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  • Another HMRC mistake lets the UK’s most notorious tax avoider off the hook.

    Another HMRC mistake lets the UK’s most notorious tax avoider off the hook.

    We wrote last month about Paul Baxendale-Walker, the former barrister and solicitor who helped create the “loan schemes” that cost the country £billions and caused misery for tens of thousands of people. HMRC say his schemes avoided £1bn in tax. His advice was negligent, and he eventually ended up struck off, bankrupt, and convicted of forgery. But HMRC made a series of errors, including missing a statutory deadline, which let Baxendale-Walker escape a £14m penalty.

    We can now reveal that, at about the same time, HMRC issued a statutory “stop notice” to stop Baxendale-Walker’s latest “Nova Trust” scheme being promoted… but HMRC mistakenly issued it to a company that had been struck-off.

    The Nova Trust scheme continued to be promoted after the stop notice. This would normally mean HMRC could apply penalties or even criminal sanctions – but, thanks to HMRC’s mistake, it’s likely there’s now nothing HMRC can do.

    And HMRC seem to be making a habit of procedural errors in avoidance cases. Just last week, a major case was struck out because HMRC missed a 5pm deadline for filing a bundle of supporting authorities. And there was a similar case last year, where HMRC’s failure to meet deadlines led to it being permanently barred from a £7m VAT case.

    Baxendale-Walker – the Nova trust

    The background to Baxendale-Walker and HMRC’s efforts to pursue him is set out in our previous report. The summary in the introductory paragraph above gives just a small flavour of why investigating him should be an HMRC priority.

    Baxendale-Walker says he retired in 2013 on grounds of ill-health. However businesses linked to Baxendale-Walker have continued to be actively involved in extensive litigation in the US and UK. And they continue to sell tax schemes, largely based around solving problems created by their previous tax schemes.

    In May 2023, HMRC published details of two schemes promoted by two Belize companies linked to Baxendale-Walker, Buckingham Wealth Ltd and Minerva Services Ltd.. The companies appear to have no internet presence; the various other Buckingham Wealth companies found by a Google search have no connection to Baxendale-Walker.

    The first scheme is a “umbrella remuneration trust” which supposedly lets you take what should be taxable earnings as a non-taxable loan. It’s either the same or a variant of the scheme that two dentists bought in 2014, and Baxendale-Walker was reported to be selling in 2016.

    The second scheme is a bizarre attempt to prevent HMRC enquiring into the first scheme, by claiming the “umbrella remuneration trust” was void, and making a “replacement” contribution to a new trust called the “Nova” trust. This is not the first time a Baxendale-Walker scheme has attempted to “rebrand” a previous failed scheme – a court recently found a previous attempt to do so to be dishonest. Arguments of this kind are the subject of a number of current tax appeals, and they are (predictably) not going well.

    On 3 May 2023, HMRC took the unusual step of publishing Buckingham Wealth Ltd‘s marketing material for the “Nova” trust:

    HMRC went further, and alleged that Buckingham Wealth Ltd did not appear to believe that one of its own tax avoidance schemes works. If correct, that could amount to (criminal) tax fraud (although as far as we are aware no charge have been brought).

    Paul Baxendale-Walker is not mentioned in the document, and HMRC’s PDF contains no metadata. We have, however, obtained an original PDF containing a slightly later version of the FAQ.

    Metadata in this PDF shows that “Paul” created the document on 14 June 2022 using Microsoft Word. We have spoken to three people familiar with Baxendale-Walker’s writing style; they each independently, without prompting, identified him as the likely author.

    When we initially asked Baxendale-Walker about Nova, he said there was no such thing as a “Nova” trust. When we subsequently put the evidence of authorship to him he said that the document “was the product of collegiate discussion”.

    HMRC’s response – the stop notice

    In July 2023, two months after publishing the Nova Trust materials, HMRC issued a “stop notice” to Buckingham Wealth Ltd.

    “Stop notices” were a new power granted to HMRC in 2021, with the rules now in section 236A Finance Act 2014.

    The effect of a stop notice is that the recipient of the stop notice mustn’t promote the specified arrangements, or anything similar to them. This restriction also applies to (amongst others) anyone who controls, or has significant influence, over the recipient of the stop notice. And if the recipient transfers its business to another person, then the stop notice applies to them too.

    The stop notice also requires the recipient to provide HMRC with detailed information on its clients, and to pass details of the stop notice to those clients.

    HMRC’s mistake

    HMRC’s stop notice was issued to Buckingham Wealth Ltd in July 2023.

    This looks like a bad mistake, because Buckingham Wealth Ltd was struck off the Belize register of companies six months earlier:

    Baxendale-Walker told us that his lawyers had assured him Buckingham Wealth Ltd “ceased to have legal existence”, and this makes HMRC’s stop notice invalid.

    We asked HMRC for their response:

    We’ve spoken to Belize counsel, and it’s our view that whether the company existed at the time is not the correct question.

    The Belize Companies Act 2022 makes a clear distinction between a company that is dissolved and a company that is struck off. A dissolved company ceases to exist. A struck-off company which has not yet been dissolved exists in a kind of “zombie” state, where it can’t engage in activity, but remains liable for its debts and can be pursued by creditors (see section 220).

    So the question isn’t whether Buckingham Wealth Ltd existed and the stop notice was valid – technically it’s reasonably clear that the company did exist. But the fact the Buckingham Wealth Ltd was struck off means that the stop notice was useless. Buckingham Wealth Ltd was not going to engage in promotional activities itself, had (we expect) already transferred its business to another person, and nobody had control or influence over it anymore. So the stop notice likely had no practical effect.

    This was, therefore, a bad mistake by HMRC. It’s usually standard procedure for lawyers commencing any kind of transaction or procedure involving a company to, on the morning of the day in question, check if the company remains in existence. If we could check the Belize incorporation status of Buckingham Wealth Ltd, HMRC certainly could. Upon discovering the company had been struck-off, HMRC should have either issued the stop notice to another entity (such as Minerva Services Ltd) or to identifiable humans involved in these companies (such as Paul Baxendale-Walker himself, Saeedeh Mirshahi, or other of his associates).

    HMRC doesn’t appear to have done this.

    The consequence of HMRC’s mistake

    It appears that Buckingham Wealth kept promoting the Nova trust, and ran a conference at Heathrow in January 2024.

    This wasn’t “Buckingham Wealth Ltd”, which no longer existed. It was either another company called “Buckingham Wealth” hiding its name and place of incorporation, or a group of individuals acting under the “Buckingham Wealth” brand. This is not how people ordinarily run a business, and we’d speculate that the purpose was to make HMRC’s job harder.

    Here’s an email summarising the conference from Osmai Management, a very dubious-looking BVI firm that appears to act as an “introducer” selling Buckingham Wealth’s schemes (PDF here):

    Baxendale-Walker did not deny that the Heathrow event happened. He said it didn’t involve Buckingham Wealth Ltd, because the company no longer existed. He said that he was aware that various persons refer to various tax arrangements under the umbrella “Buckingham Wealth”, and that is “merely a name or style”. He added, oddly answering a question we hadn’t answered, that he had “no knowledge who the natural persons are who own ‘Osmai’”.

    We do not know for certain, on the basis of the information we currently possess, whether Baxendale-Walker was involved in the Heathrow event. However we infer from the non-denial, from Baxendale-Walker’s history, and from the very Baxendale-Walker-sounding summary of the Heathrow event in the Osmai email, that he may have been involved in it.

    At this point, HMRC would ordinarily want to apply penalties for breaching the stop notice. This could be on the basis that the business of Buckingham Wealth Ltd had been transferred to a new person or persons, in which case the stop notice would now bind them. Or it could be on the basis that the people running the event (Baxendale-Walker or others) previously had influence/control over Buckingham Wealth Ltd, in which case the stop notice would bind them personally.

    And if marketing continued past Finance Act 2024 coming into force on 22 February 2024, then HMRC would want to apply the new legislation that makes any breach of a stop notice a criminal offence.

    However, HMRC are in our view unable to do any of these things, because they issued the stop notice to a struck-off company. The stop notice should have been issued to Baxendale-Walker personally.

    What can HMRC do now?

    We do not know if HMRC was aware of the problem with the stop notice before we contacted them. We also don’t know if HMRC was aware of the Heathrow event before this article. But we are concerned that HMRC’s investigation of Baxendale-Walker has been both extremely long-running and remarkably unsuccessful.

    HMRC should investigate the Heathrow event and the background to Buckingham Wealth Ltd in more detail. It may be that we are wrong and there are facts and circumstances that mean the stop notice was breached. Certainly that should be checked.

    And HMRC should share its information with the Official Receiver to see if any bankruptcy offences have been committed.

    Baxendale-Walker is subject to extended bankruptcy restrictions until 2030. This means that it’s an offence for him to act as director of a company or directly or indirectly to take part in or be concerned in the promotion, formation or management of a company, without the leave of the court.

    If Baxendale-Walker was involved in the management of Buckingham Wealth Ltd, Minerva Services Ltd, or any other entity, that would appear to be an offence.

    Was he?

    There was more than a suggestion in a High Court judgment last year that Baxendale-Walker was managing a Delaware company. Similar allegations were made by a party to another case this year.

    Baxendale-Walker firmly denied to us he was breaching the bankruptcy restrictions, and added that it would be a libel to say that he was. However, given the various allegations made in recent cases, the wave of litigation launched by associated entities, Baxendale-Walker’s history of using opaquely owned companies to pursue his own agendas, conviction for fraud, use of trusts to hide ownership, and his failure to make full and frank disclosure of his affairs to the Official Receiver, we would suggest there are good grounds for an investigation into his precise relationship with the large number of companies that appear to be associated with him.

    Many thanks to M for his research and analysis on Buckingham Wealth, I for the Belize advice, and K for general research.

    Photo by Paul Baxendale-Walker – CC BY 3.0, edited for resolution and aspect ratio by Tax Policy Associates Ltd

    Footnotes

    1. Ordinarily, missing a deadline doesn’t have this effect. The judge had made an “unless” order, which means that failure to adhere to his directions results in the case being struck out – we expect this was because HMRC had missed a series of previous deadlines. HMRC can apply for the case to be reinstated; this is often granted where there has been a one-off administrative mistake, but (as in last year’s ebuyer case) is not always granted where there has been a pattern of failures to meet tribunal deadlines ↩︎

    2. His Facebook page describes him as “Songwriter & Guitarist, Scriptwriter, Actor, Director, Producer” ↩︎

    3. In addition to the Delaware arbitration that led to that Court of Appeal decision, PBW has continued to file claims in his own name. In addition, a series of companies that appear to be related to PBW seem to be engaged in ongoing litigation, much of which relates around purported assignments to new entities. Given PBW’s track record, and the number of times he has been severely criticised by judges in the UK and US, it is unclear why the various defendants to his claims haven’t applied for a civil restraint order. ↩︎

    4. There is no way of ascertaining the beneficial owner of Belize companies; we infer from facts in reported cases that PBW is likely associated with Minerva (see for example this footnote to our original report). Previously the Minerva business was carried out by a BVI company of the same name; an unsuccessful court application which bears the hallmarks of PBW attempted to transfer its assets to the Belize company. There is less information publicly available regarding Buckingham Wealth; but it appears to have been the promoter in the Hosking case, and the Ashbolt case described “Buckingham Wealth LLP” as the successor to Baxendale Walker LLP. We don’t know if these are different entities, perhaps another move from the BVI to Belize, one entity which changed form, or if the differences just reflect errors. ↩︎

    5. which may or may not be the same scheme another dentist bought five years earlier, and appears similar to the “Sunrise” scheme at issue in the Hosking and Horsler cases. ↩︎

    6. It’s pretty clear this doesn’t work, both on general principles and from the Hosking case ↩︎

    7. Baxendale-Walker and his entities were not a party in that case and, as far as we know, HMRC has no accused Baxendale-Walker or his entities of behaving dishonestly. ↩︎

    8. From someone who received a copy of the document from an introducer ↩︎

    9. With minor textual differences, corrections of grammatical errors/partial sentences, and the addition of the ability to spread the fee out over time. ↩︎

    10. It of course being noted that this does not prove Paul Baxendale-Walker wrote the document; it could be another “Paul”, or indeed anyone who setup Word with “Paul” as the author. ↩︎

    11. Because it was probably held by a trust of some kind, rather than by Baxendale-Walker or another traceable individual directly. ↩︎

    12. which was struck off in January 2024 ↩︎

    13. Despite being incorporated in the BVI, Osmai’s website provides only a UK telephone number and its website lists only UK taxes. Until January 2019 they promoted Baxendale-Walker’s “umbrella remuneration trust”, with the claim that it was fully disclosed to HMRC and wasn’t tax avoidance. HMRC predictably did not agree. Another Osmai entity, which gives the same UK phone number, appears to operate an unauthorised FX trading scheme which makes some very suspicious claims and may be fraudulent. We attempted to contact Osmai Management for comment and received no response. ↩︎

    14. It’s redacted to protect our source, and we have masked the precise date for the same reason ↩︎

    15. HMRC usually is heavily constrained by taxpayer confidentiality, but it is usually able to disclose information to the Official Receiver. ↩︎

    16. “In these proceedings, it is said that MSD [Minerva Services Delaware, Inc.] is a shadowy company, which seeks to rely on documents which appear uncommercial and which call out for an explanation, at the very least. It is also wholly unclear who is standing behind MSD. Mr Patel also says that it is obviously Mr Baxendale-Walker and he raises more than a prima facie case that this is indeed so. Indeed, Counsel for MSD accepted for the purposes of the strike out/summary judgment that the Court had to assume that this was indeed so. I note that Mr Baxendale-Walker was made bankrupt in 2018, after a former client sued him for negligence and obtained a judgment of over £16 million against him.” ↩︎

  • HMRC’s failure to close the small business tax gap costs £15bn/year

    HMRC’s failure to close the small business tax gap costs £15bn/year

    Over the last seventeen years most of the tax gap fell by two-thirds – a remarkable achievement. But a deep dive into HMRC’s new tax gap statistics shows HMRC has lost control of small business tax. About a third of corporation tax due from the sector is not being paid. The small business tax gap rose dramatically during the pandemic, and didn’t decline afterwards. If HMRC had closed the small business tax gap as effectively as it closed other tax gaps, HMRC would collect £15bn more tax revenue each year.

