sydney or on the Moon.
It’s a fun story (not for Alan Sugar, and not for his advisers, who the Sunday Times says he’s now suing 1). But there’s a bigger question: why does the UK make it so easy to become a tax exile?
Looking at the Sunday Times “Rich List”, I’m struck by how few of those listed still live in the UK. Most of these people left the UK for a very specific reason. They built up a successful business, and were about to make a large amount of money from that business (perhaps by selling it; perhaps through a large dividend). They left the UK, sold the business (or received the dividend) and made a large tax-free gain/profit. They became a tax exile.
How tax exile works
There isn’t a loophole or trick – its just that, like almost all4 other countries, the UK only taxes people who live here – who are “UK tax resident”.5
A Frenchman in Paris won’t be subject to UK tax on dividends from UK companies. If he moves to the UK, he’ll become UK tax resident, and be subject to tax on that income6.
A Brit living in London is of course UK resident, and subject to UK tax on her UK dividends. But if she leaves the UK, she’ll no longer be taxed on those dividends.
This is sensible and uncontroversial. The UK has no business taxing people who don’t live here.
It becomes more controversial if that Brit has spent her life in the UK growing a business, and is (say) sitting on an offer from someone to buy the business for £50m. The UK has, by international standards, a pretty low rate of tax on capital gains – 20%. But if she leaves the UK and moves to a country that doesn’t tax capital gains then she’ll escape all tax on the £50m. That used to mean going to a tedious tax haven like Monaco, but there are an increasing list of non-tax havens that don’t tax recent immigrants on their foreign gains – e.g. Australia, Portugal7 and Israel.8
Could we stop tax exiles?
Absolutely. Many countries try to stop tax exiles, or limit the tax they avoid, with “exit taxes”.
Typically how this works is that, if you leave the country, the tax rules deem you to sell your assets now, and if there’s a gain then you pay tax immediately (not when you later come to sell). Sometimes you can defer the tax until a future point when you actually sell the assets or receive a dividend.9 And if your new home taxes your eventual sale, then your original country will normally credit that tax against your exit tax. Of course, it works out more complicated than this in practice because it’s tax, but the basic principle is both straightforward and commonly implemented in other countries. For example:
France has a 30% exit tax on unrealised capital gains, with a potentially permanent deferment if you’re moving elsewhere in the EU, or to a country with an appropriate tax treaty with France.
Germany has a 30% exit tax on unrealised capital gains. If you’re moving elsewhere in the EU you used to get a deferral; from the start of 2022 you instead have to pay in instalments over seven years.
Australia has an exit tax on capital gains tax – unrealised gains are taxed at your normal income tax rate for that year. There is a complicated option to defer.
The US has an exit tax for people leaving the US tax system by either renouncing their citizenship, or giving up a long-term green card. Unrealised gains in their assets, including their home, become subject to capital gains tax at the usual rate. No deferral.
Canada is of course much nicer than the US. Unrealised gains are taxed, but there’s a deferral option, and your home isn’t taxed at all.
Why didn’t the UK create an exit tax years ago? We didn’t have capital gains tax at all until 1965, and it was easy to avoid until the 90s. After that, we ran into a big problem with EU law, which greatly complicates exit taxes – in particular by requiring an unconditional interest-free deferral of exit tax until an actual disposal of the assets. That enables a massive loophole for taxpayers to leave a country, and then extract value through dividends, rather than a sale. Germany is attempting to ignore this, and I expect that will not end well.
So one new freedom the UK has post-Brexit is the ability to impose our own exit tax that has no leaks, and which the CJEU can’t stop. 10
(The UK has some exit taxes already. Companies migrating from the UK pay an exit tax. Stock options are subject to a mini-exit tax. Some trusts are subject to an exit tax. I’m sure there are a few more. But we currently have no general exit tax on individuals).
Should we stop tax exiles?
There are, inevitably, two opposing views:
One is that everyone is free to live where they wish, and if they move somewhere with lower tax, that’s up to them. No Government has a right to tax people for leaving. The knowledge that high-earning individuals can skip the jurisdiction, imposes a useful pressure on governments not to raise tax too high. It’s a useful form of tax competition.
The other view is that if you spend years in the UK building up your business, it’s only right that the UK should have the right to tax the gain you make on selling that business. More pragmatically, it seems counterproductive for the tax system to incentivise people to leave. This kind of “tax competition” is an undesirable infringement on countries’ right to raise taxes, particularly on the wealthy.
So what should we do?
I’m not sure. I’d want to see more evidence and analysis of the real-world impact of an exit tax. A poorly designed tax could put people off coming to the UK, or even accelerate departures (i.e. by causing entrepreneurs to flee to Monaco as soon as things start going well, rather than waiting until just before their big payday). And even just talking about an exit tax is dangerous, because it could prompt tax exiles to skedaddle immediately.11 Any exit tax would also need to be carefully designed to have no impact on people genuinely leaving the UK for other “normal” countries in which they’ll be fully taxed on their future gains – it should be targeted specifically at those who leave for tax havens (but targeting specific tax results, not specific countries).
In the interests of fairness, if we’re introducing new rules for capital gains when people leave the UK, we should also look again at the capital gain rules when you arrive in the UK. Right now if (for example), you build a business worth £100m from nothing, come to the UK and sell your business the next day, the UK will tax you on all £100m of gain. Even though little or none of that gain was made in the UK. That feels unfair; and there is anecdotal evidence that it deters some entrepreneurs from moving here. So we should have an entry adjustment – “rebasing” the asset to its market value at the date you arrive in the UK.
So there is a case to be made for changing the law in both directions, and establishing a principle that the UK taxes gains made when you were in the UK, and doesn’t tax gains made when you weren’t. But any change needs to be implemented cautiously and with great care.
Footnotes
Most professional negligence claims settle well before reaching a court, but on on the face of it this looks like a slam-dunk. However, we don’t know all the circumstances, what questions were asked, and whether advice was preliminary or definitive. The advisers may also be able to point to limitations of liability in their standard terms – accountants often limit liability to £1m (or thereabouts), even on very large transactions, and whether these limitations apply in a particular case is often a difficult question. Sugar would also have to show that, if he had been properly advised, he would have resigned his seat in the Lords, and then remained non-UK resident for five years – and demonstrating these kinds of counter-factual questions isn’t always easy ↩︎
The original version of this article included Toto Wolff, the motorsport executive. I don’t think he really belongs in it – he left the UK for tax security reasons, but given he wasn’t born here, and didn’t make his money here, he shouldn’t be on the list. ↩︎
Dixon’s Wikipedia article says he voluntarily pays tax in the UK. I doubt it. ↩︎
“almost all” meaning “everyone except the US”. There’s a reason the US is an outlier here. ↩︎
There used to be a huge loophole – you could leave the UK on 4 April 2020, become non-resident for the 2020/21 tax year and receive your massive gain tax-free, then fly back into Heathrow on 5 April 2022. That no longer works. There’s a special rule to tax “temporary non-residents”. If you leave the UK but become UK resident again within five years, any capital gains you made during the five years are immediately taxable. ↩︎
But not his unremitted French income/gains, because he will be a “non-dom“. ↩︎
Correction: Portugal would tax gains, but not dividends. So obvious ploy is to keep hold of the shares, but extract all the value via a dividend. Which amounts to the same thing, subject to a bit of messing around with distributable reserves ↩︎
And the UK is in a similar category in the reverse case – the UK non-dom rules means that a foreigner coming to the UK is not taxed on their foreign gains, unless they remit them to the UK. That is less generous than Australia, Portugal and Israel, where the gains are exempt even if brought into the country. ↩︎
Often you have to provide some form of guarantee so you can’t just promise you’ll pay in future, and then scarper ↩︎
Some tax nerds will worry that the UK’s many double tax treaties make this hard, because we often give up our right to tax non-residents on their capital gain. To which I say: easy, deem the tax to apply on the last day they were UK resident, so the treaty isn’t relevant. And then expressly override the treaty anyway, just to be safe. After all, treaties are supposed to be used to prevent double taxation, not to avoid taxation altogether. ↩︎
It follows that any exit tax would have to be announced suddenly and with great fanfare, and made retrospective to the date of the announcement. This would be controversial, but introducing a non-retrospective exit tax would be *massively damaging* – there would be a mass exodus of the super-wealthy ↩︎
Comment policy
This website has benefited from some amazingly insightful comments, some of which have materially advanced our work. Comments are open, but we are really looking for comments which advance the debate – e.g. by specific criticisms, additions, or comments on the article (particularly technical tax comments, or comments from people with practical experience in the area). I love reading emails thanking us for our work, but I will delete those when they’re comments – just so people can clearly see the more technical comments. I will also delete comments which are political in nature.
6pm update: St James’s Place sent me a statement saying “We are currently investigating this matter, including the nature of the planning outlined and how the marketing material was published on the website. While we work with clients to consider the tax efficiencies of their financial plans, SJP does not endorse the use of tax avoidance schemes.”
No response from Apollo, although their website has been “down for maintenance”since this afternoon.
Back in May, we reported on a widely promoted tax avoidance scheme for funding private school fees. The basic idea was to create a trust in favour of your children and put valuable assets in it (e.g. shares in a family company). The return on those shares would then be taxed at the children’s lower tax rate and benefit from the children’s tax allowances – potentially saving tens of thousands of pounds.
These schemes don’t work. There’s a specific tax rule that says that, if a parent puts assets, directly or indirectly, in the name of their children, then the assets are taxed as if still owned by the parents. HMRC subsequently confirmed this in a “Spotlight” update.
The firms we wrote about were all fairly minor players, which is what we’d expect.
The schemes were, as you’d expect, promoted by small firms – surely no serious adviser would touch such nonsense. It turns out that the country’s largest private client firm, Apollo Private Wealth, absolutely is promoting this nonsense.