    The difference between the tax that should be paid and the tax HMRC actually collect is the “tax gap”. HMRC say it’s £39.8bn. There are a large number of uncertainties, but HMRC’s tax gap estimate work is generally regarded as world-leading.

    Most of the tax gap is from small businesses, meaning businesses with a turnover of less than £10m and less than twenty employees:

    That’s always been the case to some degree, but the increase in the small business tax gap over the last three years has been remarkable:

    The uptick in 2019/20 may have initially been caused by the pandemic, but other business types didn’t see that effect, and its now clear that the trend didn’t slow down after the pandemic. HMRC tells us that a review of their random enquiry programme found that their caseworkers “were more likely to detect non-compliance in the most recent random enquiry programmes, particularly for 2019 to 2020 and 2020 to 2021, than in previous random enquiry programmes”.

    Astonishingly, a third of all corporation tax due from small businesses is now not being paid.

    There’s a sharp contrast with the large and mid-sized business corporation tax gap, which HMRC has been remarkably successful at closing. It stood at 0.85% of total UK tax revenues in 2005/6 but only 0.34% in 2022/23. Over the same period, the small business tax gap increased threefold, from 0.41% to 1.32%

    If the small business corporation tax gap had remained the same, £7.5bn additional tax would have been collected. If it had improved in line with what we see for large and mid-sized businesses, £9.5bn additional tax would have been collected.

    And it appears that problems are widespread. HMRC data shows that over a third of small businesses had undeclared tax of over £1,000 in 2019/20 and 2020/21 – a doubling since 2018/19:

    There is no such trend seen if we look at the figures for tax returns from individuals:

    And it’s worse than this. The small business tax gap isn’t limited to corporation tax. If we step back and look at the HMRC figures across all taxes we see another dramatic divergence:

    HMRC have generally done an excellent job shrinking the tax gap, with declines across the board. But after 2017/18 something changed.

    The total small business tax gap increased from 2.4% of total UK tax revenues in 2005/6 to 2.9% in 2022/23. The rest of the (non-criminal) tax gap declined over that period from 3.3% to 1.48%. If it had declined at the same rate as the rest of the tax gap, HMRC would have collected an additional £15 billion – £9.5bn corporation tax and £5.5bn other tax (mostly VAT).

    The reason, and what needs to change

    There have been many anecdotal reports of a decline in HMRC customer service (see page 31 of this CBI report and this from the Chartered Institute of Taxation). It’s not merely that HMRC funding has failed to keep pace with inflation; its most experienced personnel were moved onto other projects, particularly Brexit and the pandemic, and didn’t move back (see paragraph 1.8 onwards in this National Audit Office report). We are also hearing about long-term problems with the quality and length of staff training deteriorating.

    It isn’t surprising that it’s small business that suffers the most from these problems.

    We’ve talked before about realistic ways that the tax gap could be reduced.

    Additional funding is a pre-requisite, but on its own isn’t enough.

    We are increasingly hearing about problems with the length and quality of training new HMRC employees receive. Customer service needs to be prioritised. HMRC needs to get back in touch with taxpayer, so it can assist the vast majority that are trying to be compliant, and proactively identify those that are not. HMRC’s approach to investigations and disputes needs to change: right now it simultaneously pursues weak and irrelevant cases, cases that are oppressive to taxpayers (and sometimes inexplicable and disturbing) but at the same time misses what’s happening on the ground.

    HM Treasury mustn’t just shower HMRC with additional funding; new funds need to be carefully directed and managed. Failures to deliver important cases, or drop bad cases, should be investigated; not to blame individuals, but to find out what, systemically, is going wrong, and how to fix it.

    But HMRC’s success in reducing the tax gap over the last 20 years suggest that its failure to close the small business tax gap can and should be remedied. £15bn is an extraordinary sum to lose behind the administrative sofa.

    Image by DALL-E 3.

    Footnotes

    1. Other figures are sometimes quoted, but they are statistically naive. Richard Murphy produced a figure of £90bn back in 2019, but he did this by adopting a “top-down” methodology which, as HMRC and the IMF (page 46 here) have explained, requires a series of significant adjustments which Murphy does not make. Murphy’s estimate also fails the “smell test”. It requires us to believe HMRC are missing more than 95% of all tax evasion – that does not seem plausible given that HMRC conduct random audits of businesses (absent HMRC being corrupt, which is Murphy’s view). We’re unaware of any tax expert who believes Murphy’s approach is credible, and no country has adopted it. ↩︎

    2. Estimating the tax gap is a very difficult exercise, with numerous sources of error and uncertainty. HMRC does an impressive job to rigorous standards, generally believed to be the best in the world (most tax authorities only produce tax gap figures for VAT, which is a far simpler job given that it can be estimated with reasonable accuracy “top-down” from national accounts data). About ten years ago, HMRC’s homework was favourably reviewed by the IMF, who made various recommendations, most of which have been followed. More recently it was also reviewed by the Office for National Statistics. ↩︎

    3. It’s sometimes said that the estimates ignore offshore avoidance. This is not quite right, and there are two separate points here.

      First, our work identified that HMRC does not systematically match up offshore account reporting with self assessment data. But that is different from saying that offshore is not included in HMRC’s tax evasion estimates. At most, HMRC’s estimate may be missing some evasion that would be identified by cross-checking HMRC’s sources of data. If so, the amounts are likely modest.

      Second, HMRC’s tax gap does not include areas where something we might describe of as “avoidance” is actually permitted under the rules – for example the “double Irish” structure Google used prior to 2015. So in 2015 it was a very valid criticism to say that the tax gap estimates ignore multinational tax avoidance. However, things have changed since 2015. The many anti–avoidance rules implemented post-2015 make it much harder to see what “avoidance” remains permissible. Even the Tax Justice Network estimates (of which we’ve been very critical) show multinational avoidance costing the UK less than £2bn. This second criticism therefore feels of limited relevance today. ↩︎

    4. Also note that the definition of “avoidance” doesn’t encompass planning that’s clearly permitted by the rules (even if many people wish it wasn’t). So, for example, the big tax advantages for non-doms aren’t a result of tax avoidance – they’re how the rules work. Ditto carried interest, avoiding SDLT on commercial property using enveloping, etc. More on the definition of “tax avoidance” here. ↩︎

    5. Our source for this, and all the data in this article, are the HMRC tax gap tables. ↩︎

    6. The only other taxes where the tax gap has gone up over this period are inheritance tax (which likely results from so many more estates becoming subject to the tax) and landfill tax (we don’t know why that is; it’s an area where our team has no knowledge or expertise) ↩︎

    7. This resulted in figures being revised, but it’s unclear whether that reflects more non-compliance or a more effective enquiry programme, but the upward revision is about £800m and therefore does not materially change the trends we see – see table 1.5, cell R26. ↩︎

    8. This data is all from table 1.3 of the HMRC tax gap tables. ↩︎

    9. Errors crept up slightly but errors of over £1,000 have been static or declining ↩︎

    10. This is from table 1.4 of the HMRC tax gap tables. ↩︎

    11. As the figure is based on the HMRC tax gap statistics, it is subject to considerable uncertainty; we cannot quantity this (given the lack of quantitative error analysis in the HMRC statistics). ↩︎

    12. We can’t show this directly, as there are no detailed statistics for VAT non-compliance in the tax gap tables, and no figures for VAT revenues from small business in the VAT statistics. But HMRC figures show small business PAYE compliance has dramatically improved, with the tax gap reducing by 2/3 – we expect this is due to the widespread move towards outsourced automated PAYE services. Other taxes are not significant to most small businesses, and so by a process of elimination we can be reasonably confident that most of the non-CT tax gap here is VAT ↩︎

    13. It can seem counter-intuitive that the corporation tax gap is bigger than the VAT gap, not just in this case but generally. Since VAT is 20% of turnover, and corporation tax (in this period) 19% of profit, if someone evades tax won’t the VAT loss be greater? Why is the corporation tax gap bigger than the VAT gap? Primarily because VAT compliance is (broad generalisation) easier than corporation tax compliance. It’s your turnover (if you’re a business that only supplies standard rated products) less your inputs. Corporation tax is much more nebulous – what ends up as your “profit” is often less than obvious. What’s more, VAT is hard to avoid or evade these days – sales to customers are visible; sales to business customers leave a paper trail. There’s an additional factor for small companies that every company pays corporation tax, but only companies with over £85,000 of revenue (in 2022/23) are subject to VAT. ↩︎

    14. “A high-resolution image of a large stack of colorful papers and documents, with various colors such as yellow, pink, green, and purple, slightly blurred around the edges for an artistic touch, photographed against a plain light gray background. The documents are arranged in a disorganized pile, capturing a sense of clutter.” ↩︎

  • The Post Office – reckless with postmasters’ personal data; abusing data privacy to protect itself

    The Post Office – reckless with postmasters’ personal data; abusing data privacy to protect itself

    The Post Office recklessly published the names and addresses of 550 wrongfully convicted postmasters. But it takes a very different attitude to its own data privacy, running frivolous GDPR arguments to cover up its corporate failings.

    This is how the Post Office protected the data privacy of the 550 wrongfully convicted postmasters:

    But the Post Office was extremely protective of data privacy when I asked it how many personnel had been working on sorting out the tax mess it created for thousands of postmasters.

    The Post Office took months to fix that mess and send out letters and “top-up” payments to postmasters… a task that a small team of competent accountants could have accomplished in weeks. That meant thousands of postmasters had to complete tax returns, and pay tax, entirely unnecessarily.

    This was the Post Office’s reply to me:

    We consider that disclosure of this information is likely to breach the first data protection principle, which provides that personal data must be processed lawfully, fairly, and in a transparent manner. Disclosure of the fulltime equivalent number of the individuals calculating tax top-up payments would not constitute 'fair' processing of their personal data because the number is less than 10 and disclosure of the actual number could lead to an identification of the individuals involved. They would not reasonably expect their role and number to be disclosed in relation to this request for information.

    That’s nonsensical: knowing the number of staff cannot lead to identification of the individuals. I asked the Post Office for a review, and said that if they disagreed they needed to explain how such an identification could be made.

    The review just came back (delayed by months) and taking an entirely different line:

    We maintain that disclosing the of the fulltime equivalent number of the individuals calculating tax top-up payments will violate the absolute exemption under sections 40(2) and 40(3A) of the FOIA because they constitute personal data in their entirety. These sections exempt personal data from disclosure if that information relates to someone other than the applicant, and if disclosure of that information would breach any of the data protection principles in Article 5(1) of the UK General Data Protection Regulation (GDPR).

    They claim that the number of people working on a project is “personal data” because it “relates to” the individuals:

    That is a frivolous reading of the legislation. Almost everything to do with an organisation “relates to” the people who work there – that doesn’t mean that almost everything is “personal data”. It’s only if the information relates to and concerns an identifiable individual – that’s clear on general rules of legal interpretation, and basic common sense. It’s also clear in the Information Commissioner’s guidance.

    The legislation tells us that the key question is: can the individual be identified, directly or indirectly:

    And the obvious is that, even if the answer is that only one person was on the project, that answer wouldn’t able their identification.

    When we first revealed that the Post Office had failed to do as it promised, and help the postmasters resolve the Post Office’s tax mess, there was a flurry of internal Post Office communications. Not to fix the problem, or work out what had gone wrong, but to manage the PR.

    It’s pretty obvious that’s the real reason the Post Office refuses to tell me how many people were trying to fix its tax mess. The Post Office knows it insufficiently staffed the project, and is covering that up.

    We’ll be referring this to the Information Commissioner’s Office.

    Photo by Markus Spiske on Unsplash

  • HMRC errors let the UK’s most notorious tax avoider escape a £14m penalty

    HMRC errors let the UK’s most notorious tax avoider escape a £14m penalty

    Paul Baxendale-Walker is probably the UK’s most notorious tax avoidance scheme promoter. He’s the former barrister and solicitor who helped create the “loan schemes” that cost the country £billions and have caused misery for tens of thousands of people. HMRC say his schemes avoided £1bn in tax. His advice was negligent, and he eventually ended up struck off, bankrupt, and convicted of forgery.

    HMRC have been trying to pursue Baxendale-Walker for years, and finally last year imposed a £14m penalty on him. But HMRC made a series of mistakes, including missing a statutory deadline. The consequence, confirmed by a court judgment published earlier this month, is that Baxendale-Walker escapes the £14m penalty.

    This appears to be part of a pattern of HMRC failing to properly use the many additional powers it’s been granted over the last few years.

    We worked on this story in conjunction with the Bureau of Investigative Journalism, who are reporting it here.

    Paul Baxendale-Walker is notorious amongst tax advisers, but is very little known outside that circle. To understand the seriousness of HMRC’s failure to make the £14m penalty stick, it’s necessary to go through some of his career.

    Baxendale-Walker – a short history

    We’ve previously written about the trust and loan schemes used in the 2010s to avoid very large amounts of tax, and that culminated in financial and personal disaster for many of those involved, and bankruptcy for the Rangers Football Club, which had used a particularly aggressive variant.

    The adviser to Rangers, and one of the originators of the entire loan scheme structure, was former barrister and (now) struck-off solicitor Paul Baxendale-Walker.

    The avoidance schemes

    Baxendale-Walker emerged as a prominent adviser in the 1990s, co-writing what was seen as the leading textbook on “remuneration trusts”. These were the vehicles used for the trust and loan avoidance schemes. The basic idea was that, instead of an employer paying its employees in normal taxable wages, it would make payments to the trust. The trust would then loan the amounts to the employees. The loans wouldn’t be taxable, and the employees would often be told (with a nod and a wink) that they’d never have to be repaid. So, as if by magic, taxable income had been converted into completely non-taxable income.

    Baxendale-Walker sold variants of his trust structure to multiple clients through his firm, Baxendale-Walker LLP and related entities. He became a very wealthy man, started to moonlight as a porn star and talkshow host and acquired “Loaded” magazine (reportedly describing himself as a “porn baron”) through a publishing venture which went bust a year later.

    Baxendale-Walker charged enormous sums for his tax schemes – 10% of the value of the trust in one case (£612,000) and 10% of all ongoing contributions in another. In our view, none of these schemes worked technically. Some of his clients deserved their schemes to fail; others appear victims of mis-selling

    The downfall

    Baxendale-Walker was suspended from practice as a solicitor in 2005 for a “remarkable and colossal” and “breathtaking” error of judgment in saying that a Mr Nurkiman, who he had never met or spoken to was a “person of integrity and good standing”. Mr Nurkiman turned out not to exist, and the arrangement was fraudulent.

    He was struck off a year later for a serious conflict of interest – he advised on schemes where large fees were paid to a promoter company which he ultimately controlled.

    What’s hard to understand is that, after Baxendale-Walker and his associate Bill Auden were struck-off, promoters kept pushing Baxendale-Walker and his business, Baxendale-Walker LLP. That’s despite Baxendale-Walker’s website clearly describing Baxendale-Walker as a “former barrister and solicitor“, and his history being immediately apparent from a Google search.

    See, for example this slide deck, from 2012:

    Deep in the accompanying FAQ, they say:

    Baxendale-Walker was indeed pursuing litigation against the SRA and the Law Society, at one stage suing both for £230m. This resulted in an extended civil restraint order being granted to prevent him issuing further claims in England. He responded by suing the Law Society and the Solicitors Regulation Authority in California and Virginia, without success. Baxendale-Walker subsequently failed to pay his California lawyers, resulting in a familiar series of “dilatory” tactics, “obfuscation“, court applications and failed appeals, and Baxendale-Walker being found in contempt of court.

    Baxendale-Walker continued to pursue the SRA by impersonating an HMRC official, for which he pleaded guilty to forgery (fraud) in 2016, and was convicted and fined.

    When we told Baxendale-Walker we’d be reporting his fraud conviction, he told us “If you print that you must be sued for defamation, which would be actionable without proof of special damage.” But his conviction in 2016, and the accompanying fine and costs order, were widely reported in the legal and the general press, and were cited as fact in a US court judgment.

    That same year, the Rangers scheme was struck down by the Scottish Court of Session – Baxendale-Walker initially denied this was a problem and that HMRC had suffered a “major defeat”, but it became clear very quickly that his game was over. In 2017, the Supreme Court upheld the Court of Session’s decision.

    Many of the rest of Baxendale-Walker’s schemes failed – this article by former HMRC inspector Ray McCann gives a very good picture of the mess this left Baxendale-Walker’s former clients in, as does this article from Jersey, and this stream of Jersey cases.

    There were a large number of consequential court cases. The most serious for Baxendale-Walker was a negligence claim for £16m from his former client Iain Barker, which resulted in a 2017 Court of Appeal decision that Baxendale-Walker’s advice to Barker had been “clearly negligent”.

    The £16m award seems to have caused Baxendale-Walker some financial difficulty. Having previously borrowed from two companies controlled by a client, he now tried to argue that the loans were void and he could keep the money – he failed. Baxendale-Walker failed to pay the now £16.7m owed to Barker, and was made bankrupt in 2018. Baxendale-Walker responded to the bankruptcy with a variety of legal strategems and court applications, all of which failed. Baxendale-Walker failed to make full disclosure of his assets to the bankruptcy trustee, and so the usual bankruptcy restrictions were extended for ten more years and remain in place.

    Along the way, Baxendale-Walker made at least half a dozen different court claims against a former partner to recover gifts he had made to her. Baxendale-Walker’s claims all failed, and were summarised by one judge as a “use of the court’s process for ulterior and illegitimate motives“.

    Baxendale-Walker says he retired in 2013 on grounds of ill-health, was diagnosed with cerebral vasculitis in 2015, and since then has suffered a number of cerebral stroke events. He says he re-trained as a psychologist and psychotherapist and publishes books under the name of Paul Chaplin.

    All of this is a brief and incomplete summary of an astonishing career.

    It’s hard to explain how someone so peculiar, and with so many legal troubles, could have been treated as an expert by people who should have known better, trusted by the likes of Rangersand ended up causing so much damage to the tax system and to many peoples’ lives.

    The HMRC investigation

    There is a great deal of anger, among his former clients, HMRC personnel and many tax professionals, that Paul Baxendale-Walker appears to have escaped responsibility for his actions. It’s understandable that HMRC should look for every opportunity to recover tax and penalties from him.

    HMRC investigations are usually confidential, but thanks to US court documents we can reveal that HMRC started investigating Baxendale-Walker’s own historic personal tax affairs at some point around 2018.

    In the court documents, the IRS says HMRC claimed that, from 2007 to 2018, the total tax avoided using Baxendale-Walker’s schemes was £1bn, and that he used the same schemes to avoid tax on his fees. HMRC claim that £51m went into Baxendale-Walker’s own remuneration trust. But given Baxendale-Walker’s usual fees were 10% of the amounts put under trust, and the tax benefit was around half the amount put into trust, it seems reasonable to assume from this Baxendale-Walker’s total remuneration was much higher – potentially over £200m. And this is consistent with Baxendale-Walker’s own claim when he sued the Law Society back in 2011 – he was trying to recover £230m of lost personal revenue. The tax at stake could, therefore, be very large indeed.

    Baxendale-Walker says he “accounted for and paid all due tax on [his] fees. HMRC has never alleged anything different.”. That is untrue. The document the IRS filed with the US court says that HMRC “believes Walker used these same schemes to avoid paying tax on the significant fees he earned from their sales”..

    HMRC alleges that Baxendale-Walker was uncooperative with HMRC’s enquiries, and sought to frustrate its investigation. In particular, HMRC says that in 2013 he tried to hide evidence by selling the assets of his business, Baxendale-Walker LLP, including his records, to Hawk Consultants LLP, a US LLC entity. Baxendale-Walker tells us that he is being persecuted by HMRC, who lied to the IRS. He said:

    “it is not ‘unusual’ that the rump business, including all papers, of an LLP which has ceased to trade, are sold to its ultimate owner entity, so that the LLP can be wound up properly.”

    But in 2013, Baxendale-Walker LLP’s only registered members were PBW and Sargespace Limited (which was wholly owned by PBW). In June 2014, a form was filed with Companies House retrospectively appointing Belize Offshore Services Limited as member from 1 July 2013 and retrospectively removing PBW and Sargespace as members from the same date. In January 2015, a form was filed Companies House retrospectively appointing Hawk Consultants LLP as member as of 1 July 2013. This is highly unusual.

    We cannot be sure whether HMRC or Baxendale-Walker is telling the truth. However it is our opinion, based on the known facts and Baxendale-Walker’s well-documented history of obstruction, that HMRC are correct and Baxendale-Walker did attempt to frustrate HMRC’s investigation.

    The US court application was made by the IRS, after HMRC used the tax treaty between the US and the UK to request that the IRS obtain the records from the LLC. The IRS issued a summons and, despite an attempt to contest it, a court order compelled production of the documents. PBW told us that the IRS withdrew its case: we do not know if that is correct (and it’s not clear to us how that could happen after the court order had been issued).

    We don’t know what happened subsequently, but these events may have led to HMRC making more specific information requests in the UK.

    Baxendale-Walker told us:

    “I was never subject to any amended or discovery assessment for tax in this jurisdiction in relation to the tax properly paid on my drawings from Baxendale Walker LLP.“

    We don’t know what this means. Clearly you can’t be subject to a discovery assessment “in relation to tax properly paid”, but we don’t know if that is loose wording and Baxendale-Walker is saying there’s never been an enquiry or discovery assessment at all, or if instead this is a a very specific denial.

    The £14m penalty

    On 10 January 2022, HMRC successfully obtained an “information notice” from a UK tax tribunal against Baxendale-Walker, requiring him to provide HMRC with information about (we believe) both the tax affairs of Baxendale-Walker himself, and those of other entities (possibly his clients; possibly Minerva and/or the other companies with which he’s been linked).

    The information notice required Baxendale-Walker to provide the information by 11 March 2022.

    At this point something unfortunate and perhaps improper happened. HMRC waited four days to serve the information notice on Baxendale-Walker, and then (without permission of the tribunal) updated the deadline on the notice to 15 March 2022, to reflect that delay. It’s possible that this invalidated the penalty discussed in this article, but that’s a point the parties parked for the moment – it’s not HMRC’s main failing.

    Information notices are usually taken very seriously by taxpayers, and nobody in our team has seen a client even suggest simply not complying with them. That, however, was how Baxendale-Walker appears to have proceeded:

    • Right before the new deadline expired, on 15 March 2022, Baxendale-Walker’s lawyers asked for an extension to 29 March 2022. Rather generously, HMRC agreed. Then on 28 March 2022 they asked for another 14 day extension; which HMRC understandably did not grant.
    • Having received nothing from Baxendale-Walker, HMRC issued a £300 penalty on 29 March. This was under paragraph 39 of Schedule 36 Finance Act 2008. By May, HMRC had still not received a response – daily penalties had reached £1,800.
    • On 1 March 2023 (i.e. almost a year later), for reasons that are unclear, HMRC wrote to him withdrawing all previous penalties and providing a further 14 days for full compliance with the information notice, i.e. giving him until 15 March 2023.
    • Having still received nothing, HMRC issued a new paragraph 39 penalty on 15 March 2023.
    • Finally, on 28 March 2023, HMRC applied to the Upper Tribunal to impose a penalty under the separate provision in paragraph 50. This enables a penalty to be charged based on the amount of tax at stake. HMRC’s claim was for £14m – at this point we don’t know how that was calculated, or what the underlying avoidance was.

    The Upper Tribunal now had to decide whether to impose the £14m penalty under paragraph 50.

    But there was a problem. Here’s the legislation:

    50(1)This paragraph applies where— (a)a person becomes liable to a penalty under paragraph 39, (b)the failure or obstruction continues after a penalty is imposed under that paragraph, (c)an officer of Revenue and Customs has reason to believe that, as a result of the failure or obstruction, the amount of tax that the person has paid, or is likely to pay, is significantly less than it would otherwise have been, (d)before the end of the period of 12 months beginning with the relevant date F177..., an officer of Revenue and Customs makes an application to the Upper Tribunal for an additional penalty to be imposed on the person, and (e)the Upper Tribunal decides that it is appropriate for an additional penalty to be imposed.

    At this point everything goes wrong for HMRC (the judgment is here):

    • If HMRC’s decision on 1 March 2023 to cancel penalties and give Baxendale-Walker more time amounted to a variation of the original 2022 information notice, then the penalty HMRC imposed on 15 March 2023 was invalid, because the time for compliance had not yet expired. So there was no valid paragraph 39 penalty, and therefore no possibility of a paragraph 50 penalty.
    • If, on the other hand, the 1 March 2023 decision was just giving Baxendale-Walker an informal grace period under the original information notice and not changing the formal compliance deadline (which in our view is the more likely result) then more than a year had passed, and the condition in paragraph 50(1)(d) was failed. There was, again, no possibility of a paragraph 50 penalty.
    • That’s in addition to the possibility that HMRC’s original change to the deadline in the 2022 information notice, without the Tribunal’s authority, rendered the information notice invalid (the Upper Tribunal didn’t need to decide this point, given HMRC had already failed to apply the penalty; we have not considered this point either).

    It appears that the judge was unhappy with this outcome:

    Disposition Notwithstanding PBW’s clear failure to comply with the information notice, the only conclusion open to me is that HMRC’s application for a paragraph 50 penalty has no reasonable prospect of success. This application is allowed and HMRC’s application for a tax-related penalty must be struck out.

    The Upper Tribunal gave judgment back in July 2023 – it appears as if either HMRC or Baxendale-Walker tried to prevent publication; it was eventually published on 3 June 2024 with the name of the HMRC official removed.

    What went wrong

    There were at least five serious failures by HMRC:

    • HMRC should not have amended the deadline in the information notice without the Tribunal’s permission.
    • HMRC shouldn’t have waited a year once it became clear Baxendale-Walker was not complying with the information notice – the standard £60 penalty was clearly inadequate. HMRC is able to apply to a tribunal to increase the daily penalty from £60 to up to £1,000 – it should have used these powers.
    • HMRC should not have set a new deadline on 1 March 2023; it was an unnecessary step which (foreseeably) created legal problems.
    • However, once HMRC had decided to go down the path of allowing Baxendale-Walker more time, it should have been made clear that this was an exercise of HMRC’s discretionary “care and management” powers and the original information notice remained in force.
    • HMRC should have procedures to track the elapsed time after paragraph 39 penalties are issued, so that paragraph 50 penalties can be assessed well within the one year deadline. The importance of statutory deadlines is something that’s drilled into trainee lawyers; but it appears that HMRC either had no such procedures, or they were insufficient.

    HMRC may have lost all hope of obtaining a £14m penalty, but that does not mean they should give up on obtaining the information they were seeking. We would very much hope that, when the judgment was issued last year, HMRC responded by immediately issuing a fresh information notice, and following that up carefully and aggressively. We do not know if this is what happened.

    Why did HMRC fail?

    Conversations with HMRC insiders suggest there is a wider problem with a lack of resources, a lack of experienced staff, and inadequate systems and training.

    In the Baxendale-Walker case, one officer was involved throughout; it is unclear if they were appropriately supervised, given the seriousness of the matter. The information notice legislation is not terribly complex, but there are some pitfalls which can catch out the inexperienced.

    We asked HMRC for comment – they responded that:

    “We continue to robustly tackle promoters. We have safeguards in place to ensure future penalties are issued within the time limits”

    … which looks like an admission that there were insufficient safeguards in place in 2023.

    However it seems that whatever new safeguards were put in place are inadequate.

    We are aware of an avoidance case just two days ago (not yet reported) where HMRC submitted their bundle of authorities just over two hours late (19:05 rather than by 17:00 on Monday).  There was an “unless” order which meant that the case would be struck out unless the authorities bundle was submitted on time.  And so at 17:01 on Monday the case was struck out automatically.  

    Once again, the current law and practice of HMRC seems insufficient to deal with bad actors. We’ll be writing more about this soon.

    Baxendale-Walker’s response

    We asked Baxendale-Walker for comment.

    The letter he sent us was extraordinary.

    First, he denied a series of established facts about his history, including the fact he was struck-off and the fact he was convicted of fraud (we’ve footnoted some of the key denials). He specifically denies promoting tax avoidance schemes, and says he was just an adviser. However it is reasonably clear that Baxendale-Walker had a financial interest in FSL, the entity promoting his structures in the 90s and early 2000s – this was in fact the reason he was struck off. It is also reasonably clear from reported cases that he had an interest in Minerva and Buckingham Wealth, the entities promoting his structures more recently.