Apollo Private Wealth may be the country’s largest private wealth firm,1 and is a “senior partner practice” of St James’s Place, the FTSE listed wealth management business. These are significant businesses, with large numbers of high net worth clients.
The scheme
This LinkedIn post looks like it’s promoting something boring and sensible like an ISA.
The link goes through to a pretty brochure (archived here) which does indeed mention ISAs, but also includes this proposal:
The meaning is clear: that parents can use a trust to “divert” their own assets/income to their children, and benefit from the children’s lower rate and higher allowances.
Tax law can be complicated, with unclear and highly contestable boundaries between good tax planning, failed tax planning, and tax avoidance.
In this case, it’s easy.
Here’s section 629 of the Income Tax (Trading and Other Income) Act 2005:
The terms “settlement” and “settlor” are defined exceedingly broadly:
Applying these rules to the Apollo proposal: the trust is a “settlement”, the parents are “settlors”, and income is paid under the settlement for the benefit of the settlor’s children. Section 629 then applies and the parent, not the child, is taxed on the income. Whatever layers and complexity are added won’t make a difference, given the breadth of the legislation.
Any client entering into the arrangement Apollo suggests would, once HMRC become aware, have to repay the tax, plus interest, plus (very likely) penalties for carelessness. Any tax adviser should know this – there’s no grey area or uncertainty here.
The questions for Apollo
It’s pretty worrying that a large advisory firm is promoting something that just can’t work, and after HMRC issued a Spotlight on the same subject. More worrying if they’ve actually advised anyone to do this. The obvious question is: if they get something this simple wrong, and are happy to put something this rubbish in a glossy brochure, what on earth are they recommending to clients behind closed doors?
I’ve asked Apollo and St James’s Place for comment.
Many thanks to Sam Brodsky for bringing this to our attention.
Footnotes
Apollo Private Wealth has no connection with Apollo Global Management, the asset management giant ↩︎
The “grandparent” variation they mention would work, if the assets start out truly owned by the grandparents and not the parents. But then you don’t need a trust – the grandparents could just pay the school fees directly. ↩︎
During the pandemic, Baroness Mone referred a company called PPE Medpro to the Department of Health and Social Care to supply PPE equipment. PPE Medpro was awarded £200m of contracts, in circumstances which are now the subject of litigation and a fraud investigation by the National Crime Agency.
BaronessMone at the time did not disclose any connection to PPE Medpro, and in 2020 her lawyers denied “any suggestion of an association”. However, new evidence suggests that PPE Medpro’s true ownership was hidden by a company controlled by her husband, Douglas Barrowman. If that was intentional, then criminal offences were committed.
Our full analysis is below, and the Sunday Times is carrying a report on our findings here.
The Department of Health and Social Care has commenced legal action to recover the £122m paid under the second of the two contracts. PPE Medpro is also the subject of an ongoing fraud investigation by the National Crime Agency, and Mone’s actions are the subject of an investigation by the House of Lords Commissioners for Standards’ Office1.
Mone has said she is in no way associated with PPE Medpro. Lots of press coverage has been highlysceptical of this.
Who really owns PPE Medpro?
At the time, PPE Medpro’s shares were owned by an Isle of Man resident, Anthony Page.
Sometimes the true owner of a company – the “person with significant control” (PSC) – can be different from the shareholder. For example, if one person owns shares in a company, but there is a formal or informal understanding that they always act on the instructions of another person, then both people should be listed as PSCs.
But the Companies House register showed Mr Page as the sole PSC:
At the same time, Anthony Page was the managing director of the Knox Group.
Another director of PPE Medpro was Voirrey Coole – who was the director of another Barrowman company.
This suggests three possibilities:
PPE Medpro was a private venture of Mr Page, and nothing to do with Mr Barrowman.
Mr Barrowman’s Knox Group was engaged to provide corporate services for an unknown third party, and Mr Page was the shareholder in his capacity as employee of the Knox Group.
Mr Barrowman was the true owner of PPE Medpro. The Guardian says it has a document listing PPE Medpro and LFI Diagnostics as “entities” of the Barrowman family office (but Tax Policy Associates has not seen that document, and so we cannot independently assess this claim).
How plausible are the three scenarios?
Scenario 1: Mr Page owned PPE Medpro in his own right
New evidence means that this scenario can now be ruled out.
The Sunday Times reported last week that Anthony Page was dismissed from the Knox Group for “gross misconduct”. If Mr Page owned PPE Medpro in his own right then his ownership of PPE Medpro would have been unconnected with his employment by the Knox Group. Page would have remained the PSC of PPE Medpro when the Knox Group fired him.
The obvious inference is that Mr Page held the PPE Medpro shares as part of his employment by the Knox Group and, when that employment ceased, he was required to transfer his ownership of those shares. He was not the true owner, and should not have been registered as the sole PSC.
Scenario 2: Mr Page and the Knox Group are acting for some unknown third party
There are, however, two problems with this explanation.
First, Mr Page and Ms Coole are not acting at all like typical corporate service providers.
Mr Page actually holds the shares in PPE Medpro himself. This is highly unusual. Employees of corporate service providers (CSPs) are often directors for their clients’ companies, but rarely, if ever, shareholders – for the very good reason that this creates unacceptable risks for the client. What if the employee leaves the company? What if they die? Or decide to commit fraud? The best case is that a court order would be required. The worse case is that valuable assets could be lost. We asked one of our contacts, very familiar with the ultra-high net worth world, whether he had ever seen a fiduciary business put a client’s company’s shares in an employee’s own name – he described the suggestion as “insane”.
CSP businesses therefore don’t put shares in their client’s companies in the name of the CSP’s employees. The usual practice is that the CSP business has a nominee company to hold shares when required. For example (to pick two reputable corporate services businesses), Equiom Corporate Services Limited and Intertrust Fiduciary Services Ltd.2
Importantly: the client is a client, and the CSP will do what the client asks. That means that the client and not the CSP is the “person with significant control”.
You can see numerous examples of this if you look at companies where, for example, Intertrust or Equiom, provides one of its employees as director. That employee is never a shareholder, and never listed as the PSC.
Second, Mr Barrowman’s behaviour is hard to explain if in fact the Knox Group was acting as a CSP for some other party
Douglas Barrowman and Baroness Mone are facing serious allegations, and PPE Medpro is being investigated for fraud by the National Crime Agency. It is strongly in his interest to demonstrate that he is in fact not the controller of PPE Medpro. So why wouldn’t Mr Barrowman clear his and his wife’s name by revealing who the true owner of the company is? There is no obligation of confidentiality here – in fact the reverse, because the PSC rules require the true owner to be disclosed.
Hence the suggestion that Mr Page was acting in the ordinary course of his CSP business does not, we believe, fit the facts. It is also an inadequate explanation for those involved because, even if it were correct, the Knox Group will covered-up the identity of the true owner of PPE Medpro, and that has potentially serious legal consequences. We explain this further below.
Scenario 3: Mr Page was acting for Douglas Barrowman
This seems the most plausible scenario, even if we disregard the Guardian report. Mr Page is acting either informally on behalf of Mr Barrowman, as his agent, or as his nominee/trustee – in all these cases, Mr Barrowman should have been disclosed as the PSC.
If that is correct then, again, the Knox Group has covered-up the identity of the true owner of PPE Medpro, with potentially serious legal consequences.
The legal framework
The “people with significant control” rules
Until 2016, Companies House showed who the shareholders of a company were, but stopped there. So if, for example, a company had a “nominee” shareholder, acting at the direction of the real ultimate beneficial owner, then only the nominee would be shown in Company House’s records. There would be no way to find out who the real owner was.
That all changed with the Small Business, Enterprise and Employment Act 2015, putting rules in place requiring companies to identify their “people with significant control” – meaning the actual humans who were able to tell the company what to do.3.
The definition of “person with significant control”
The definition is set out in Schedule 1A of the Companies Act 2006, which sets out conditions that will each result in a person being a PSC. In our case, the relevant condition is in paragraph 5:
If, as appears to have happened, the Knox Group had the power to remove Mr Page as shareholder/director of PPE Medpro and replace him with Mr Lancaster, then the Knox Group (and Douglas Barrowman, as the person who controls the Knox Group) had “significant influence or control” over PPE Medpro. Mr Barrowman should have been listed as the PSC. If the Knox Group was acting for some other unknown party then they should also have been listed as a PSC.4
Either way, there has been a breach.
How the PSC rules work
A company is required to identify and then register its “people with significant control”.
Section 790D of the Companies Act requires a company to take reasonable steps to find out who controls it:
In some cases, a company may not know who its ultimate controller is, and so there are procedures for the directors to notify the immediate shareholder and require them to identify their owners. But in the PPE Medpro case there are no such complexities – Anthony Page and Arthur Lancaster are surely both aware of the circumstances in which they became shareholders of the company, and whose instructions they follow.
A company is then required by section 790M to keep and update a register of its PSCs:
And section 790VA requires entries in the company’s own PSC register to be notified to the Registrar of Companies (i.e. Companies House):
The criminal offencesfor directors
There are specificoffences for breaches of sections 790D, 790M and 790VA, committed by the company itself, and every director responsible. On conviction, the director faces up to two years in jail and an unlimited fine.
There is also a general Companies Act offence of knowingly or recklessly delivering a false statement or document to Companies House. Again, up to two years in jail and an unlimited fine:
If Messrs Page and Lancaster were responsible for PPE Medpro delivering statements which listed them as the PSCs, when they knew they were acting at the direction of one or more other people, then they potentially committed both offences.
What are the criminal offencesapplicable to Mr Barrowman?