    We would strongly recommend reading Baxendale-Walker’s communication with us in full. The black text is from an email we sent to him; the blue text is his response. It refers in places to an earlier communication which we agreed we would not publish (and this is why it starts with point 9). We have redacted parts of the correspondence relating to matters we will be covering at a later date.

    PDF version here, and clickable thumbnails below:

    Second, he accused our founder, Dan Neidle, of committing the criminal offence of harassment by emailing him for comment. Dan was replying to an email Baxendale-Walker had sent him, after Dan sent a message to Baxendale-Walker’s solicitors asking for contact details.

    Third, Baxendale-Walker was keen that we didn’t publish his denials, and so constructed a “unilateral contract” that purported to charge Dan £500,000 if we did:

    We believe a first year law student would be able to identify why this is ineffective. Our response to Morr & Co, Baxendale-Walker’s solicitors, summarised the position as follows:

    27. This attempt to constrain my actions is wholly without merit; indeed it is childish game-playing. 28. I said in the prior email that I intended to publish any response; if PBW did not wish his words to be published, he should not have replied to me. 29. Needless to say, PBW’s “offer” is not accepted. Whilst a contract can be accepted by conduct, that is only if the conduct in question is intended to constitute acceptance. Here it is not (see Reveille Independent LLC v Anotech International (UK) Ltd [2016] EWCA Civ 443) 30. In any event, the purported contract would fail for lack of consideration: I was free to read the document and publish it as soon as I received it. I did not need PBW’s consent to do so. 31. I expect you agree with me on this. If not, please take this letter as a unilateral offer that you can reply to this letter for a fee of £1bn, and you will accept that offer by conduct if you reply.

    Our complete response to Morr & Co is available here as a PDF, or clickable thumbnails below:

    Morr & Co didn’t reply themselves – they sent this covering email

    In his attached letter, Baxendale-Walker denies that he was previously denying his suspension and striking-off (although it seems clear that he was). He claims that holding various entities as nominee meant that he was not lying when he said he didn’t own them, and says that the bankruptcy trustee accepted he held as nominee. We don’t know if this is true, and it begs the question as to who the ultimate owner was. His response is available here as a PDF, or clickable thumbnails below. We have again redacted parts of the correspondence relating to matters we will be covering at a later date:

    Baxendale-Walker’s tactic throughout all the many disputes he’s been involved in has been to obfuscate, and we expect that’s what he’s doing here.

    The wider failure to stop promoters

    Baxendale-Walker is an extreme case, but by far from the only one. HMRC has consistently failed to penalise promoters of tax avoidance schemes; that is all the more unfortunate when, at the same time, it aggressively pursues the clients of their failed schemes.

    We believe the law needs to change so that promoters become personally, and potentially criminally, liable for the failure of their schemes. But that isn’t enough – HMRC itself needs to change. There’s no point having a wide array of powers if they’re not used competently and effectively.

    Many thanks to K and I for their insight and research on this report, and to L, J and M for further technical input.

    (We rely on an informal team of experts across the legal and tax profession; accountants, solicitors, ICs and retired HMRC officials. Most have to remain anonymous for professional reasons; but Tax Policy Associates would not exist without them.)

    Photo by Paul Baxendale-Walker, licensed under the Creative Commons Attribution 3.0 Unported license, and edited (for aspect ratio, adding filler image to the left and right edge using generative AI) by Tax Policy Associates Ltd

    Footnotes

    1. Baxendale-Walker denied this to us, and claims his advice was not followed. He told Channel 4 News that he hadn’t advised Rangers at all; “somebody” had advised Rangers, using his book. But the Supreme Court itself said that Baxendale-Walker devised and operated the Rangers scheme. ↩︎

    2. The fact that the loans would never be repaid is often denied by scheme promoters, and PBW has denied it to us. But it is in fact inevitable. The loans were clearly a substitute for employee wages – instead of receiving £100,000 of taxed income, the employee would receive a £100,000 supposedly untaxed loan. Great. But if the employee repays the loan, they have nothing. The trust that received the loan repayment would typically be prohibited from returning any money to the employee. This was never an outcome that people would want or accept. We have reviewed dozens of loan schemes and hundreds of loans, and spoken to hundreds of scheme users – none ever saw a loan repaid, and (before the schemes collapsed) none thought that was a realistic outcome. ↩︎

    3. PBW has denied to us that he owned Loaded – he says he never owned Loaded Media Limited or Blue Publishing Limited. But Companies House filings show him as the sole shareholder of both companies, and of the related production company Bluebird Productions Limited. PBW’s acquisition of Loaded and his involvement with Bluebird Productions Limited was widely reported at the time in the legal and general press.  When we put this to PBW, he says he was merely a nominee. PBW was registered as the person with significant control of Bluebird Productions Limited up until the point it dissolved in 2019 (which suggests he was not a nominee). Blue Publishing Limited remains in existence, with PBW the sole director and company secretary; no PSC has been registered, which appears to be a breach of company law by PBW (whether or not he was a nominee). Loaded Media Limited was dissolved in December 2016; a PSC should have been registered from April 2016 but there again appears to have been a breach of company law by PBW. ↩︎

    4. Lawyers and other tax advisers usually charge by the hour, or sometimes with a fixed fee. Tax avoidance scheme promoters often charge by reference to the value of the tax benefit (explicitly or implicitly). A fee equal to 10% of the value of the property – not the benefit, but the property – is astonishingly high. ↩︎

    5. Even before more aggressive anti-avoidance rules were introduced in 2010, we believe the loan schemes all failed. In some cases they were shams. Even when they weren’t, there were two very serious problems with the structure. First, the “loans” were not really loans, as there was no intention to repay them. HMRC and the courts sadly took a long time to understand this. Second, most of the loan scheme trusts excluded all the intended beneficiaries (to avoid a tax charge) but the trustees nevertheless made interest free “loans” to these people, despite the fact that this was clearly a benefit. Their argument was that an interest free loan was not a benefit – we would say that is plainly incorrect, and we therefore agree with those who say the trustees must have acted in breach of trust. Anyone who disagrees is welcome to make a large interest free loan with no repayment date to Tax Policy Associates Ltd. ↩︎

    6. We have heard from several sources that PBW never put any of his advice in writing, relying on his ability to “persuade” clients that the attractiveness of his loan trust suggestion spoke for itself. Most of the tax avoidance scheme promoters we’ve written about took a similar approach. ↩︎

    7. The avoidance schemes weren’t limited to tax; Baxendale-Walker was also involved in a scheme that purported to enable people to access their pensions before retirement (a so-called “pension liberation scheme“). The Pension Regulator’s position was that the scheme constituted misuse or misappropriation of the pension assets, and in 2014 they applied for an injunction against him and others involved. Baxendale-Walker appeared at the court hearing on the first day representing himself. He announced that there were “many more remunerative things” he could do with his time than attend the court, and declined to attend subsequent days. This worked about as well as one would expect, with the court ruling that Baxendale-Walker’s interpretations of the law were incorrect; he and the other defendants then agreed to discontinue the schemes. ↩︎

    8. PBW at first appeared to deny this; he said “Looks like DN is being fed information by another of which PBW’s solicitors are aware, and who has been warned about purveying falsehoods: when PBW’s solicitors can provde (sic) they are false.”. But the case we cite is a matter of public record. ↩︎

    9. The Law Society/SRA’s interest in Baxendale-Walker appears to have started when the SFO began to investigate the arrangement. In the course of the investigation, Baxendale-Walker was fined £1,000 for contempt of court). The SFO then prosecuted Baxendale-Walker; this prosecution failed after a civil judgment relating to the same matter determined that he had not acted dishonestly. The Law Society then began a lengthy investigation. Baxendale-Walker was cleared of some of the Law Society’s allegations. ↩︎

    10. Again PBW appeared to deny this, but it is once more a matter of public record – the SDT decision is here, and see Paul Baxendale-Walker v Middleton & Ors [2011] EWHC 998 where his appeal was struck out as an abuse of process. ↩︎

    11. There were other grounds for the application to strike-off PBW, some of which were not upheld. The Law Society’s investigation included commissioning a report into the efficacy of PBW’s tax avoidance schemes, which reached the conclusion that they were ineffective and involved a breach of trust. This was not in the end upheld as a reason for disciplinary action. However we note in passing that PBW obtained an opinion from Robert Venables QC (as was) that the conclusions of the report commissioned by the Law Society were wrong, based on what appear to have been very one-sided instructions. We have previously reported on Mr Venables’ reputation for issuing opinions which turn out to be incorrect, and that was the case here. ↩︎

    12. PBW says the Law Society was required to pay £200,000 of his costs, and that a costs order was made in interlocutory proceedings before the Master of the Rolls. We do not know if that is true. It is a matter of public record that an initial costs order by the SDT in favour of PBW was overruled by the Court of Appeal in Paul Baxendale Walker v Law Society [2007] EWCA Civ 233. The effect of the Court of Appeal judgment was that the Law Society paid none of PBW’s costs, and PBW was required to pay 60% of the Law Society’s costs. The case has since been widely cited as establishing that there are only very limited circumstances in which the SRA has to pay costs for a failed prosecution. ↩︎

    13. The promoter, Cavendish Knight, appears to no longer exist – it’s not to be confused with the escort agency Cavendish Knights. ↩︎

    14. Paragraph 112 of this case is interesting in what it reveals about PBW’s standard trust scheme ↩︎

    15. PBW said to us “PBW never sued the Law Society or SRA in England & Wales”. But Paul Baxendale-Walker v Middleton & Ors [2011] EWHC 998 is a reported case where PBW sued the Law Society in the English High Court. ↩︎

    16. PBW says an extended civil restraint order was made against him because he objected to a statutory demand from the Law Society. We do not have a copy of the order, but Judge Briggs in Iain Paul Barker v Paul Baxendale-Walker [2018] EWHC 2518 said “Mr Baxendale-Walker litigated to such an extent that a civil restraint order was made against him.”. And that is the legal position: such an order can only be made when a person has persistently issued claims or made applications which are “totally without merit”. ↩︎

    17. In both the California and Virginia cases, Baxendale-Walker’s co-claimant was Shahrokh Mireskandari, who had been struck-off by the SRA for acting dishonestly by lying about his qualifications and hiding his criminal convictions in the US for 15 counts of telemarketing fraud. Mireskandari was required to pay costs of £1.4m; his actions had very unfortunate consequences for some of his clients. ↩︎

    18. Baxendale-Walker denied to us that he had sued in Virginia, but the Virgina court docket is a matter of public record. ↩︎

    19. Which Baxendale-Walker admitted – see paragraph 80 of Paul Baxendale-Walker v Middleton & Ors ↩︎

    20. We have no first hand knowledge of the fraud trial, and cannot exclude the theoretical possibility that it was misreported, the US court was misled (although the judge says he has seen the conviction certificate) and PBW was not in fact convicted. However that would be quite extraordinary, and (given his proclivity for litigation) PBW’s failure to pursue the media outlets reporting on his conviction would be very hard to understand. If this was the only denial we had received from PBW, we would have taken it more seriously; however the large number of false denials he sent us means that we do not have much difficulty in dismissing it. ↩︎

    21. Baxendale-Walker attempted (and failed) to assign rights to sue another law firm to a BVI company he controlled. He attempted (and failed) to stop his bankruptcy trustees from obtaining documentation from third parties (with which he was associated). ↩︎

    22. PBW plays with words here, he says he “was released from bankruptcy after the standard 1 year period”. This is correct, but the restrictions period was extended by ten years because of his failure to make full and frank disclosure, and lapses in 2030. This is a matter of public record and confirmed by a public statement by the Official Receiver. PBW says “the bankruptcy trustees [were] satisfied that they had established all of PBW assets, income and sources of income”. But the Official Receiver said he failed to make a full and frank disclosure of his affairs, failed to disclose interests in property, and under-declared his income. This is a matter of public record. ↩︎

    23. PBW’s response to the bankruptcy was such that PBW’s bankruptcy trustee applied for a limited civil restraint order. This was refused, but the judge said there was “material which is well capable of forming a basis” for a general civil restraint order to be granted by the High Court. We do not know if such an application was made. ↩︎

    24. Baxendale-Walker’s evidence to the Court in one of those cases was: “She was never anything more than a TV stripper and glamour model, who provided sex and occasional companionship in exchange for a comfortable and conditional standard of living which I procured for her. … She is only one of more than a dozen girls for whom I procure the provision [of] housing, cars and other benefits. The provision is always conditional on my satisfaction with the relationship. As soon as I am no longer satisfied, the use benefits are withdrawn.” ↩︎

    25. PBW told a US court in 2015 he was too disabled to be able to participate in the proceedings; the judge disagreed. ↩︎

    26. We have barely touched on the large number of court and tribunal cases involving Baxendale-Walker (directly or indirectly), some relating to proceedings around the world, others much closer to home. There’s more material in PBW’s Wikipedia article, but the accuracy is questionable, and it stops around 2016, and therefore misses out the Rangers judgment which collapsed Baxendale-Walker’s house of cards. We would add that we very much doubt this YouTube channel, this Facebook account or this Twitter account are actually operated by PBW. ↩︎

    27. This textbook, 2012 edition, is still available for £150. We’d be interested to know how many sales it makes. PBW also wrote a book on “purpose trusts”, sadly out of print, in which he argued that English law should recognise private non-charitable purpose trusts. In our view there is obvious potential for abuse of such entities, were they permitted. ↩︎

    28. The otherwise comprehensive Wikipedia article on the collapse of Rangers is curiously light on how the club came to sign up to the schemes. ↩︎

    29. It’s possible there was activity in the late 2010s – an appeal was filed by Baxendale-Walker in 2019 against HMRC and the Official Receiver; but we don’t know what it concerned, and it doesn’t appear to have progressed. We would guess (and it’s only a guess) that PBW tried to sue HMRC and the Official Receiver, failed (in an unreported case) and this is the appeal he made, which he didn’t progress. ↩︎

    30. The content of this section comes from the US court papers. The IRS’s initial application is here. The response from Baxendale-Walker’s associate is here (it misunderstands the bankruptcy point we mentioned in the previous footnote; it also makes the very odd claim that it’s hearsay for the IRS to cite HMRC’s reasons for their request). The court judgment is here – the judge found in favour of the IRS, and disposed of the LLC’s arguments in not much more than a sentence. An order was made requiring production of the documents. ↩︎