Mr Barrowman may be a “shadow director” of PPE Medpro – i.e. a person who is not formally a director but who in practice calls the shots. If that is correct, then the specific criminal offences mentioned above will potentially apply to him, in the same way as the registered directors.
There is also a specific requirement in section 790G that, where someone knows they control a company, but they haven’t received a notice from the company requiring them to provide information, then they have to inform the company:
Failure to comply with section 790G is an offence under paragraph 14 of Schedule 1B of the Companies Act 2006, again punishable with up to two years’ imprisonment, and an unlimited fine.
It follows that Douglas Barrowman may have committed a criminal offence if (as is plausible) he was the PSC of PPE Medpro, knew that he wasn’t correctly registered as the PSC, but took no steps to remedy that. Often someone in this position would run the defence that they didn’t understand the rules. For Mr Barrowman that may be difficult, given that he is a sophisticated businessman with years of experience in business, funds and corporate finance, who runs a group of companies that provide technical tax and legal services to private offices. All the more so given that he knows his links with PPE Medpro have been widely reported, and that PPE Medpro is under criminal investigation.
If Knox was acting on behalf of some unknown third party then that action may also constitute a criminal offence.
Will there be a prosecution?
Companies House only prosecutes the most serious offences; in other cases a civil fine is typically levied.
Here there is a possibility that the offence was very serious indeed: i.e. if Mr Barrowman was the true owner of PPE Medpro, and that fact was hidden to enable his wife to recommend the company to the Department of Health and Social Care.
Response from Messrs Barrowman, Page and Lancaster
We wrote to Douglas Barrowman, Anthony Page and Arthur Lancaster on Friday and asked them to comment; we received no reply. That is most unusual for accusations this serious.
We are, as ever, keen to understand if there are any facts we have misunderstood, or any explanation we have missed, and we will update this report as and when we hear anything further.
Next steps
Arthur Lancaster is a member of the Chartered Institute of Taxation and the Institute of Chartered Accountants of England and Wales. The CIOT and ICAEW require their members to follow high professional standards. Involvement in an apparent breach of the PSC rules breaches those standards. We have, therefore, written to the Taxation Disciplinary Board and the ICAEW, asking them to investigate Mr Lancaster. Mr Lancaster was previously the subject of a referral to the TDB for the “seriously misleading” evidence he gave to a tax tribunal.
Anthony Page is a member of STEP, the Society of Trust and Estate Practitioners, which has a Code of Professional Standards. Mr Page’s involvement in an apparent breach of the PSC rules breaches that Code, and we have therefore reported him to STEP.
We have provided the information in this report to the Metropolitan Police, and they are currently assessing the information to establish the appropriate investigative body.
Thanks to D and C for their help with the Companies Act and PSC analysis, and G for his insights into ultra-high net worth planning.
Comment policy
This website has benefited from some amazingly insightful comments, some of which have materially advanced our work. Comments are open, but we are really looking for comments which advance the debate – e.g. by specific criticisms, additions, or comments on the article (particularly technical tax comments, or comments from people with practical experience in the area). I love reading emails thanking us for our work, but I will delete those when they’re comments – just so people can clearly see the more technical comments. I will also delete comments which are political in nature, or which are potentially legally problematic.
Footnotes
Currently stayed pending the outcome of the criminal investigation ↩︎
We should stress that Intertrust and Equiom are businesses with good reputations and we are listing them as examples of what we consider good practice. ↩︎
The legislation starts here, and is fairly easy to read – there’s also useful (statutory) guidance↩︎
With a few exceptions, for example if the unknown party was a consortium in which no person held more than 25% of the company ↩︎
Uber’s latest financial reports, filed yesterday, reveal that HMRC is challenging its VAT position and claiming £386m. Uber is appealing but has had to pay the disputed VAT up-front.
Uber historically charged no VAT. It said it was just an app, with its drivers supplying the service to customers. As most drivers‘ income fell below the VAT threshold of £85,000, that meant Uber rides were free from VAT. That was challenged by HMRC in 2022, with Uber paying £615m. Many people expected Uber to then charge 20% VAT on its fares, but it instead used the Tour Operators Margin Scheme to pay a low effective rate of VAT HMRC is now challenging that.
UPDATE: Uber just got in touch to confirm that I’m correct that the new dispute is about TOMS; but I was wrong to think the 2022 settlement was on the basis of TOMS – it wasn’t.
Most businesses charge VAT at 20% on their goods and services. But the UK has an unusually high VAT threshold of £85,000 and, as most taxi drivers earn less than that, most taxis don’t charge VAT.
That was historically the case for black cabs, and for most private cabs. They might be coordinated by booking service, but realistically the drivers are independent businesses and the booking service is just their agent. Each driver pays a fee (say 10%) to the booking service, and that would be subject to VAT, but the fee the driver charged the customer is the fee for his services, and so no VAT applies.
Uber’s position was more interesting:
Uber said it was the same as a normal taxi booking service, and was just an agent for the drivers – so the fares were not subject to VAT1
But in tax terms, Uber was pushing their luck. Uber controls many aspects of their drivers’ business; it’s more than a mere agent, and so it always seemed more plausible that Uber was the “principal”.2 That meant they should charge VAT.
Uber’s position became hard to defend after, in a March 2022 employment law judgment, the High Court confirmed that Uber was indeed the principal, following a Supreme Court decision that Uber drivers were “workers” and not self-employed.
A normal person, or even a normal tax advisor, might think that Uber having to charge VAT meant a 20% increase on all fares. Uber would be able to recover VAT on its expenses (“input VAT”), but this won’t be much – Uber’s main expense is paying drivers, and they mostly/all earn too little to charge VAT.
But there is something called the “Tour Operators Margin Scheme” (TOMS).
Say I am a travel agent. I put together a package holiday involving a whole bundle of different services: hotel, flights, coach services, restaurants, train tickets, etc. Potentially across multiple different countries. In theory, I should be charging my client 20% VAT on the package holiday, and recovering input VAT on those costs are incurred that were subject to VAT. But all the different countries mean my VAT position would be an unholy mess. TOMS says: yeah, it’s all too difficult. Let’s not bother with the usual VAT accounting. Instead, I’ll just account for 20% VAT on my profit margin. That’s TOMS.
Uber takes the position that TOMS applies to it. It is buying the drivers’ services, and no doubt other ancillary services as well, and then supplying a bundle to the customer in the form of their ride. You might well say; hang on, Uber is not a tour operator. However, TOMS does more than it says on the tin, and even the HMRC guidance goes out of its way to say that it can apply in cases where outside a classic tour operator.6
The consequence is that it is only Uber’s profit from each ride which is subject to 20% VAT. That is probably why Uber paid only £615m, and why Uber’s fares did not noticeably increase after it started charging VAT.7
The other consequence is that a business hiring an Uber taxi cannot recover VAT on the fare. That stands to reason because VAT is not the normal 20%, but some smaller amount which the business cannot know.
The new £386m claim
The disclosure doesn’t say, but my understanding from a well-informed source is that HMRC is claiming that Uber can’t use TOMS, so that Uber has to pay an additional £386m. This is very plausibly the difference between TOMS and standard VAT on one year of Uber’s revenue.8
The conditions are pretty simple:
Uber must be a “tour operator”
it must buy in supplies from another person (the drivers)
those supplies must be “resupplied without material alteration or further processing”
and Uber must supply them from an establishment in the UK, for the direct benefit of a traveller
All of these are easy, except the third. The most likely HMRC challenge is that Uber is not at all like a travel agent, because it shapes every aspect of the taxi driver’s services, so that there is “further processing” or “alteration” of those services. Importantly, the driver doesn’t control his or her pricing, and may not even know how much Uber charges.
HMRC recently made a challenge on a similar basis to a business that leased apartments and then let them to tourists. The “alteration” here was that the taxpayer painted the apartments and provided furniture. The taxpayer won; these alterations were found to be “superficial and cosmetic”. The case is Sonder Europe, and the judgment is here.
There’s another more ambitious and fundamental way in which HMRC could challenge Uber’s use of TOMS. It could argue that the drivers are in fact employees of Uber. In that case, there are no supplies bought-in, and TOMS cannot apply. The whole taxi fare becomes subject to VAT.
If I was HMRC I would run both arguments.
Is this tax avoidance?
There is no single legal definition of tax avoidance. I’ve written more about that here. But, for what it’s worth, I think Uber’s original approach was tax avoidance, because they were artificially taking a position that VAT was not due, when on the face of it, it was. The fact Uber backed down without a fight adds strength to this.
However, the question of whether TOMS applies is a dry technical question which does not relate to any particular structuring or act of Uber. Uber’s approach seems legitimate to me, whether or not it ultimately turns out to be correct. If we don’t like TOMS being used in this way, we can change the law.
Who will win?
That is hard to say. This is a difficult area with little relevant authority, and neither I nor our regular team of experts have sufficient experience to be able to call it. Both Uber and HMRC may think they have good arguments.
Given that, and the amounts involved, we can probably expect it to be appealed at least once, and possibly several times. It’s not unusual for this kind of dispute to take ten years. But, with VAT, you “pay to play”. Uber had to pay the £386m upfront. As time goes on, without the dispute being resolved, Uber will have to pay additional amounts upfront, reflecting the position that TOMS does not apply. Only if Uber eventually wins does it get its VAT back.9
An Uber spokesperson told me “Uber is seeking clarity for the whole industry in order to protect drivers and passengers.”
Update 3 August: I belatedly remembered the way US accounting works for indirect tax disputes. We can deduce from the way the Uber disclosure is phrased that Uber has been advised that it is “more likely than not” to win the dispute, and recover the VAT back. It has therefore booked a receivable in its accounts to reflect that eventual recovery – that’s why the statement says there is a cash impact, but no impact on the income statement (because the £386m debit for the VAT is cancelled by a £386m credit for the receivable). Uber has confirmed to me that this is indeed the position.
In my experience, US corporations take these issues very seriously, and require clear advice before their accounting personnel and auditors permit such a receivable to be booked. Of course that doesn’t necessarily mean Uber will prevail – HMRC may also be confident of its position. But it does mean this is much more than a try-on. Asking around, there’s no clear view amongst VAT experts on who will win here.
What’s the consequence for the taxi industry, and our fares?
The outcome of the Sefton case means that the entire private taxi industry (i.e. not black cabs) will be affected by the result.
If Uber win, then we will continue with most of the taxi fare being outside VAT, and only the taxi firms profit margin being subject to VAT at 20%.
if Uber lose, then, unless I am missing something, the entire fair charged by taxi firms will be subject to 20% VAT. But, if you book a private car directly with the driver, there won’t be VAT. That seems a very distortive result, that would drive economic inefficiency. We all benefit from being able to book taxis in a centralised way, i.e. over the phone or on apps, and it seems crazy for tax to push in the other direction.
What about black cabs?
individual black cab riders usually earn less than £85,000, and so don’t charge VAT.
The centralised black cab booking services appear to use the same structure as Uber used before 2022, with the booking service, saying it is merely the agent for the driver. The judgements that stopped Uber and other private taxi services from operating in this way don’t apply to black cabs.
So, when I booked a taxi with FreeNow yesterday, I received two receipts.
First, the platform’s fee, with VAT.
Second, the driver’s fee, with no VAT:
The paragraph at the bottom gives away that the agency structure is being used.
Should the Government change the law?
This all seems very odd. There’s a plausible case that the TOMS rules should be amended, so that TOMS only applies in cross-border cases where there is a real need for it to apply (and, post-Brexit, the UK can easily make changes of this kind to our VAT system). That wouldn’t change Uber’s historic position, but would ensure full VAT applied going forward. Changing the law would be very easy; it looks like HMRC can just designate taxi firms as outside TOMS. There’s even an argument for abolishing TOMS – in the modern world it looks less like a simplification, and more like a hand-out.
But that would just formalise the distortive economic result that booking a taxi directly results in no VAT, and booking through an app means 20% VAT.
But the real problem here is the high VAT threshold, which (if Uber lose) will be responsible for a 20% cost difference between booking a taxi directly and booking one through an app/phoneline. That is, in my view, unjustifiable – it’s economically distortive and drives tax, evasion, tax avoidance, and uncertainty/tax disputes. The threshold should come down (enabling a VAT rate cut at the same time).
So I have to say that, from a policy standpoint, I hope Uber wins (so that there’s mostly no VAT on any taxi fare), or that the threshold is cut (so there’s VAT on all taxi fares).
Let’s just hope we don’t end up with other fudges, like a 0% rate for taxis, which would further erode the tax base and create opportunities for avoidance (e.g. by combining other VATable services with a taxi ride)
Thanks to B for the tip-off and expert input on this.
in principle, they should’ve been if the driver earned over £85,000; I’m not sure how this was dealt with in practice, and it may never have happened. ↩︎
The original version of this paragraph said that Uber was an outlier compared with other taxi firms; StuartW in the comments below gives good reasons to doubt that was correct. ↩︎
Uber has been stupendously loss-making for most of its existence, but from a VAT perspective that doesn’t matter, because VAT looks only at the income and costs attributable to a particular ride. Other elements responsible for Uber’s losses (such as all those coders and their expensive coffee, servers, marketing, cost of capital, etc) won’t be relevant here ↩︎
To ballpark this: Uber’s fee income is c£800m and its gross income is c£2.6bn. So the difference between TOMS and normal VAT for one year will be around 20% x (£2.6bn – £800m) = £360m. ↩︎
Corporation tax and income tax don’t work this way at all. You almost always get to keep the tax while you dispute it, and only have to pay it to HMRC (plus interest) if you lose your final appeal. There is, needless to say, no rational basis for the distinction. ↩︎
The Tax Justice Network claims the world will lose $5 trillion in tax abuse over the next 10 years. They say $301bn of tax is lost each year to cross-border corporate tax abuse by multinationals, and £171bn is lost each year to tax evasion by wealthy individuals using tax havens.
Both claims are false. The corporate tax abuse calculation measures fictitious tax avoidance. The “tax haven” calculation has been falsified by actual cross-border tax reporting. TJN have used the same methodology for years, and ignored criticisms of it. Nobody should take these numbers seriously.
I’ll look at the tax haven accounts and multinational profit-shifting claims separately.
Wealthy individuals and tax havens
The claim is that the world loses $171 billion each year to wealthy individuals putting funds in tax haven bank accounts, which are not disclosed to the tax authorities, and therefore tax is evaded:
Historically, it was very easy for a wealthy individual to do exactly this. If I opened a bank account in Monaco in 2002, in my own name, or the name of my dog, it would be very hard for HMRC to find out. That all changed with various international agreements in the 90s and 2000s, culminating in the US enacting FATCA, and most of the rest of the world adopting the OECD Common Reporting Standard. If I open a bank account in Monaco today, it will be reported straight back to HMRC. It is still certainly possible to evade tax using offshore accounts, or indeed onshore accounts, but it’s significantly more difficult.1
CRS and FATCA have been extremely successful.
The OECD reports that information on EUR 11 trillion of financial accounts was exchanged in 2021:2
US taxpayers’ accounts are reported separately under FATCA:3
So that’s about $16 trillion in cross-border accounts, reported to each accountholder’s home tax authority. The days of anonymous offshore tax evasion are over.
The TJN figure of $171bn of tax lost to tax haven accounts is based on a figure of $10 trillion of undisclosed offshore accounts. 4.
What adjustments do TJN make to the $10 trillion to reflect reporting to tax authorities, voluntarily and under FATCA/CRS? Absolutely none. How do they incorporate that FATCA and CRS data? They don’t.5
Astonishingly, the report doesn’t mention FATCA or CRS, even in passing. The research cited in the report all pre-dates FATCA and CRS. They are trying to estimate a problem (offshore tax evasion) without taking any account of the central measure introduced to solve that problem. It’s as if someone came up with a theoretical estimate for the number of burglaries in the UK, on the assumption that all doors and windows were left open and unlocked.
The $171bn figure is simply $10 trillion, multiplied by an assumed 5% return on investments, multiplied by an average top personal income tax rate of 34%. There is nothing else in the calculation.6
How do TJN reconcile it with the data, when we know for a fact that $16 trillion of financial accounts were reported to taxpayers’ home tax authorities under CRS and FATCA? They don’t even try. To believe the $10 trillion figure is correct would require an enormous worldwide conspiracy to undermine FATCA/CRS, involving all the world’s largest tax authorities. It’s not credible.
Now FATCA/CRS clearly isn’t perfect. Some percentage of the $16 trillion will be accounts which were never reported under FATCA/CRS, which were wrongly reported (intentionally or not), or where the tax authority failed to act on the reporting. There will be wealth which is entirely outside FATCA/CRS (for example many cryptocurrency accounts). What percentage of the $16 trillion is that? That’s a fascinating question which will be the subject of a later article. By comparison with known tax non-compliance effects, if it was 1% we should be pleased; if 10% we should be disappointed; more than 10% would (at least to me) be shocking.
The $10 trillion figure for undisclosed offshore accounts, and hence the $171bn figure for evaded tax, assumes non-compliance of 66%. That’s not credible.
This has been pointed out many times. A couple of years ago, I had an exchange with one of the authors of the report, who it turned out was not even aware of FATCA/CRS. He said he’d incorporate their effects in a future report. He didn’t.7
The continued publication of this report, and the use of a $171bn figure which cannot be right, is inexplicable. The authors know it’s wrong, and don’t care. One of the founders of the Tax Justice Network, Richard Murphy, says that the “State of Tax Justice” report is “hopelessly misleading”. He’s being kind.
Multinational profit shifting
The Tax Justice Network claim is that $301bn of tax is lost each year to cross-border corporate tax abuse by multinationals, “shifting” profit from highly taxed countries into tax havens.
Nobody should deny that some/many multinationals do avoid tax by shifting profits into lower tax jurisdictions. This is about to become much less effective, when the OECD 15% global minimum tax is implemented. But until then, whilst there are many anti-avoidance rules intended to stop profit shifting, it undoubtedly happens. And the OECD global minimum tax will certainly not eliminate profit-shifting altogether.8
There are a variety of ways in which profit shifting can be estimated. However, the Tax Justice Network do not try to do this.
This is the claim:
And here’s the methodology:
The methodology (“misalignment”) and the claim (“tax abuse”) are not remotely the same thing.
The methodology is looking at the amount of theoretical tax that would be paid if there was an international corporate tax system that allocated each country taxing rights based on the wages paid in that country and the number of employees in that country.
That is, however, not the way international tax works. No country taxes on this basis. I’m not aware of any proposal that any country should tax on this basis. Any company that actually paid tax on this basis would be breaking the law in every country in which it operates. It’s a fictitious calculation.
The Tax Justice Network then calculate the difference (“misalignment”) between the tax actually paid, and the tax that would be paid in their fictitious calculation. This could be fairly described as the potential tax revenue if their model was adopted (assuming no behavioural change). However, it is not a measure of profit-shifting, and absolutely not a measure of tax avoidance or tax abuse.
To give an example, take a German real estate investment company which has all its employees in Germany, but which owns real estate across Europe via local subsidiaries. It will pay corporate income tax only in the countries where it holds real estate, and not in Germany.9. That’s a perfectly sensible result. But the TJN methodology sees this as a “misalignment” from its fictitious calculation, and labels it as tax abuse.
The disparity between what the methodology does, and what TJN claims it does, is indefensible.