    31. Of course there could have been earlier investigations of which we are unaware. ↩︎

    32. The effect of bankruptcy is (very broadly) to eliminate historic debt. A well-advised bankrupt therefore ensures that all of his or her affairs are in order with HMRC before becoming bankrupt: not necessarily paying all the tax that’s due, but making sure all the tax that’s due has been legally assessed by HMRC (so it is then wiped out by the bankruptcy). It looks like Baxendale-Walker didn’t do this. If HMRC assesses 2007-2018 tax today, then that becomes a liability today, and isn’t affected by his previous bankruptcy. ↩︎

    33. We are surprised by this number. The loan charge was said by HMRC to collect £3bn. There were many other promoters pushing these schemes; it would be astonishing if PBW is responsible for one third of that. There are several possible explanations. One is that HMRC are simply wrong. Another is that the amount includes avoidance that the loan charge can’t counter for some reason. Another is that the figure includes avoidance entirely unrelated to loan schemes. We asked PBW about this; his response was to deny any knowledge of the tax avoided by schemes on which he advised. ↩︎

    34. As reported in the cases cited above ↩︎

    35. Baxendale-Walker denies this. He told us “These facts do not properly lend themselves to a bizarre allegation that PBW is a multi-millionaire Machiavelli, operating a vast empire of tax avoidance businesses. The allegation is manifestly a fantasy. It is one which HMRC themselves no longer ascribe to, according to Court documents filed in 2024 in another case which does not involve PBW. PBW’s solicitor has possession of those documents, which are confidential and will not be disclosed to Dan Neidle.” But we have no evidence that these documents exist. The fees received by entities connected to PBW are a matter of public record; and PBW’s denial is contradicted by his own claim for £230m from the Law Society. ↩︎

    36. PBW replied to this saying that the IRS withdrew its case in Federal Court. We have no evidence of that; but even if it did, PBW’s claim that HMRC never alleged he hadn’t paid tax is false, and we expect he made it because he didn’t realise we had access to the US court documents ↩︎

    37. There is another potential avenue for HMRC. We understand PBW believes that Baxendale Walker LLP’s accounting profits were “rectified” (which is to say, reduced) following a 2015 judgment of the Belize Supreme Court that it actually held substantial amounts as fiduciary for Minerva. We have not located that judgment – it may or not be connected with this 2017 Belize Court of Appeal judgment. We do not know if the accounts were retrospectively “rectified” in this manner. However, we would ordinarily expect HMRC to challenge a retrospective contention that a large amount received by a UK LLP with UK members, and booked in its accounts, was actually received as fiduciary for an offshore entity. We do not know if they did. ↩︎

    38. We infer this because an information notice seeking information from a taxpayer about the same taxpayer can be issued straightforwardly by an HMRC official – it doesn’t require a tribunal to be involved. However the penalty provisions used by HMRC only relate to tax of the subject of the information notice. Hence it is our belief (based on experience and the legislation) that the information notice both related to Baxendale-Walker himself and third parties. ↩︎

    39. Baxendale-Walker claimed to us that the information notice was invalid because he did not have the information. That is an elementary legal mistake on his part; an information notice is valid regardless of whether the subject holds the information; but an information notice only requires a person to produce a document if it’s within their “possession or power“. Hence the proper response to an information notice, if you don’t possess the document, is to formally respond to HMRC and explain that you don’t have it. If, alternatively, PBW really believed the information notice was invalid, it is hard to explain why he didn’t make that point at the time, rather than seeking a series of extensions. ↩︎

    40. Possibly PBW had appealed the penalties and the amounts involved were too small for HMRC to want to bother with? ↩︎

    41. Mark Baldwin, a very experienced and respected tax partner at law firm Macfarlanes ↩︎

    42. Thus avoiding any arguments about the status of the original notice ↩︎

    43. That officer being the individual whom HMRC wishes to protect by redacting their name from the judgment. ↩︎

    44. All of this is set out in the judgment in Paul Baxendale-Walker v Middleton & Ors. PBW originally claimed he wasn’t the controlling influence of FSL or the beneficial owner of it. The SDT found that he did have control over FSL, and received substantial sums from it. When PBW appealed against that decision, he asked his “effective ownership” of FSL to be “taken as correct” by the court, but said it didn’t amount to a conflict of interest (see paragraph 50). PBW subsequently withdrew his appeal. ↩︎

    45. PBW’s letter to us talks about a “Minerva community” as if it is independent from him. The facts do not bear this out. ↩︎

    46. (which appears to have no internet presence; the various other Buckingham Wealth companies found by a Google search have no connection to Baxendale-Walker) ↩︎

    47. The judgment in Northwood v HMRC [2023] UKFTT 351 (TC) includes the text of an engagement letter between Baxendale Walker LLP and a client, which includes an appendix saying that “MINERVA” is a separate business of Baxendale-Walker LLP, which sells and markets strategies devised by Baxendale-Walker LLP. MINERVA’s fees were 10% for every contribution to the trust. PBW therefore most certainly knew what fees Minerva was making and, on the basis of the text from his own engagement letter, he benefited from those fees. ↩︎

    48. The judgment in Dukeries Healthcare Limited [2021] EWHC 2086 (Ch) describes “Minerva” as an “associated company” of Baxendale-Walker LLP. Again, the Baxendale-Walker LLP engagement letter provided for a fee equal to 10% of each trust contribution to be paid to Minerva. ↩︎

    49. As part of US litigation unrelated to the matters discussed in this report, a deed was disclosed under which Baxendale-Walker LLP says it holds sums as bare trustee for Minerva Services Limited ↩︎

    50. The judgment in CIA Insurance Services v Commissioners for HMRC also refers to a Baxendale-Walker LLP engagement letter where 10% of each trust contribution was to be paid to Minerva. ↩︎

    51. The judgment in Iain Paul Barker v Paul Baxendale-Walker notes that “As to [PBW’s] claim about lack of resources the Court was struck by three companies willing to financially assist Mr Baxendale-Walker, including his own remuneration trust, EW LLP, Minerva Ltd, Hawk, Brunswick Wealth and Burleigh House PTC Ltd.” ↩︎

    52. The judgment in Paul Baxendale-Walker v APL Management Limited [2018] EWHC 543  states that, in May 2015, Baxendale Walker issued a claim “in respect of various fees that he alleged were owed to his companies (Baxendale Walker LLP and Minerva Services Ltd)” (my emphasis). That same case reports Minerva Services Limited (BVI), Minerva Services Limited (Belize) and Buckingham Wealth Ltd acting on behalf of PBW. ↩︎

    53. There has been other litigation involving Minerva, the background to which is not clear to us, involving a Pankim Kumar Patel suing Minerva Services (Delaware) Inc, PBW himself and one other individual. The judgment is here. A witness statement is here, giving more of the background and with much criticism of PBW (although of course, as a witness statement, it must be taken with a pinch of salt). ↩︎

    54. A series of companies that may be related appear to be engaged in ongoing litigation, much of which relates around purported assignments to new entities, and PBW continues to be involved in litigation personally. ↩︎

  • What are marginal rates? And why do they matter?

    What are marginal rates? And why do they matter?

    We keep talking about marginal rates, but rarely stop to explain exactly what they are, and why they matter. Here’s a short explainer, to accompany our interactive marginal rate charts.

    There is an updated article on marginal rates here.

    The marginal rate is the percentage of tax you’ll pay on your next £1 of income. It therefore affects your incentive to earn that £1..

    If you doubt that, imagine that you pay tax at 20% on your income, but the next £1 you earn, or indeed the next £10,000 you earn, will all be taxed at a marginal rate of 100%. Would you work extra hours for zero after-tax pay? I think most people would not.

    That seems a silly example (although we can find worse ones in our own tax system – see below). But a marginal rate below 100% will also change your incentives.

    Perhaps you are only just managing to afford childcare, and every hour you earn increases your childcare costs. A marginal rate of 70% might mean your take-home pay is less than the childcare cost.

    Or it may just be that you value your own time so that, if your take-home pay from working additional hours drops below a certain point, it’s not worth it to you.

    We should look at some examples.

    Marginal rates – a boring example

    In the current, 2024/25 tax year, combined income tax and national insurance rates for an employee look like this:

    • No tax on incomes below the £12,570 personal allowance.
    • £12,570 to £50,270 – a combined income tax and employee national insurance rate of 28%
    • £50,271 to £125,140 – a combined rate of 42%
    • Above £125,140 – a combined rate of 47%.

    It’s important to realise that the different tax brackets only apply to income in that bracket. If you earn £50,271 you’re in the higher tax bracket, but you only pay 42% tax on £1. You still pay 28% tax on everything you earned before above the personal allowance. This is unfortunately not very well understood.

    Imagine Bob is an employee earning £12,570. None of his income is taxed. Bob has the opportunity to earn an additional £1,000, putting him in the 28% tax bracket.

    There are three ways we could describe Bob’s position after earning that £1,000.

    1. The applicable headline rate. Bob is a basic rate 28% taxpayer.
    2. The overall effective tax rate. This is the total tax paid divided by Bob’s income. Total tax paid = £1,000 x 28% = £280. Income = £13,570. So effective tax rate is 280/13570 = about 2%.
    3. The marginal rate – the percentage tax you’re paying on that new £1,000. This is 280/1000 = 28%.

    Each of these has their uses.

    The first figure is simple.

    The second is useful for assessing how much tax Bob pays overall. If a political party proposed a sweeping set of tax reforms, Bob would be very interested in the impact on his effective rate.

    But the third – the marginal rate – is important, because it affects Bob’s incentive to earn the additional pound. Right now it’s the same as the headline rate – but that’s not always the case…

    Marginal rates – a less boring example

    Jane is earning £60k and claiming child benefit for three children. That’s worth £3,094.

    She’s now in the 42% tax band. Jane still pays basic rate tax for her income between £12,570 and £50,270, but now pays 42% tax for everything over that. So her total tax bill is (50270 – 12570) * 28% + (60000-50270) * 42% = £14,643 and Jane takes home £45,357.

    Jane is thinking of working a few more hours to earn another £1,000. She’s still in the higher tax band – so in a sane world she’d expect another £420 of tax, and a marginal rate of 42%.

    But that is not the result. Once Jane’s income hits £60,200, the “High Income Child Benefit Charge” starts to apply to claw back her child benefit – 1% for every £200 of earnings.

    So that £1,000 of additional earnings costs Jane HICBC of £154.70, on top of the £420 of “normal” tax. A total of £565.

    So how do we describe Jane’s position after earning that £1,000?

    1. The applicable headline rate. Jane is a higher rate 42% taxpayer.
    2. The overall effective tax rate – the total tax paid divided by Jane’s income. That’s 15207/61000 = about 25%.
    3. The marginal rate – the tax Jane is paying on that new £1,000. This is 56.5% – and we will have the same result for all incomes between £60k and £80k.

    As I mentioned at the start, there can be practical reasons for people to turn down work if the marginal tax rate gets too high – but there are also psychological factors. For many people, 50% feels like a high rate.

    Oh, and if Jane’s a student repaying her student debt, then the marginal rate goes up by 9% to 66%.

    And if the Green Party formed a government they’ll raise this to 72%.

    The big picture

    We can chart Jane’s marginal rate for each income she could earn. Incomes along the bottom, marginal rate along the top:

    You can see the HICBC as the “tower” between £60k and £80k, which should be a smooth 42% plateau. Instead it hits 57%. (I’m hiding what happens after £100k)

    The HICBC is a gimmick which enabled George Osborne to somewhat-surreptitiously raise tax on people on high incomes without raising the tax rate itself.

    It’s a really bad policy:

    • It means that Jane pays a higher marginal rate rate than someone earning £90k, or indeed £900k. Where’s the logic in that?
    • The way in which HICBC works creates a nasty trap for the unwary, with thousands of people accidentally incurring HMRC penalties.

    The politics are nice and intuitive – surely it’s not right for people on high incomes to receive child benefit? But the reality is that this logic inexorably leads to a high marginal rate, and a cumbersome and sometimes unjust collection mechanism.

    Can it get worse?

    Very much worse.

    George Osborne’s HICBC was copying a trick invented by Gordon Brown to clawback the personal allowance for people earning £100k.

    Again, the politics are nice, but the consequences are a mess.

    If Jane starts earning between £100k and £125k then she faces a marginal tax rate of 62%. It then drops to 47% from £125k. Her marginal rate chart looks like this:

    62% is a very high rate. And if she has a student loan, that will add on 9% to the marginal rate, taking her total marginal rate, between £100k and £125k, to 71%.

    We’ve received many reports saying that high marginal rates affecting senior doctors/consultants are an important factor in the NHS’s current staffing problems – exacerbated by the fact that the starting salary for a full time consultant is just under £100,000. But it’s important not to just focus on the impact on jobs that we think are of particular societal importance. It’s also problematic if an accountant, estate agent or telephone sanitiser turns away work because of high marginal rates – it represents lost economic growth and lost tax revenue. Sometimes people take the work, but use salary sacrifice or additional pension contributions so their taxable income doesn’t hit the threshold. But that doesn’t work for everyone; sometimes they’ve hit the pensions allowance; sometimes it doesn’t always make sense to work harder now, for money that they can’t touch for years.

    The Conservative Party election manifesto pledges to move the HICBC from £60-80k to £120-160k. That helped Jane on £60k but now creates a nasty problem. When she’s earning £120k, and almost out of the personal allowance clawback, she gets the full effect of both the child benefit clawback and the personal allowance clawback:

    (Purple is how things are now; blue is the Conservative manifesto proposal)

    That’s a marginal rate of 70%. And then, when she hits £125k, she’ll have a marginal rate of 55% all the way to £160k.

    It’s a mystery to me why the Conservative manifesto didn’t set the new HICBC at £125k – you’d still have a 55% marginal rate beyond that, but at least you’d avoid 70%. The most plausible reason is that they were defeated by the complexity of the system.

    And worse?

    There are other similar features I’m skating over. The £1,000 personal savings allowance drops to £500 once you hit the higher rate band, and to zero once you hit the additional rate band. That can create high marginal rates at these points. The marriage allowance lets a non-working spouse transfer £1,260 of their unused personal allowance to their partner, if they’re earning less than the £50,270 higher rate threshold. So it’s worth £252 – and it disappears once the higher rate band is hit.

    And 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:

    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. And the negative spike at £8,668 is because it’s at that point you qualify for the scheme – you have a huge negative marginal tax rate (which has the potential to create obvious distortions of its own).

    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.

    But don’t worry

    If Jane started earning beyond £145k, all of these problems go away, and she has a nice straightforward marginal rate of 47% forever. 

    What kind of tax system creates complexities and high marginal rates for people earning £50-125k, and simplicity and lower marginal rates for peopel earning more than £125k?

    What’s the solution?

    But these problems are going to get worse over time, as more and more people get dragged into the thresholds that trigger these high marginal rates. When the HICBC was initially set at £50k, that was a fairly high salary. By 2025/26, around 21% of taxpayers will earn £50k – and that’s likely what motivated Jeremy Hunt to raise it to £60k. But in these inflationary times, £60k will be the new £50k relatively soon.

    In theory it’s easy: don’t add tricks and gimmicks into the tax system. If you want to raise more money from people on high incomes, raise rates or lower thresholds so you raise more money from people on high incomes.

    In practice it’s hard. Scrapping these rules and making child benefit, the personal allowance, and childcare subsidies universal, would be expensive (somewhere between £5-10bn, depending on your assumptions). And the obvious way of funding that – increasing income tax on high earners, appears to have been ruled out by all main parties.

    Let’s hope whoever is the next Chancellor can see these problems clearly, doesn’t make them worse, and – ideally – looks for smart solutions.

    Photo by Osman Köycü on Unsplash

    Footnotes

    1. 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 ↩︎

    2. Ignoring Scotland for the moment. I’m sorry, Scotland – you are included on the charts, but I can’t lie to you… it’s not pretty ↩︎

    3. That’s the headline rate – the actual rate is different… for which see further below. ↩︎

    4. Perhaps he is self-employed and chooses which clients/work he takes on. Perhaps he is employed, and can choose how much overtime to work, or whether to accept a promotion. Perhaps he is going back to work after time spent looking after young children. Many people have the ability to work additional hours if they wish. ↩︎

    5. Strictly that doesn’t exist – you’re paying basic rate tax plus Class 1 employee national insurance contributions. But realistically this amounts to 28% tax. I’m going to count income tax and national insurance as if they’re one tax throughout this article. ↩︎

    6. Strictly that doesn’t exist – she’s paying 40% higher rate tax plus 2% Class 1 employee national insurance contributions. Realistically this is 42% tax. ↩︎

    7. Note that the marginal rate will vary depending on how we calculate it, and the size of the “perturbation” we calculate the marginal rate over. Most textbooks define the marginal rate as the % tax on the next pound/dollar of income. Say that we looked at the tax Jane paid on £60,199 of income – that would be £14,726. A £1 pay rise takes her to £60,200, and tips her into the HICBC – she now pays £0.42 more higher rate tax, plus an additional HICBC charge of 1% of your child benefit – £30.94 (assuming you have three kids). So the marginal rate is 100 * (£31.63/£1) = 3,163%. This is not very meaningful, as nobody’s incentives are going to be affected by the consequence of a £1 pay rise. It also creates the silly result that the marginal rate on her next £1 pay rise will be 42%, because the HICBC won’t increase until she gets to £60,400. So it’s better to use a more realistic figure like £1,000. The practical consequence is that the 56.5% figure isn’t *the* correct answer, but it’s a sensible and useful one, and it’s important to check that weird marginal rates aren’t just an artifact of the chosen perturbation. Our charts use a £100 marginal rate for convenience, but then “smooths” the HICBC formula so the marginal rate doesn’t leap up and down. ↩︎

    8. I think this is an unfortunate consequence of the Green Party having a policy to forgive all student loans, and another policy to increase national insurance by 6% for everyone earning £50k+. That would be a net win for someone paying off a student loan. However at some point during the manifesto process, they relegated student loan forgiveness to a “long term objective”, but didn’t change their national insurance plan. ↩︎

    9. Particularly when the economy is running at very little spare capacity; it would be different if there was high unemployment/plenty of spare capacity, because the work that was turned away would (at least in theory, in the long term) be undertaken by others ↩︎

    10. The £5,000 starting rate for savings is also phased out, but very slowly, and the phasing-out seems unlikely to be relevant to many people. ↩︎

    11. 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) ↩︎

    12. The 20,000% figure is a consequence of the code that produces the chart incrementing the gross salary by £100 in each step. It would be a mere 2,000% if we used the same £1,000 perturbation as above. ↩︎

    13. Ignoring pensions, which create a marginal rate problem all of their own… ↩︎

  • Our take on the Reform UK manifesto

    Our take on the Reform UK manifesto

    Reform UK has published its manifesto. They plan personal tax cuts which they say will cost £70bn; however our analysis shows that they’ve miscalculated, and the actual cost will be at least £88bn.

    Reform UK says it will fund these tax costs with £70bn of savings and additional revenue, but it provides few details. Their proposal to change Bank of England reserve rules is over-stated by at least £15bn, and the cost would likely fall on businesses and consumers, not banks.

    These two factors mean that Reform UK’s plans have a total unfunded cost of at least £33bn – about twice the unfunded cost of Liz Truss’ ill-fated 2022 “mini-Budget“.

    We hope other estimates become available soon, but for the moment this is the only currently available estimate of the impact of Reform UK’s proposals. We asked Reform UK for the calculations they had used; they did not respond.

    We have published our methodology in full, together with the supporting spreadsheet and modelling. We welcome suggestions and corrections.

    Our analysis is for tax year 2025/26 only; the cost will be higher towards the end of the Parliament. And, as the Institute for Fiscal Studies points out, the long-run annual cost will be higher still.

    The overall tax effect of the manifesto

    We have previously said that the tax increases that Labour and the Conservatives were arguing about were so small as to be irrelevant.

    Reform UK, on the other hand, are proposing £70bn of personal tax cuts:

    And £18bn of business tax cuts:

    This chart superimposes the size of Reform’s tax cuts over all the figures for UK tax receipts in 2023/24 (and, for ease, it’s in the top left, but not all the cuts are to income tax):

    Costing the tax cuts

    Reform UK don’t break down their estimates between their various tax cuts, and provide no explanation for how they arrived at their figures. All they present is the £70bn and £18bn totals:

    We were critical of the Green Party for failing to explain their figures, but at least, when we asked them, they were able to provide a breakdown between the different taxes. We asked Reform UK for a breakdown, and received no response.

    Reform UK’s lack of detail is very disappointing given the ambition and magnitude of their tax costs.

    Our analysis is that the £70bn figure for personal tax cuts is a significant under-counting of the actual cost, even when we make very generous assumptions as to the cost of each measure. Our breakdown looks like this:

    We were not able to properly assess the £18bn figure for business tax cuts, because it lacks sufficient detail. In particular, we do not know what is meant by “abolish IR35”. However we believe that the minimum cost is very close to Reform UK’s actual estimated cost. The actual cost could be many £bn higher, depending upon what precisely Reform UK’s proposals actually are:

    If Reform UK are serious about entirely abolishing IR35, and not just changing the enforcement rules, then the cost would be very much higher than this.

    We set out below the methodology we used in arriving at these figures.

    Methodology – income tax cuts

    Increase income tax personal allowance to £20k and increase higher rate from £50k to £70k

    Increasing the personal allowance is very expensive, because it benefits everyone earning above £12,570 – that’s 70% of all taxpayers. Increasing the higher rate affects everyone earning over £50k – which will be about 21% of all taxpayers in 2025/26.

    The easiest way to assess many proposed changes in tax rules is to use the “direct effects of illustrative tax changes bulletin” provided by HMRC – sometimes called the “ready-reckoner”.

    Using the figures in the ready-reckoner suggests that increasing the personal allowance by 10% costs £10.6bn for 2025-26, and increasing the starting point of the higher rate by 10% costs £5.4bn. On its face, that means the overall cost of the Reform UK proposals would be £82bn.

    However the ready-reckoner was prepared to illustrate the effect of small changes. It is not intended or designed to be used to model the kinds of large changes Reform UK are proposing.

    Reform UK’s proposal can be modelled statically as follows:

    • Take HMRC’s income percentiles for 2020/21
    • Update the income in each percentile by an inflator so that the percentage paying higher rate tax accords with the percentage for 2025/26 set out in table 3.4 of the OBR’s latest economic and fiscal outlook.
    • For each percentile:
      • Calculate the tax due under current rules, and subtract the tax due under the Reform UK proposals. This gives the revenue cost of Reform UK’s income tax proposals for one taxpayer in this percentile.
      • Multiply that by the total number of income tax payers (also from table 3.4) and divide by 100 – this gives the total revenue cost for all taxpayers in this percentile.
    • Repeat for all percentiles and add together: this gives the total revenue cost of the Reform UK income tax proposals.

    The result of this is an estimated revenue cost of £70bn.

    This is a simple static calculation. In reality, declared taxable income increases when tax rates reduce; in part this is people paying tax that was previously avoided or evaded. In part this is people rationally deciding to take on more work when tax rates drop. Any realistic estimate of the impact of tax changes, particularly large ones, should take account of these “dynamic” effects.

    We can express these effects quantitatively as the “elasticity of taxable income” or ETI – the amount that declared income will change when the rate of tax changes. However estimating the ETI is very difficult, and there has always been a wide variation in results. We see larger elasticities for large tax changes, and larger elasticities for higher earners. Research suggests that for moderate earners in the UK (i.e. not the very wealthy), the figure is likely between 0.10 and 0.30. There is an excellent summary of the state of the research in this Scottish Fiscal Commission paper, table 4.2, page 17, and a clear explanation of how ETIs work on page 16 (although they refer to ETIs as TIEs).

    We included dynamic effects into the methodology above, using what we think is a reasonable “best case” scenario for Reform UK by taking the rather high ETIs used by the Scottish Fiscal Commission (see page 20 of the paper). We say this is a “best case” because Scottish ETIs are higher than rest-of-UK ETIs for the obvious reason that it’s relatively easy for many Scottish taxpayers to escape Scottish tax by moving over the border to England. However, as we will explain below, the exact ETI chosen does not materially impact the analysis.

    The methodology for each income percentile is then as follows:

    • calculate the tax position of a taxpayer in that percentile under current rules, and their marginal rate
    • calculate the tax position of the taxpayer under Reform UK’s proposals
    • increase their pre-tax income by (% increase in marginal rate) x ETI for that level of income
    • calculate final tax position in light of increased taxable income

    On this basis, the estimated revenue cost is £68bn, only slightly less than the static costs.

    One might wonder why dynamic effects are so limited. The reason is that ETI operates at the marginal rate, and the Reform UK proposal doesn’t do much to marginal rates:

    • Moving the higher rate threshold to £70k reduces the marginal rate for taxpayers earning between £50k and £70k, because they are now paying the 22% basic rate (plus NI) or their income instead of 42% higher rate (plus NI). In our model, for example a taxpayer on £60k increases their declared taxable income by about £2k, meaning they pay around £500 more tax.
    • A taxpayer earning more than £70k pays £4k less tax (i.e. because they now have £20k of income taxed at 22% not 42%) but this is a windfall that doesn’t change their marginal rate. Tax elasticity theory says they therefore have no additional incentive to earn.
    • Moving the personal allowance to £20k has a big benefit for people on incomes just below that – someone on £19k sees their marginal rate fall from 28% to 19%. But on such low incomes the magnitude of incentive effects are limited.
    • And taxpayers earning more than £20k receive a £1,634 tax cut (because they now have £7.5k taxed at 0% rather than 22%) but again it’s a windfall that doesn’t change their marginal rate. Increasing the personal allowance is very expensive.

    So the final result is not very sensitive to the ETIs used – if we (unrealistically) double the ETIs, only £2bn of additional tax is collected. Dynamic effects are much greater if you cut rates rather than increase thresholds. For example, and purely for illustrative purposes, our model suggests that if took the very dramatic step of replacing all of income tax with a flat tax of 17% it would cost £84bn on a static basis, but £12bn of dynamic effects mean the end cost would be about the same as Reform UK’s (£72bn). That is, however, on the basis of the unrealistically high ETIs we are using to be generous to Reform UK’s proposal, and a very simplified model – that would almost certainly not be the result in reality. However it does illustrate that tax cuts should be designed to cut marginal rates – this makes them more affordable, which is another way of saying that they are then more effective at driving growth.

    These are, therefore, badly designed tax cuts, that don’t provide much “bang for the buck” and are unlikely to drive growth.

    All these calculations were performed using an adaption of the well-tested code used to create our marginal tax rate chart. We have made the new code available on our GitHub here.

    This is a simple model with important limitations. In particular:

    • It assumes everybody is only receiving employment income (and not self-employment income, rent, dividends etc). That means the model cannot be used for e.g. changes in the level of national insurance or tax on passive income. However, Reform UK’s proposal affects all types of income without regard to the source, and therefore this limitation doesn’t impact our analysis.
    • It doesn’t properly model the income of the top 1%, because it analyses it as if all the top 1% earned the base pre-tax income for that percentile of £216k. In fact the income of the top 1% is much higher than this – there are 28,000 people with income over £1 million, collectively paying £28.3 billion in income tax – that’s more tax than the 18 million taxpayers earning less than £20k. This means the model will dramatically undercount the cost and ETI effects of tax changes that impact the marginal rates of people earning more than £216k. However, Reform UK’s proposal does not affect the marginal rates of anyone earning more than £70k, and therefore this limitation doesn’t impact our analysis.
    • When people’s after-tax income increases, they are likely to spend more, especially those on lower incomes. This increased spending often results in higher VAT revenue and stimulates economic activity, creating positive ripple effects throughout the economy. Conversely, reduced government expenditure resulting from a tax cut can decrease the income of others in the economy, leading to negative ripple effects.A full analysis would require detailed econometric modelling, but the economists we spoke to were reasonably confident there would be an overall negative effect given that most of the benefit of Reform UK’s tax cuts goes to higher-income individuals, who have a lower propensity to spend.

    Methodology – other personal tax cuts

    All the calculations supporting the figures below are set out in the spreadsheet available on our GitHub.