Footnotes
For example you could find a bank that is both corrupt and brave, use a normal bank but provide it with fraudulent identification documents (which it does not challenge), or bank in a country, which has not signed up to CRS (but those are generally countries where your bank account would not be particularly safe). ↩︎
That’s the total of the second column of table 5.2, on page 46 of the report. It is unclear how this figure is derived – the explanation in the methodology document is convoluted, and the calculation spreadsheets are not published ↩︎
TJN claim that “the State of Tax Justice does not assume all offshore bank deposits are related to tax abuse and goes to great lengths to account for this.” But whatever (unclear) steps they take, plainly do not take account of FATCA and CRS ↩︎
There is more to say about the way they allocate the $10 trillion between different countries; they calculate a regression based on cherry-picking, and make the unexamined (and false) assumption that financial centres only exist because of tax abuse. But that is a sideshow; everything goes wrong once they start with a $10 trillion figure, and don’t adjust for reporting. ↩︎
Subsequently, TJN justified their conclusions on the basis that the data showed little change in offshore wealth since FATCA/CRS had been introduced. The obvious explanation is that TJN’s methodology has always been wrong, and FATCA/CRS merely reveals this. TJN, however, prefer to believe that their methodology is correct and the actual measurable outcomes of FATCA/CRS should be discarded. ↩︎
Multinationals will still be able to obtain an advantage by shifting profits from a country with a tax rate of over 15% into a tax haven (or a country with a corporate tax rate of 15% or less). And companies with a global turnover of less than €750 million will not be subject to the OECD global minimum tax, and so their profit shifting will be unaffected. ↩︎
Technically this is because the dividends from the subsidiaries will be exempt from German corporate income tax and trade tax. There will be some German tax, as transfer pricing rules will require the German headquarters to be remunerated on an arm’s length basis, in a way that reflects the contribution of its German personnel. That will in most real-world scenarios be much less tax than is due on rental/gains on the real estate ↩︎
Interest withholding tax is easily avoided by sophisticated businesses, but a hassle for everyone else. Time for it to go.
I’m keen to identify taxes that don’t serve a purpose, don’t raise much money (or can be easily replaced) and add nothing except complication and economic distortion. The first two were stamp duty and the bank levy. The third is withholding tax.1
We’re all familiar with withholding taxes. The basic idea is: the government doesn’t trust us. In particular, it doesn’t trust us to pay tax on our earnings. So our employer is required to withhold tax on our salary, at more or less the right rate.2.
There’s another type of taxpayer the government trusts even less than employees, and that’s foreigners. If a foreign person receives interest paid by a UK person, then, in theory, the foreign person is subject to UK income tax at 20%.3. Realistically they’d often not pay it. So the UK charges a 20% withholding tax on interest paid to foreigners. 4
How withholding tax works in practice is a hot mess. Most big-firm tax practitioners are used to dealing with it (it’s standard fare for junior tax lawyers/accountants), which means we sometimes under-appreciate how cumbersome it is for everyone else. The length and wonkishness of this article is itself an argument for abolition.
How things work now
There are many exemptions from interest withholding tax. The most important ones are:
Payments which aren’t interest at all, but are “discount”. For example: I could lend you £100 for five years and charge you 5% interest per year, with the interest rolling-up and repayable in five year’s time. Or I could buy a bond from you for £100, repayable in five years at its face value of £128. These transactions are economically identical, but the first is subject to interest withholding tax and the second isn’t.6
So when does withholding tax apply in practice? Between very sophisticated parties: never. Between less sophisticated parties: sometimes, when the lender is in a tax haven. But it can still cause a disproportionate amount of hassle.
Some examples:
Scenario 1 – Marks & Spencer plc issuing bonds to investors
Many larger companies choose to raise funds on the capital markets, by issuing bonds, instead of borrowing from banks. It’s often cheaper (i.e. lower rate of interest) and can come with fewer restrictions. The bonds are usually listed on a stock exchange, to ensure liquidity.
But the way modern capital markets work, at least in Europe, means that Marks and Spencer has literally zero idea who the ultimate holders of its bonds are.
Bonds are held in a “clearing system”. That makes it very easy for people to trade bonds electronically. So M&S issues bonds to the “common depositary” for the clearing system. Financial institutions are members of the clearing system, and the clearing systems records will show which financial institution holds which percentage of the bonds. But these financial institutions will mostly not hold the bonds for themselves – they hold them for their clients. Often these clients will be another institution (think someone like Hargreaves Lansdowne) who will themselves hold on behalf of the ultimate investors.
So there’s a chain of payment. M&S pays the clearing system. The clearing system pays its members. Its members pay their clients. Their clients pay the ultimate investors. There’s full tax reporting at each link in the chain, so the complexity of the chain doesn’t create tax avoidance/evasion possibilities. But it does make it impossible for M&S to withhold tax – it doesn’t know who and where the ultimate recipients are, and so can’t apply the correct rate.
Fortunately, as I mentioned above, the UK has a nice simple withholding tax exemption for payments on a “quoted Eurobond”:
And if M&S’s bond is listed on the London Stock Exchange, it will be a “quoted Eurobond“:
The outcome is that Marks & Spencer plc doesn’t have to worry about withholding tax. That’s sensible.
Scenario 2 – Doctor Evil
You’re an evil supervillain, living in a volcano in a tax haven. You have an evil UK subsidiary, and you’d love to receive interest from it – but there’s a 20% withholding tax.
Fortunately, there is an easy solution. Create a listed bond, almost exactly like Marks & Spencer’s.
“Almost” doing quite a lot of work, because your bond differs from M&S’s bond in two important respects:
You, Doctor Evil, are always going to be the only bondholder. You don’t care about liquidity. The listing is solely for tax reasons.
M&S had to do all kinds of tiresome disclosure to satisfy London Stock Exchange rules and get a listing. Supervillains aren’t very keen on disclosure. Fortunately, you can just list on the Channel Islands Stock Exchange. It will cost about £20,000 all in, and pretty much no information will ever be public. Your villainous UK subsidiary will never even have to tell HMRC what you’ve done.
Clearly tax avoidance, but the quoted Eurobond exemption doesn’t care. HMRC have no prospect of challenging the arrangement.
The outcome is that Doctor Evil doesn’t have to worry about withholding tax. That’s deeply silly.
Scenario 3 – UK widget-maker borrowing from a large US bank
You’re a UK widget-maker looking to expand with a cheap loan from a US bank.
Problem is, you have to withhold tax at 20%. Fortunately, there’s a treaty between the US and the UK, which says that actually the rate is zero. And the UK has treaties with most countries (with the important exception of tax havens), which do the same thing.
If you’re borrowing from Citibank then you’re in luck – Citi has a “treaty passport”7 which means that HMRC have preapproved it. So all you, the borrower, have to do is complete HMRC online form DTTP2 and then wait for HMRC to issue with a “direction” to pay the interest without withholding – which should take a couple of weeks, but in recent years has been taking months. This is all under the Double Taxation Relief (Taxes On Income) (General) Regulations 1970, perhaps the oldest piece of direct tax legislation still in force.
In the meantime, you have to withhold tax. Citi will make you eat the cost of that – another 20% on your interest payments. Then, when the “direction” arrives, Citi can apply to HMRC for a refund of the tax withheld, and pay it back to you. Pure hassle for you, Citi, and HMRC – as millions of pounds go around in a circle for no reason.
Or, if you’re brave, you can pay without withholding, betting that the “direction” will come through – but then you’ll be on the hook to HMRC if something’s wrong and HMRC decide not to issue a direction.
In theory, you could issue Citi a bond, but if you’re a small company you would probably regard that as a bit racey. And even if you’re a large company, you’ll probably find Citi’s bank loan team want a loan, not a bond.
The outcome is pointless bureaucracy and delay. HMRC knows exactly who Citi is, and shouldn’t be putting obstacles in the way of people borrowing from Citi. There is no tax at risk here. We trust companies to self-assess their corporation tax. Why have an old-fashioned 1970s system for withholding tax?
Scenario 4 – UK widget-maker borrowing from a small US bank
You’re a UK widget-maker looking to expand with a really cheap loan from an obscure US bank.
Problem is, Kentland Federal Savings and Loan doesn’t have a treaty passport. So it has to complete HMRC form US-Company (an actual paper form). Then complete US tax form 8802 and mail both forms to the IRS in Philadelphia (not email; actual mail mail). Then after a random amount of time (supposedly 45 days, but six months is not uncommon) the IRS will send the HMRC form with a US residency certificate to HMRC in the UK. Or – as seems to happen about 10% of the time – lose the form.
Then HMRC takes a random amount of time to consider the form and issue a “direction” to you to pay without withholding tax.8
All this means months and months, and sometimes over a year, before HMRC authorise you to pay without withholding tax. In the meantime, you’re paying the withholding tax, and eventually all that money will (hopefully) come round in a circle back to you.
Again, you could pay the interest before the “direction” without withholding tax, and chance your luck. But it’s a risk.
The outcome is that an entirely commercial arrangement runs into a maze of pointless bureaucracy, for no reason at all.
Scenario 5 – Private fund making a loan
You’re a private fund, looking to make a loan:
Perhaps you’re a private equity fund, and you’re using the loan to juice up one of your own portfolio companies’ tax position, by getting additional interest tax relief. These days that’s hard.
More likely debt is just a more efficient way to extract profit from your businesses than equity (don’t need to declare dividends, don’t need accountants to confirm sufficient distributable profits).
Or perhaps you’re not a private equity fund at all, but a debt fund making a loan to a third party?
You’re a partnership, which means that for tax purposes you don’t exist9. Your investors are taxed as if they made the fund investments themselves – and all of your investors are probably in countries with 0% treaties with the UK. So in theory you can just make treaty claims for those investors, and any investors that are in “wrong” countries suffer the withholding tax. Simple!