    Scrap VAT on energy bills

    There is a figure for this in HMRC’s document setting out the cost of different reliefs – the current rate of 5% is estimated to represent a revenue cost of £8bn compared to if it was at the standard rate of 20%. Hence the cost of scrapping the 5% rate will be approximately £3bn.

    Lower fuel duty by 20p per litre

    The ready-reckoner suggests a cost of £9bn for reducing fuel duty by 20p. We understand that this figure includes dynamic effects (i.e. people using more fuel when duty falls).

    We can sense-check this result by adjusting the current £25bn fuel duty yield to reflect a 20p cut. That results in a figure of £10bn – this will be a slight over-estimate given that the HMRC data includes non-domestic fuel duty (e.g. aviation fuel).

    We can sense-check again using RAC figures for the volume of petrol and diesel sold in the UK. That gives a figure of £12bn – but it will include agricultural petrol and diesel, which is not taxed.

    We will therefore use the £9bn figure.

    These calculations are shown in the spreadsheet available on our GitHub here.

    Stamp duty

    The current rates are 0% for up to £250k, 5% to £925k, 10% to £1.5m and 12% thereafter.

    Reform want to cut this to 0% up to £750k, 2% up to £1.5m and 4% thereafter.

    We can calculate this with the HMRC ready-reckoner. The total comes to £3bn.

    The calculations are again shown in the spreadsheet available on our GitHub.

    It’s important to note that this change would likely result in increased property prices – buyers would probably not end up better off. This therefore ends up as an expensive house price subsidy. We explain why here.

    Inheritance tax – increase nil rate band from £325k to £2m

    This is again too big an increase for the HMRC “ready-reckoner” to be useful.

    We can better estimate the result from the raw data on IHT returns, calculating the revenue reduction at each level of estate value. This comes to £5bn. Dynamic effects are obviously limited.

    Methodology – business tax cuts

    All the calculations supporting the figures below are set out in the spreadsheet available on our GitHub.

    Reduction in corporation tax from 25% to 20%

    The “ready-reckoner” suggests a figure of £18.5bn, but that should be viewed with caution given the magnitude of the change.

    The 2022 Autumn Statement reversed the tax cut from the controversial Spring Statement, and put the rate back from 19% to 25%. The stated revenue from this was £17bn for 2025/26. It follows that we can prudently estimate the cost of a cut from 25% to 20% as £14.2bn. We would suggest that is the appropriate figure to use.

    Lift minimum profit threshold to £100k

    We do not understand this proposal.

    Currently the rate for companies with profit of less than £50k is 19%; the rate for companies with a profit of more than £250k is 25%. Between these £50k and £250k the rate smoothly increases.

    But Reform UK are proposing cutting the rate to 20%. What is the point of a special small company rate of 19%? The small company rules are highly complex and create an administration headache for taxpayers and HMRC. That is perhaps justified where the tax rate saving is 6% – it cannot be sensible where the tax rate saving is 1%.

    We calculate the cost of the tax cut, and therefore the total benefit to small business, as a very small £100m.

    Lift VAT threshold to from £90k to £120k

    In our view this would be a serious mistake which would cause many growing small companies to constrain their growth to £120,000. We already see this effect at the £85,000 level of the current VAT threshold, where there is a “bulge” in the statistics of companies holding back their growth. That effect would be more serious (and more deleterious to economic growth) at a higher turnover level. Our analysis of the current situation is here.

    We can estimate this in two ways.

    First, we can look at the £185m cost of increasing the threshold from £85k to £90k in the most recent budget, and simply multiply that by five. That results in a figure of £1.1bn.

    Alternatively, we can look at the £2.3bn of total VAT (see table T5b) paid by companies with a turnover of between £85k and £150k, and pro-rate that linearly to reflect a £120k threshold, resulting in a figure of £1.2bn.

    We will use the £1.1bn figure.

    Abolish IR35

    We do not know what this means.

    “IR35” is name usually given to the rules introduced in 2000 to stop people who are realistically employed from instead being engaged as contractors, via a personal service company (PSCs). PSCs were widely used in cases where someone (particularly IT consultants working for large businesses) was working as part of a team for a long period of time, and being treated in almost every respect as an employee.

    If Reform UK were really going to abolish these rules then we would see a return to the very large-scale levels of avoidance seen in the 1990s – except it would now be worse given that corporation tax has fallen, and income tax has risen, making PSCs more attractive and the losses from avoidance therefore greater. We are not at this point able to estimate the cost in lost tax, but it would be very high indeed, plausibly £10bn or more.

    There have been more recent changes to IR35. Some larger employers failed to apply the rules correctly, relying on the fact that the risk of this was on the contractor or their PSC, not the employer. So in 2017, rules were introduced putting liability on public sector employers ; the stated revenue from this measure was around £150m/year. In 2021, this was extended to the private sector; the stated revenue from this for 2025/26 was about £1.7bn/year. It is important to stress that the 2017 and 2021 changes do not alter the technical application of IR35 at all; all they do is change the person who is liable to the employing business, and therefore effectively force businesses to take the rules more seriously.

    It may be that Reform UK are only proposing to abolish the 2017 and 2021 reforms – in that case the cost would be around £1.8bn. This would in our view be unwise, because it rewards businesses that ignore the law.

    Assessing the revenue-raising

    Reform UK say:

    And they put figures on these proposals here:

    These are massive numbers – about 5% of GDP in total. No details are provided; it is also unclear how “first 100 day tax cuts” can be funded from savings that would take time to implement. The 5% figure ignores the fact that some areas (e.g. the NHS) are said to be protected from cuts. And the long-term impact of significantly reducing immigration surely deserves more analysis than one number in a table.

    We, however, will focus on the “stop bank interest” figure of £35bn figure, which arises from (broadly speaking) ending the practice of the Bank of England paying interest on the reserves placed with it by UK banks.

    This is a proposal that’s been made by others, including Chris Giles (the economic commentator) and the Left-wing New Economics Foundation. However Reform UK’s figure is much higher than anyone else’s, and we doubt it is correct:

    • The fundamental business of banks is charging customers an interest rate that reflects their own average/marginal cost of funding (plus a margin). If their costs increase, the interest rate increases. So, for example, there is good evidence that the cost of a levy on banks isn’t actually borne by banks, but by their mortgage customers in the form of higher rates. We expect the same would be true here – ultimately it would be consumers and (non-bank) businesses paying the most of that £35bn cost, in higher borrowing rates or lower savings rates.
    • That is all the more so given that we estimate that total UK profits of the bank sector are around £30bn..
    • If interest rates fall, the figure will fall from £35bn. This is not a sustainable way of funding a long term tax cut.
    • Experts in monetary policy think £35bn is much too big a figure. The New Economics Foundation suggested a realistic figure was £19bn. The Institute for Fiscal Studies thinks slightly less. Chris Giles has said around £5bn to £10bn is a realistic figure..
    • And economics and financial markets expert Toby Nangle thinks there would be much wider economic implications to Reform UK’s approach. In macroeconomic terms, the proposal amounts to “helicopter money“. More seriously, the Bank of England would risk losing monetary control. Toby thinks these risks would be minimal if the Bank of England slowly ramped up the proportion of reserves on which it didn’t pay interest (to say the kind of £5-10bn figure Chris Giles suggests).
    • Reform UK don’t appear to have considered any of these issues at all; the Toby Nangle article gives the impression that Reform UK were hearing them for the first time.

    Reform UK’s revenue projections therefore appear to be over-stated by at least £15bn and possibly as much as £30bn, the actual revenues would likely come at the expense of households and businesses, not banks and their shareholders, and there are complex macroeconomic consequences which Reform UK appears to not have considered.

    Thanks to O, R and K for their work on the calculations and modelling.

    Disclosure: Our founder, Dan Neidle, is a member of the Labour Party, and sits on its most senior disciplinary body. His tax advice has always been regarded as non-partisan, and he was highly critical of Labour Party tax proposals in the 2017 and 2019 elections.

    Footnotes

    1. The cost of the mini-Budget was projected by the Truss government to be £19bn in 2022/23, rising to £45bn by 2026/27, and others thought the true figures would be higher ↩︎

    2. Note that these figures don’t include Reform UK’s proposal to exempt all NHS medical staff from basic rate income tax for three years – this seems to be included in the £17bn “NHS pledge” rather than on the tax side. No breakdown of the £17bn is provided, but we can estimate the cost from the 627,000 FTE medically-qualified NHS staff and the average NHS FTE pay of £38,000. After Reform UK’s £20k personal allowance, that’s a basic rate tax saving of £3,600 each, so about £2.3bn altogether. Thanks to James Goffin for asking about this. ↩︎

    3. Until the point at the personal allowance gets phased out; £125k at the moment. ↩︎

    4. With Reform’s 60% increase in the personal allowance costing £60bn and the 40% increase in the higher rate costing £22bn ↩︎

    5. Or, more precisely, the rate of retaining after-tax income changes) ↩︎

    6. UK_tax_change_calculator.py is the script, using the same UK_marginal_tax_datasets.json as the marginal tax rate calculator, with a new dataset added into that json for the Reform UK proposal ↩︎

    7. One might expect these two effects to cancel out, but that is not necessarily the case. It largely depends on who receives the benefit of the tax cuts and who faces lower income from reduced government expenditure. Tax cuts for lower-income individuals typically have a higher multiplier effect compared to cuts for higher-income individuals who might save more – people on lower income spend more – they have a higher “propensity to spend“. Government spending can also have a higher multiplier effect, depending on the nature of the spending, the economy’s capacity at the time, and wider macroeconomic conditions – in some circumstances government spending can “crowd out” private spending. The OBR has published an excellent summary of how they model multiplier effects. ↩︎

    8. Many thanks to Paul in the comments for pointing out an error in the initial version of this report. Our apologies. ↩︎

    9. Reform UK’s bands are different from the current stamp duty bands; we adjusted for that with a simple pro rata calculation. ↩︎

    10. It provides an estimate of £90m for increasing the nil rate band by £5,000. A linear application of that to Reform UK’s increase results in reduced revenues of £30bn, which is obviously nonsensical. ↩︎

    11. But not zero – there is evidence that the timing of reported deaths is affected by inheritance tax rates. ↩︎

    12. The figure comes as a result of the Truss/Kwarteng abolition of this rule in the 2021 “mini-Budget” and its subsequent reinstatement. There is an extended analysis for this here. ↩︎

    13. See the second tab of our spreadsheet, available on our GitHub. Note that this is lower than the figure for the total profits of the UK banks, because much of this profit is generated overseas. Our figure is, however, too high, because it will include foreign banks with UK operations; but only UK banks place reserves with the Bank of England. ↩︎

    14. That is derived from the “non-remunerated” tier and so is a sustainable figure, not affected by changes in rates ↩︎

  • Our take on the Labour manifesto

    Our take on the Labour manifesto

    The Labour Party has published its manifesto. Labour claims to raise £7.35bn from additional tax – but almost three-quarters of that is from increased tax compliance rather than actual new taxes. The most obvious criticism is a lack of ambition, and lack of any proposals to reform the most serious problems with our tax system.

    We set out the issues in more detail below.

    The overall tax effect of the manifesto

    We have previously said that the tax increases that Labour and the Conservatives were arguing about were so small as to be irrelevant. That is very much true for the Labour manifesto. The total new tax they’ve identified, most of which isn’t an actual tax increase, vanishes into insignificance compared with the almost trillion pounds collected by HMRC each year.

    This chart superimposes the size of Labour’s proposed new tax revenues over all the figures for UK tax receipts in 2023/24 (and, for ease, it’s in the top left, but none of the proposed Labour tax increases come from income tax):

    The Labour manifesto says this.

    “The Conservatives have raised the tax burden to a 70-year high. We will ensure taxes on working people are kept as low as possible. Labour will not increase taxes on working people, which is why we will not increase National Insurance, the basic, higher, or additional rates of Income Tax, or VAT”

    We are concerned about politicians boxing themselves into an impossible corner with this kind of promise. These three taxes make up more than two-thirds of all UK tax receipts; once you’ve promised not to increase them, what do you do if you find you need to fund additional expenditure?

    • Break your promise and increase tax anyway, saying circumstances have changed. This has historically not gone well for politicians.
    • Scrabble around making lots of increases to minor taxes to make up the sums you need. But that will also often come at a political cost: most of these taxes either directly hit households (e.g. council tax or stamp duty) or will be passed onto them (e.g. alcohol duties; insurance premium tax; fuel duties). There are a few others, but they don’t add up to much.
    • Create entirely new taxes that aim to raise large amounts of money without hitting typical households. This, however, is hard. The wealth tax proposed by the Wealth Tax Commission might fit the bill; but nobody, anywhere in the world, has ever implemented such a tax, and its actual consequences are unclear. The recent Spanish wealth tax, targeted at the very wealthy, raised only €632m in 2023. Perhaps for this reason, Labour appear to have ruled out a wealth tax altogether.
    • Do nothing, freeze tax thresholds and allowances, and let income growth/inflation push people into higher tax brackets – “fiscal drag”. It’s taxation by stealth, and it can raise very large sums – the current Government’s freeze of the personal allowance and higher rate threshold is forecast to raise £34bn of tax in 2028/29.

    We expect the answer in practice (whoever wins the election) will be the tried-and-tested last one. That is an unfortunate, but a consequence of having expediently ruled out the better, and more honest, options.

    No tax reform. No pro-growth tax policies.

    From a tax policy perspective, the most important thing about this manifesto is what’s not in it – tax reform. We made the same criticism of the Conservative Party manifesto, so if you’ve read that, you can skip right past this.