Nope.
Getting treaty forms off all your different investors will be a right faff. Particularly if your investors are themselves funds with multiple investors. And then what happens when investors in your fund change (or investors in the fund investing in your fund)?
So absolutely standard practice is that the fund doesn’t lend itself. It sets up a subsidiary special-purpose company, often in Luxembourg, and therefore in the jargon, “Luxco“. Luxembourg has a tax treaty with the UK, which reduces interest withholding tax to zero.
Luxco then obtains a treaty passport, which is a slow and annoying process (but the Luxemboug tax authorities are way faster than the IRS). But once it has the treaty passport, it can lend relatively straightforwardly. When making the application, Luxco should provide HMRC with full details of its ownership structure and, in particular, promise that all of the fund investors are in “good” tax treaty jurisdictions.
Hang on! Luxembourg SPVs? Tax-motivated transactions? Some would say “tax avoidance”!
I don’t agree.
If we ignore the detail, the tax result is in substance the “correct” one: investors in good countries are receiving UK interest without withholding tax.
And if we want to be tedious lawyers and obsess over the detail, the tax result is also correct, because Luxco benefits from a tax treaty.
This is tax hassle avoidance, not tax avoidance.
But it’s also clearly daft. All the investors are in “good” jurisdictions. There’s no tax risk here for the UK. So why are we forcing the fund to waste time and money setting up a pointless Luxembourg subsidiary?
Scenario 6 – fund can’t use Luxco
The facts are the same as in scenario 5. But everything is moving quickly, and you just have no time to make a treaty claim. Or, for obscure technical reason, you cannot use a Luxco (investors in some countries may not be permitted to invest in a fund that sets up this kind of subsidiary).
So you take a page out of Doctor Evil’s book, and lend to the borrower using a kinda-fake listed bond. Now it’s not really tax avoidance (because all your investors are in a “good jurisdiction”). It’s not as evil as Doctor Evil, because the bond is (probably) being issued between genuine third parties. But it’s a weird outcome.
Scenarios 7 through to 100
There are lots of other ways that sophisticated people can “work round”, “mitigate” or “avoid” withholding tax:
Lend from a tax haven, then at the last minute before interest is paid, flip the loan to someone in a nicer country with a tax treaty. Serious avoidance territory, but I believe some people do this.
You can have a UK bank make the loan, but then have a back-to-back arrangement between that bank and a tax haven lender, such as a hedge fund. This happens a lot. Is it tax avoidance? Depends on whether the ultimate owners of the hedge fund are in a tax haven, or in nice tax treaty countries.
The short version
For sophisticated businesses, and sophisticated tax avoiders, withholding tax is optional.
For less sophisticated businesses, and sometimes even larger ones, withholding tax is a hassle.
How much money does withholding tax raise?
We don’t know.
HMRC does not have statistics on withholding tax that take into account the significant amount of withholding tax that ends up being refunded.
HMRC told me, in an FOIA response, that £230m in interest withholding tax was withheld in 2021-22. But much of this will be cases where there were delays obtaining authorisation to pay without withholding, and so the lender will in due course obtain a refund of the tax. HMRC does not keep track of those refunds. So we don’t know the true figure for the net amount withholding tax raises, after withholdings and refunds. My expectation, and that of most other advisers, is that it will be very small.
What do other countries do?
The UK is an outlier these days in both having interest withholding tax, and having such a cumbersome procedure to access tax treaty exemptions.
Most of Europe now has no interest withholding tax at all (save on payments to some tax havens). That includes France, Germany, Austria, Denmark, The Netherlands, Sweden and others (some of which are typically regarded as high tax jurisdictions).
Other countries still have interest withholding tax in theory, but exemptions and/or wide tax treaty networks, with straightforward procedures so that it rarely becomes a business impediment. That includes for example United States, Ireland, Denmark, Norway, Spain, Australia.
If these countries manage without a complex interest withholding tax regime, why can’t the UK?
The best solution
My preferred solution is to abolish all withholding tax for payments between companies.
If that’s all we did, it could facilitate erosion of the UK tax base by payments to tax havens by people who aren’t sophisticated enough to use one of the many existing ways to “get around” withholding tax. So we probably do need some kind of backstop. My suggestion would be to create a new prohibition on corporation tax interest relief, where interest is paid (directly or indirectly10) to a related party in a tax haven.11
My instinct is that these two changes would be broadly revenue-neutral, or even raise a small amount of additional tax (i.e. because some existing structures which facilitate deductibility with no withholding tax would now lose deductibility). Given the lack of statistics around the real cost and benefit of the current withholding tax framework, considerable analysis would be required before abolition.
And the quoted Eurobond exemption would now serve no purpose, and would be scrapped.
The less good solution
We probably can’t abolish withholding tax on payments by individuals, because that could lead to a material revenue loss.12 So, whatever we do with corporate interest withholding tax, we in practice likely need to find another solution for interest payments by individuals.
And, if you think total abolition of withholding tax on payments to companies is a step too far, we need a less good solution for companies too.
In both cases, I think there’s an obvious answer: abolish withholding tax on everything except the payments we really care about – payments to tax havens.
So no withholding tax, and only a very simple procedure, for withholding tax paid abroad, provided that the ultimate beneficial owner of the interest is not in a “bad jurisdiction” – i.e. a tax haven or other country where the UK doesn’t have a tax treaty with an interest provision.
This needs to be done very carefully, to prevent large-scale evasion and avoidance whilst still ensuring it’s workable for normal businesses. Here’s one way it could work:
To take advantage of the new rule, a lender completes a simple online form, confirming – for the benefit of the borrower and HMRC – that its ultimate beneficial owners are not in a bad jurisdiction.
The lender could be a financial institution or a “fiscally transparent” fund. Doesn’t matter. The rule looks to the ultimate beneficial owners.
The borrower can then immediately pay without withholding.
Alternatively, the lender could confirm that say 5% of its beneficial owners are in a bad jurisdiction, and then withholding applies at 5% times 20%.
The form has scary wording ensuring that people take it seriously – for example when you sign a US withholding tax form, you sign a statement that you are certifying under “penalty of perjury“.
If it turns out the lender statement was wrong, then withholding tax becomes retrospectively due, plus 100% penalties. HMRC can collect the tax (but not the penalties) from the borrower, or the tax and penalties from the lender, the “bad” ultimate beneficial owner, or anyone between them in the ownership chain.
If HMRC collects from the borrower, then the borrower has a statutory indemnity right against those same people (which it is entitled to deduct from future interest payments13).
Any contractual provision which in substance makes the resultant tax the cost of the borrower (e.g. counter-indemnity or gross-up) is void.
To prevent tax haven lenders doing an end-run round these rules by using listed bonds, we’d need to tighten up the quoted Eurobond exemption:
We could, for example, create an exclusion where it is the parties’ expectation that the bonds will at all times be predominantly held by a related person.
And at the same time create a simple reporting regime for payments on quoted Eurobonds – HMRC currently doesn’t track these at all.
Again, my instinct is that this change would be revenue-neutral, or perhaps even slightly revenue positive. But HMRC would need to undertake a proper analysis.
The bottom line
The UK’s existing corporate interest withholding tax is easily circumvented by bad actors. It’s an unnecessary complication for large businesses. It can be an impediment to smaller businesses.
And we can probably abolish it, or greatly liberalise it, at zero cost.
Thanks to all the bank, private equity and corporate borrower people who spoke to me about this.
Obvious caveat: nothing in this article, or indeed anything on the Tax Policy Associates website, is legal or tax advice.
Image by Stable Diffusion – “a man with a tangled ball of string as a head”
Footnotes
I’d love to hear more ideas on pointless taxes that should be abolished. The only rule is that, given the current state of the public finances, the tax must either raise zero revenue, or be easily replaced by a simple expansion of an existing tax. So “let’s abolish VAT!” is a non-starter, I’m afraid. ↩︎
Actually almost everybody wins from this. Employees don’t have to worry about tax. Government doesn’t have to worry about employees not paying tax. Government gets paid the tax much earlier than it would under self assessment. Everybody except the poor old employer, who has to operate the system ↩︎
The “in theory” hides a lot of complexity which is fascinating, but I won’t go into now ↩︎
The basic rule is in section 879 of the Income Tax Act 2007. Strictly it’s a “requirement to deduct income tax at 20%” but most people call it “withholding tax”. ↩︎
Not strictly an exemption, but it may as well be ↩︎
Again not strictly an exemption, but it may as well be ↩︎
Full disclosure: I played a small role in the creation of the treaty passport scheme, many years ago, acting for the Loan Market Association. Believe it or not, it’s a huge improvement on how things had been before. ↩︎
You could persuade the Kentland Federal Savings and Loan to apply for a treaty passport – but that still necessitates the US form 8802 process. ↩︎
This is a simplification, but a pretty good one ↩︎
i.e. we’re looking at the ultimate recipient, not entities in the middle of a structure ↩︎
This would need to be legislated with care. For example, in many structures (both commercial and avoidance-driven), a loan to a tax haven is derecognised for accounting purposes, so in fact there is no tax relief to deny. Debits and credits would have to be re-recognised in a tax haven/related party case, and the debits then disallowed. ↩︎
For two reasons. First, individuals can’t use the listed bond exemption, and so it’s currently not so easy for an individual to escape withholding tax… thus abolition could represent an absolute tax loss. Second, individuals don’t usually get a tax deduction for their interest payments, so we can’t use deductibility as a backstop ↩︎
that’s not a radical change – it’s already there in the 1970/488 SI ↩︎
There’s a Youtube video doing the rounds on Twitter which claims that Muslims don’t have to pay stamp duty when they buy a house. The claim is false, and most likely racist disinformation1.
I couldn’t see an explanation of this point on the internet, so thought I’d quickly put one together:
Normal mortgage finance
If I buy a house in a normal way then I pay stamp duty2 at 5% (or more). I pay a deposit of say 20% up-front. I borrow 80% from the bank under a mortgage loan, and use that plus the deposit to buy the house. Then over the next 25 years I pay interest, and repay the loan, one small piece at a time. After 25 years the mortgage is repaid and I own the house outright.
I pay stamp duty when I buy the house. Obviously I don’t pay it again when the mortgage ends, and I own the house outright.
Islamic Financing
Observant Muslims believe interest is unethical. But they still need to buy houses. So there are a variety of Islamic finance structures that look very similar to a normal mortgage in cash terms, but where the payments are structured differently.
A common one is “diminishing shared ownership” or “diminishing Musharakah”. I pay cash to buy 20% of the house. The bank buys the other 80%. I pay the bank rent for its share of the house, and over time I pay the bank to buy back the rest of those, one small piece at a time. After 25 years, I own the house outright.
Wouldn’t you know it, the rent and purchase prices add up to be very similar to interest and repayments on a normal mortgage, but almost always more expensive (because it’s more complex, and there’s less competition in the UK Islamic finance world).
But, on the face of it, there are two stamp duty charges. One when I and the bank buy the house. And then another series of charges (or single up-front charge) when I buy the slices. That seems unjust, given that both cases are (economically) the same transaction.
So there are specific tax rules that most treat most3 Islamic Finance the same as normal mortgage finance. In this case, a specific exemption for the second stamp duty charge, so that people using Islamic Finance (whether they are Muslims or not) pay the same amount of tax as everyone else.
There is a practical difference, which is that in the normal case I pay the stamp duty, and in the Islamic Finance case the bank pays it. The bank of course passes the cost to its customer. Often that is paid out over time, which might look like a better deal than a typical mortgage (where the stamp duty must be paid up-front). But that benefit is more than cancelled out in the higher deposit that’s required for an Islamic Finance product – rarely, if ever, less than 20%, and in the fact that payments overall are considerably higher.
Who uses Islamic Finance?
Payments under an Islamic Finance arrangement are economically similar to those under a normal mortgage loan, but typically significantly higher. In part because the products are complicated and riskier for the bank; in part because the market is much less competitive.
Non-Muslims absolutely could use Islamic Finance if they wanted to – although, given the increased cost, there’s no reason they would. There were some cases years ago of non-Muslims using Islamic Finance because they thought they’d found a way to escape stamp duty. They were wrong.
Scotland
Land law and mortgages all work differently in Scotland, and there’s Land and Buildings Transaction Tax instead of stamp duty/SDLT. I don’t have expertise on any of this. But my understanding is that the end result is the same: someone buying the house using Islamic Finance is in the same tax position as someone borrowing using a conventional mortgage.
Initially I thought it might be an innocent error, but the poster blocked me, and has a history of repulsive racist posts, so it’s reasonably clear he knows he’s lying ↩︎
Technically stamp duty land tax, but most people call it “stamp duty” so I will use that term in this article ↩︎
but not all; it’s a difficult area, and surprisingly easy to accidentally end up with a double stamp duty charge ↩︎
Here’s Oxfam’s press release from earlier this month:
To Oxfam’s credit, they now link to the methodology from the press release:
So a company has made a “windfall profit” – and gets taxed at 90% – if its 2021-2022 average profit is 10% above the 2017-2020 average profit.
Here’s a simple math question: how fast would a company’s profitability have to grow over those six years before it has a 10% profit increase, and therefore a “windfall”?
Let’s start by assuming no real terms profitability growth at all, and see what happens. Starting with $100 profit in 2017, and using a very simple model that just uprates each year’s profit by global average inflation in the previous year:
Now let’s keep going, and see where zero real terms profitability growth takes us in 2021-22:
That 11.2% increase is, in Oxfam’s terms, a windfall – and the 90% tax applies (because they only use nominal figures). But in real terms, there’s been no profit increase at all.
So the answer to the simple math question is: Oxfam forgot about inflation, and compounding. so its methodology will always consider a company to have a windfall unless its profit has shrunk in real terms. They didn’t actually find 722 multinationals that had made a windfall; they found 722 multinationals whose profits hadn’t fallen in real terms (or at least hadn’t fallen much).
I wrote to Oxfam pointing this out and received a disappointing response (full copy here) which justifies reporting profits in nominal figures (which is fine, indeed commonplace), but doesn’t justify using nominal figures/ignoring inflation to calculate “windfalls”. I don’t think it can reasonably be defended.
I don’t think this was intentional. Oxfam used to write thoughtfulpieces about the role of taxation in development. Now they just throw out endless identikit windfalltax and wealthtaxproposals; how and whether such proposals could actually be implemented doesn’t seem terribly important to them anymore.
It’s a shame. Oxfam have considerable resources and a large research team. If they turned back to serious tax policy they could do a lot of good.
Here’s an interactive map showing incomes in each parliamentary constituency in 2020/21, shaded by median incomes. You should be able to zoom around with your mouse/fingers, and if you hover/touch a constituency you’ll see the full data, broken down by employment income, self-employment income and total income tax paid:
If we shade by mean income, instead of median, the map turns entirely white (and you have to zoom into central London to see any colour). Which tells us something about income inequality:
There are some big caveats here. It’s data from income tax only, so won’t include capital gains. The sample size per constituency is small, so the accuracy won’t be great. Both these reasons mean that very high earnings likely won’t be captured.
Here’s an interactive map showing inheritance tax paid in each parliamentary constituency in 2019/20, and shaded by the number of estates paying inheritance tax. You should be able to zoom around with your mouse/fingers, and if you hover/touch a constituency you’ll see the data:
It’s easy to forget quite how few estates pay inheritance tax these days, given that most households will need £1m of net assets before they start paying the tax, and old age naturally depletes the assets we were saving in our life. Looking around to see how many households have £1m+ now is a poor guide to how many will end up paying inheritance tax (particularly given that many people will give assets to their children before they die).
So even in Richmond Park, only 159 estates paid inheritance tax.
And of course many of those that do pay inheritance tax will have a small bill. For example, if your estate has £1.5m of net assets, the inheritance tax is only on amount over the threshold/allowance – so an IHT bill of roughly £200,000.
(Note that the reason is absolutely not “the very rich don’t pay inheritance tax”. They do: they just pay a significantly lower effective rate than the merely comfortable off.)
So is there some political pattern in inheritance tax that makes it a big political draw? What if we look at the seats the Conservative Party has to hold to stay in power, say the 100 seats with the smallest Conservative majority? Many of those have less than 30 estates paying IHT, but of those with 30 or more:
No particular pattern, other than almost all of them have less than 100 estates paying inheritance tax (the Excel file is available here).
So, why does inheritance tax matter politically?
I’m not sure we know, but it won’t stop me guessing: it’s because of a widespread perception that the rich don’t pay the tax, but the merely comfortably off can be landed with large bills. (I think that’s consistent with this fascinating research from Demos).
That perception is basically true. Check out this chart, from HMRC, looking at the 2016/17 figures on what estates are actually paying in inheritance tax. There’s a spectacular drop-off in the effective rate for large estates (£9m+):
And look at what an outlier the UK is in international terms, with a relatively high rate but relatively low revenues:
There’s an obvious answer: we should fix inheritance tax so the green curve above is more flat, and the seriously wealthy pay the same effective rate as the merely reasonably wealthy. We should be able to do that by capping reliefs that are meant for small farms and small businesses, but end up providing a massive tax reduction for multi-millionaires. Then we can lower the rate to something more like 20% or 25%, without reducing revenues, and put the UK closer to The Netherlands, Denmark and Germany.
I think that would be the right thing to do, and treat both the seriously wealthy and the reasonably wealthy more fairly. I’ll leave others to judge how politically popular it would be.
The bank levy is a highly complex and distortive tax which serves no purpose other than raising money from banks – and there’s a much better and more efficient way to do that, without any loss of revenue.Time for it to go.
I’m keen to identify taxes that don’t serve a purpose, don’t raise much money (or can be easily replaced) and add nothing except complication and economic distortion. The first was stamp duty. The second is the bank levy.1
We create taxes for a variety of reasons. For example:
Most obviously: to raise money. But we want to raise money in the simplest and least economically distorting way that we can. Better to have one tax which raises £10bn than ten taxes, each raising £1bn
Fairness/redistribution. We often (but not always) want a tax to be mainly paid by those with more income/assets.
To discourage behaviour that we regard as undesirable and/or ensure the person responsible bears the cost. Many activities have a “negative externality” – they impose costs on third parties for which no compensation is paid. For example, creating pollution. A good answer is to create a tax (a “Pigouvian” tax) which will hit (in this case) the polluter and ensure the cost of the pollution are visited on it. Perhaps the polluter won’t pollute; but if they do, we now have enough tax to clean it up.2 We’re correcting a market failure.
To protect other taxes. For example, most economists agree that taxing capital gains is inefficient. The problem is that, if we don’t tax capital gains, people will use various tricks to shift taxable income into capital gains. So we have a capital gains tax – but its primary purpose is really to defend income tax. 3
After the financial crisis, there was a general desire for more bank taxes. There were at least three purposes – governments needed money, it felt fair to tax/punish the banks, and we could try to discourage behaviour which (it turned out) had had a very large negative externality.
The bank levy emerged from all that.
In concept, it’s very straightforward. Banks caused the financial crisis by having out-of-control balance sheets, with too many short-term liabilities. So we should tax balance sheet liabilities (excluding equity and “tier one” capital), taxing short-term liabilities more than long-term liabilities. Simply tot-up the balance sheet, and apply a percentage tax to it. That all sounds simple and very rational.
In practice, not so much:
First, that was a terrible explanation of the financial crisis, or at least a terribly incomplete one.
A better explanation: loose monetary policy leading to a housing market bubble and poor quality lending (residential and corporate). Then complex financial instruments created out of that poor quality lending which created risks that were not correctly priced/understood, and ended up being widely disseminated in non-transparent ways across the financial system. All being leveraged up thanks to the loose monetary policy.
A good answer (at least to the lending, financialization, transparency and leverage elements) is better regulation.
Tax is not a good answer, particularly when it only very vaguely relates to the actual causes of the GFC. It’s doubtful that the bank levy, or anything like it, would have changed the outcome of the financial crisis one iota.4
Second, the incentive doesn’t work
A four-word summary of the cause of the financial crisis goes “banks bought risky assets”. But the bank levy creates no disincentive on buying risky assets. It actually creates an incentive to buy high-risk assets.
Why?
I’m a bank. I raise £1bn of short-term liabilities to buy some extremely low-risk assets, giving me an annual profit of £2m (on which I’m taxed at 25%5). The bank levy is charged at 0.1% of the £1bn liabilities. My effective tax rate on the profit is therefore 75%.6
I’m a more aggressive bank. I raise the same £1bn but use it to speculate wildly and buy risky assets, earning an annual profit of £100m. The bank levy is still 0.1%. My effective tax rate is 26% (Total tax is £100m x 25% plus 0.1% x £1bn = £26m, divided by £100m profit)
This understates the problem. Banks, particularly international banks, are very complex beasts, and applying the bank levy consistently to their assets and liabilities turns out to be really hard.
Probably the hardest technical problem I ever saw as a tax lawyer involved one paragraph of the bank levy rules. No caselaw. No pages of dense interweaving legislation. Just one paragraph. The bank levy is so obtuse that in practice most people follow HMRC guidance and ignore the legislation. No tax should work that way.
This all means that banks have had to create, and constantly update, highly complex systems to manage and report their bank levy liabilities. The rules are so complex and uncertain that the cost of this is significant, even for the largest banks. Worse, the nuances of the bank levy, particularly around hedging, can nudge banks into structures that aren’t economically efficient.
Fourth, the bank levy is anti-growth
The bank levy only applies to bank balance sheets over £20bn. On the face of it, this shouldn’t deter a bank from growing above £20bn, because only liabilities above £20bn get taxed (i.e. it’s not like the infuriating way stamp duty land tax used to work, where if you got a penny over one of the thresholds, absolutely everything became taxable at a higher rate).
But the complexity of the bank levy, and the need to build/maintain/manage complex systems means that, if you’re a foreign bank with a branch in London, reaching £20bn of liabilities is highly undesirable. The way liabilities are calculated for branches means that, to control the branch-allocated liabilities, you have to control the branch assets – in other words, prevent the UK branch from growing. The unpredictability of exchange rates and asset prices means you’ll want to be a comfortable distance off £20bn.
There’s also the human factor – do you want to be the bank executive that approves growth above £20bn, and sign off on all the compliance and system costs the bank levy then requires, only to look a right Charlie a year later when the balance sheet drops below £20bn and it turns out to have all been a big waste of time?
I’m personally aware of two cases where foreign banks took significant decisions to redirect growth away from London – because of the bank levy. There are likely many more.
Fifth, in large part it’s paid by bank customers
When businesses are taxed on their profits, the burden is borne by some mixture of shareholders and employees (the precise balance depends upon the wider economic environment).
However when businesses’ pre-tax costs are increased, for example by a tax like the bank levy, we can get a different result. Banks usually price their interest/lending as the cost of their own funding plus the “spread” – their profit. Anything that increases their costs therefore will potentially increase the interest they charge customers. And this is what a study by the European Bank of Reconstruction and Development found when they looked at the effect of the Hungarian bank levy: “the tax is shifted to customers with the smallest demand elasticity8, such as households”.
Sixth, if we want to tax banks, there are better ways
How about just making the banks pay a higher rate of corporation tax?
We did that – it’s called the bank surcharge.9 It’s a fairly simple tax – an additional percentage on top of normal corporation tax. The rate used to be 8% and is now 3%10
And the advantage of the surcharge is that it shouldn’t be passed onto customers.
Why have both the bank levy and the bank surcharge? Unclear.
So what’s the answer?
It’s easy. Repeal the bank levy.
That would create about a £1.5bn hole in government revenues.
Fortunately, there’s an easy way to fill it – just raise the bank surcharge back up to 8%.11
That should be revenue-neutral overall for the Government (plus some small cost savings for HMRC, likely around £10m12).
It would be revenue-neutral for the UK bank sector overall (but with some significant administrative/systems cost savings, probably approaching seven figures for the larger banks).
There would be winners and losers as between different banks. Broadly, lower risk/lower return banks would benefit, and higher risk/higher return banks would lose out (i.e. because of the shift to taxing profits). We might see potential losers lobbying heavily against any change. That shouldn’t stop us. But, having spoken to people within the industry (including two heads of tax at large banks), my feeling is that even the “losing out” banks may welcome the simplification.
There aren’t many opportunities to abolish an entire tax, and nudge UK tax policy in a pro-growth direction, at no net cost to the Exchequer. This is one – we should take it.
Thanks to all the bank people who spoke to me about this.
Image by Stable Diffusion – “tangled ball of string, insanely detailed”
Footnotes
I’d love to hear more ideas on pointless taxes that should be abolished. The only rule is that, given the current state of the public finances, the tax must either raise zero revenue, or be easily replaced by a simple expansion of an existing tax. ↩︎
Another more pure example is the diverted profits tax, which was designed as the “Google tax” to punish Google for its international tax structuring. The intention is that the tax is so horrible that people would change their structure, and pay more corporation tax – and nobody would actually pay diverted profits tax. It did not work out like that.↩︎
More generally, we should be very cautious about jumping on tax as a solution to complex problems (outside of Pigouvian cases, where we can price an externality and then apply a tax to it) ↩︎
Yes, the rate isn’t right, but it makes the numbers easier ↩︎
i.e. £2m x 25% plus 0.1% x £1bn = £1.5m tax in total, divided by the £2m profit. This is a very simplified example, and I’m ignoring the regulatory capital cost entirely, as well as the way liabilities are determined for UK branches of foreign banks, but I’m aware of cases alarmingly like this in the early 2010s. In one instance the bank discovered, after the event, that the bank levy ended up giving them an effective tax rate of over 100%. Most banks ended up building systems to ensure this couldn’t happen by accident. ↩︎
The bank levy rules are kludged so that the really low-risk stuff (e.g. government bonds) doesn’t have this effect, but other low-risk commercial activity absolutely does. ↩︎
i.e. because households can’t go somewhere else for their mortgage. Businesses can. ↩︎
I also have problems with the surcharge – there are better and less distortive ways to tax banks. But it’s a whole lot better than the bank levy ↩︎
Because the surcharge was created to prevent banks getting any benefit from the cut in corporation tax down to 19%, so it’s rational to partially reverse it when corporation tax rates go back up to 25% ↩︎
The bank surcharge raised about £2.4bn when it was 8%. So, in broad terms, we can abolish the bank levy, and raise an additional £1.5bn from the surcharge by taking the rate back to 8% i.e. because 3% + (1.5/2.4 x 8%) = 8% ↩︎
HMRC report the average cost of administering the tax system is 0.5% of taxes collected; the bank levy probably costs rather more than that to administer, given the small number of taxpayers (and so no economies of scale), but I’ll use that figure in the interest of prudence. On the other hand, adding 5% to the bank surcharge should not add any material administration cost for HMRC ↩︎
![629Income paid to [F1relevant] children of settlor
(1)Income which arises under a settlement is treated for income tax purposes as the income of the settlor and of the settlor alone for a tax year if, in that year and during the life of the settlor, it—
(a)is paid to, or for the benefit of, [F2a relevant] child of the settlor, or
(b)would otherwise be treated (apart from this section) as income of [F2a relevant] child of the settlor.](https://taxpolicy.org.uk/wp-content/uploads/2023/09/Screenshot-2023-09-07-at-20.39.08-1024x162.png)
![Duty to keep register
(1)A company to which this Part applies must keep a register of people with significant control over the company.
(2)The required particulars of any individual with significant control over the company who is “registrable” in relation to the company must be entered in the register [F17before the end of the period of 14 days beginning with the day after all the required particulars of that individual are first confirmed].
(3)The company must not enter any of the individual's particulars in the register until they have all been confirmed.
(4)Particulars of any individual with significant control over the company who is “non-registrable” in relation to the company must not be entered in the register.](https://taxpolicy.org.uk/wp-content/uploads/2023/08/Screenshot-2023-08-11-at-13.06.44-1024x236.png)
![14(1)A person commits an offence if the person—
(a)fails to comply with a duty under section 790G or 790H, or
(b)in purported compliance with such a duty—
(i)makes a statement that the person knows to be false in a material particular, or
(ii)recklessly makes a statement that is false in a material particular.
(2)Where the person is a legal entity, an offence is also committed by every officer of the entity who is in default.
(3)A person guilty of an offence under this paragraph is liable—
(a)on conviction on indictment, to imprisonment for a term not exceeding two years or a fine (or both);
(b)on summary conviction—
(i)in England and Wales, to imprisonment for a term not exceeding twelve months or to a fine (or both);
(ii)in Scotland, to imprisonment for a term not exceeding twelve months or to a fine not exceeding the statutory maximum (or both);
(iii)in Northern Ireland, to imprisonment for a term not exceeding six months or to a fine not exceeding the statutory maximum (or both).]](https://taxpolicy.org.uk/wp-content/uploads/2023/08/Screenshot-2023-08-09-at-18.23.57-1024x482.png)