    There are serious problems with many of the UK’s most important taxes:

    • VAT is inefficient; the VAT threshold is too high, and that stops small businesses from growing. The exemptions and zero rates are too broad, causing uncertainty for business and disproportionately benefiting the wealthy. The flat rate scheme is being widely abused by criminals.
    • Corporation tax has become impossibly complicated. The move to “full expensing” was incomplete. The constant changes to the rate (three in one year) make it difficult to plan. The OECD global minimum tax means that the largest companies now have to undertake two completely different corporate tax calculations.
    • Income tax has been damaged by a series of gimmicks, bodges and compromises employed to avoid increasing the rate. There’s an “accidental” top marginal rate of 62% (if we include national insurance) for people earning between £100k and £125k (and, if they’re a graduate, 9% more than that). Someone with three children under 18 faces a top marginal rate of 57%. Anyone claiming free childcare and earning £100k potentially faces a marginal rate of over one million percent.
    • Employer national insurance creates a massive difference between the cost of employing someone and the cost of engaging an independent contractor. This means that the thin – and ultimately notional – line between employment and self-employment becomes hugely important. Complex rules are created to guard the line. HMRC’s efforts to police it waste their time and that of taxpayers. And there remains plenty of avoidance and evasion.
    • Stamp duty land tax reduces labour mobility, results in inefficient use of land, and plausibly holds back economic growth.
    • Council tax is hilariously broken, based on 1991 valuations, and with bands which mean that the Buckingham Palace residence pays less council tax than a semi in Blackpool.
    • Inheritance tax is deservedly unpopular. The rate is too high. The burden falls on the upper middle class. The very wealthy easily escape it.
    • Bank taxation is unnecessarily complex, with an entire tax that has no reason to exist, and could easily be shifted to another, better, tax.
    • Capital gains tax has a rate that’s so low it invites avoidance from people shifting income into capital.
    • Our environmental taxes are a muddled mess. There’s an economic consensus across the political spectrum in favour of a carbon tax. This is hard to do unilaterally, but the UK could play an important role advocating for a carbon tax in current OECD discussions.
    • There is now a widespread view, amongst individual taxpayers, business and the tax profession, that HMRC is seriously under-resourced. That is highly inconvenient for taxpayers (and sometimes much more serious than that). But it also means that some tax is not being paid: taxpayers are making mistakes, and HMRC is not helping them.

    We believe a pro-growth agenda has to include tax reform. It’s therefore a shame that there is little discussion of any of these issues in the Labour Party manifesto (or indeed any of the others).

    The only items in the Labour manifesto which might qualify as tax reform are a commitment to slow down the rate of constant change in business taxation. That’s welcome – but it barely scratches the surface of what’s needed.

    Costings

    Labour publishes these costings. The white space on the left side of the page makes clear how little Labour are planning to do to the tax system:

    and:

    Tackle avoidance and evasion – £5bn

    “We will modernise HMRC and change the law to tackle tax avoidance. We will increase registration and reporting requirements, strengthen HMRC’s powers, invest in new technology and build capacity within HMRC. This, combined with a renewed focus on tax avoidance by large businesses and the wealthy, will begin to close the tax gap and ensure everyone pays their fair share.“

    An important point of detail: it’s unlikely to be possible to raise £5bn by clamping down on tax avoidance, because HMRC figures identify only £1bn of tax avoidance:

    The focus on tax avoidance by “large businesses and the wealthy” may play well with focus groups, but doesn’t reflect the reality of where the “tax gap” actually is:

    To be fair, Labour have published a fairly detailed plan which justifies the £5bn figure, and it covers compliance and evasion as well as tax avoidance. It’s unfortunate that the manifesto mis-states what they actually say they’ll do.

    The other parties are also promising to raise large sums from increased tax compliance:

    The Conservatives included a plan to “clamp down on tax avoidance and evasion” as part of their National Service press release. The document doesn’t appear to be publicly available; we published it here.

    The origin of the £6bn figure common to Labour and the Conservatives appears to be the head of the National Audit Office, who said earlier this year that £6bn could be raised by cracking down on avoidance and evasion. But he didn’t say how, or how much it would cost.

    The Lib Dems just present the £7.2bn figure as 2028/29 funding in their manifesto costings document. They don’t give figures for earlier years. There is no published plan.

    In our view, targeted and carefully managed investment in HMRC compliance, customer service, investigation and enforcement functions could raise significant sums. We wrote about this in detail here. We are a little sceptical about whether Labour’s £5bn figure is realistic – naturally that scepticism applies to the other parties too (and more so, given their larger numbers).

    Business taxation

    The manifesto says:

    “The business tax regime matters for investors. It is not just the rates of tax that matter, but also certainty. Under the Conservatives there has been constant chopping and changing – corporation tax has changed 26 times – and multiple fiscal events have made drastic changes often at little notice. Labour will stop the chaos, and turn the page with a strategic approach that gives certainty and allows long-term planning. We are committed to one major fiscal event a year, giving families and businesses due warning of tax and spending policies. We will publish a roadmap for business taxation for the next parliament which will allow businesses to plan investments with confidence.”

    We expect business will welcome a slow-down in tax policy. We would, however, suggest that Labour go further: publish the roadmap with the first Budget and commit to make no changes to business taxation, other than simplification and targeted anti-avoidance measures.

    “Labour will cap corporation tax at the current level of 25 per cent, the lowest in the G7, for the entire parliament, and we will act if tax changes in other countries pose a risk to UK competitiveness.”

    It is correct that the 25% UK corporation tax rate is the lowest in the G7; it is, however, fairly average by international standards:

    There has also been a significant widening of the UK tax base over the last 30 years, and so UK corporation tax collects significantly more now (as a % of GDP) than it did in the 1970s when the rate was 52%:

    The effect of increasing the UK rate to from 19% to 25% in 2023/34, at a point when the base had become historically wide, was therefore to significantly increase the overall tax on companies. In our view this was likely the correct decision given economic circumstances, but we would be cautious about raising the rate further. We therefore believe Labour’s approach is sensible. Indeed it appears that no party is currently proposing to increase the rate.

    “We will retain a permanent full expensing system for capital investment and the annual investment allowance for small business. And we will give firms greater clarity on what qualifies for allowances to improve business investment decisions.“

    “Full expensing” was introduced by the Conservative Government in the 2023 Spring Budget. It gives a business up-front tax relief for all the cost of an investment rather than, as was historically the case, requiring the cost to be written-off for tax purposes over many years. That historic treatment created an unfortunate bias in the tax system against long-term investment, which is the opposite of what a sensible tax system should do. Full expensing was therefore a good pro-growth tax reform.

    The move towards full expensing followed a long campaign from the Adam Smith Institute and others. It’s a good policy, which should boost growth, and will cost less than first thought.

    Full expensing was unusual in that its effectiveness under a Conservative Government was highly dependent on the attitude of the Opposition: businesses would only take long-term business decisions on the basis of full expensing if they thought the rules would be there in the long-term. So Labour’s embrace of full expensing last year was important.

    However this is an area where Labour could consider going further. Something like a third of investments do not benefit from full expensing. That means the policy is less effective in supporting growth than it could be. It also creates uncertainty for businesses on where precisely the line should be drawn. The best way to increase clarity would be to dramatically extend full expensing to all investment; that would realistically have to form part of a major reform of the corporation tax base, including a curtailing of interest relief for debt financing. Such a move would face considerable technical and political challenges; but it is something we would hope a new Government would seriously consider.

    Ending the use of offshore trusts by non-doms – £0

    “Labour will address unfairness in the tax system. We will abolish non-dom status once and for all, replacing it with a modern scheme for people genuinely in the country for a short period. We will end the use of offshore trusts to avoid inheritance tax so that everyone who makes their home here in the UK pays their taxes here.“

    For hundreds of years, people living in the UK but born elsewhere have been “non-doms”, taxed on their UK income but only taxed on foreign income if they bring it into the UK. An even more important benefit: non-doms weren’t subject to UK inheritance tax on their non-UK property. This regime encouraged wealthy people to come to, and stay in, the UK – but has been perceived by many as unfair.

    The Conservative Party announced the end of the non-dom regime in the Spring Budget, along lines very similar to what we had proposed the previous month. They intend to replace the non-dom rules with a four year exemption on income/gains, and likely a ten year exemption from inheritance tax. But they proposed to permit existing non-doms to use trusts to escape inheritance tax forever.

    We believe this was a pragmatic compromise, aimed at preventing an exodus of the most wealthy non-doms. Many very wealthy people would not regard paying UK income tax and capital gains tax on their worldwide assets as a disaster. In some cases (e.g. Americans) the tax result is not so very different from their home tax result. For others, there is more tax but the difference is not hugely material. However UK inheritance tax, at 40%, has one of the highest rates in the world. Emotionally (rightly or wrongly) many non-doms regard it as an anathema, and would leave the UK rather than subject their estates to it if they die.

    There are really three questions here:

    • Is it simply wrong in principle for some people to be able to live most of their life in the UK, but (because of where they were born) for their estates to be mostly outside inheritance tax? Regardless of the cost/benefit?
    • Is it perfectly fine in principle for the UK to have a special inheritance tax rate for non-doms, regardless of the cost/benefit?
    • Or is this a question where we should reach our view based upon pragmatism – whether scrapping the favoured inheritance tax treatment results in more tax being paid, or less tax being paid?

    Most politicians move immediately to the third position. The problem with that, however, is that it’s very hard to say what the effect would be of removing non-dom inheritance tax trust privileges. There have been no such changes before that we can measure.

    Labour have previously suggested a £600m benefit from ending the trust “loophole”; however it’s interesting that this figure is now relegated to a footnote, and not included in Labour’s costings calculation:

    No reason is given for this, but we would speculate that it reflects a recognition of the unpredictable effect of this policy.

    Ultimately this is a matter of political choices and priorities, rather than assessing evidence, because we do not believe there is adequate evidence (and it’s not clear to us, even in principle, how evidence could be found).

    One important step that could be taken to reduce a non-dom exodus – and because it makes sense in its own right – would be to reform inheritance tax. Close down loopholes, expand the base, and reduce the rate to something more in line with other countries.

    Business rates

    The manifesto says:

    “The current business rates system disincentivises investment, creates uncertainty and places an undue burden on our high streets. In England, Labour will replace the business rates system, so we can raise the same revenue but in a fairer way. This new system will level the playing field between the high street and online giants, better incentivise investment, tackle empty properties and support entrepreneurship.“

    This characterisation of business rates is common; it is therefore unfortunate that it is incorrect. It is well established that, whilst business tenants pay business rates, the person who actually pays economically is the landlord (in the jargon, the “incidence” of the tax is on the landlord).

    It is unclear how Labour will achieve the stated objectives. A tax on land cannot easily (or perhaps at all) distinguish between different types of user of the land. Landlords should already pay business rates on empty properties (and some tricks some were using to avoid that were recently kiboshed).

    We would suggest the answer lies in something more radical: scrapping business rates and the two other unpopular and failed taxes on land: stamp duty and council tax. Replace them instead with a land value tax. That would be a major pro-growth tax reform which would have support from economists and think tanks across the political spectrum. Would Labour have the courage for such a step?

    Carried interest – £600m

    “Private equity is the only industry where performance-related pay is treated as capital gains. Labour will close this loophole.“

    A banker pays tax on their bonus at a marginal rate of 47%; but that comes out of a bonus pot that was all subject to 13.8% employer national insurance. That’s a total tax of about 54%. By contrast, when private equity executives receive a share of the returns of their fund – called “carried interest” – it is taxed as a capital gain, at 28%. That treatment wasn’t enacted by Parliament – it results from a spectacularly successful lobbying effort in 1987.

    Our view is that this treatment is both inequitable and wrong in law. We welcome Labour ending it.

    The question is how much that will raise. Private equity executives made gains on carried interest of £3.4bn in 2020/21, which if taxed as income would have potentially meant another £600m of tax.. The gains in 2021/22 were much higher – about £5bn, which if taxed as income would potentially yield almost £1bn.

    And there is significant additional carried interest earned by private equity executives who are non-doms, which isn’t even included in these figures – and those tend to be the most senior executives, who earn the largest amounts. Our discussions with private equity industry figures suggest that carried interest reforms plus the non-dom reforms could potentially yield up to £2bn.

    The important word in the previous paragraphs is “potentially”. There is no doubt that many private equity executives, particularly non-doms, would leave the UK rather than pay tax at 47%. Other countries in Europe and around the world would have more favourable regimes, and private equity executives are highly mobile, with many having only temporary ties to the UK.

    One answer would be for Labour to increase the rate of tax, but not equalise it. That, however, seems ruled out by the manifesto wording.

    It therefore seems likely that a significant number of private equity executives would respond to the additional tax by leaving the UK. Were this to happen, the economic effect of is debatable – it would not (or at least, not necessarily) reduce private equity investment into the UK, but change the location that investment is made from. There would be wider effects, e.g. on service industries and asset prices, which deserve consideration but are beyond our expertise.

    There are, therefore, a great deal of uncertainties, but Labour’s £600m figure seems to us to be reasonably prudent given that it is so much lower than the potential static yield.

    We would make two suggestions for Labour’s reform, which would create useful pro-growth incentives for the private equity industry:

    • Labour’s reform should be targeted at the controversial “buyout funds“, not venture capital or infrastructure investment funds.
    • Labour’s reform should only apply to traditional carried interest – where either the executives put in no money, or money is “round-tripped” and not actually at risk. It shouldn’t apply where private equity executives make a genuine investment into their funds. So if a private equity executive genuinely puts £1m into their fund, risks losing it, but the fund succeeds, then there remains a good argument that their return should be taxed as capital.

    We would add as an aside that there is speculation that Labour are secretly considering equalising the rate of capital gains tax and income tax. If Labour were going to equalise the rates, they would not need to change the tax treatment of carried interest.

    Windfall tax – £1.2bn

    “To support investment in this plan, Labour will close the loopholes in the windfall tax on oil and gas companies. Companies have benefitted from enormous profits not because of their ingenuity or investment, but because of an energy shock which raised prices for British families. Labour will therefore extend the sunset clause in the Energy Profits Levy until the end of the next parliament. We will also increase the rate of the levy by three percentage points, as well as removing the unjustifiably generous investment allowances.“

    We have written previously about the flaws in the Government’s windfall tax (which we don’t view as a windfall tax at all; just another profits tax). We suggested £5bn could be raised; Labour’s £1.2bn looks modest.

    Stamp duty – £40m

    “Labour will support local authorities by funding additional planning officers, through increasing the rate of the stamp duty surcharge paid by non-UK residents“

    Non-residents buying UK property have to pay a surcharge of an additional 2% stamp duty land tax. Labour are proposing a 1% increase, and say that will raise £40m in 2028/29. The charge was brought in during 2021 having been proposed by Theresa May’s government – it was probably prohibited by EU law prior to Brexit.

    HMRC publishes a document showing estimates of the impact of various tax changes – they show this change as raising £40m in 2026/27. If HMRC are correct, Labour’s figure will therefore be a slight under-estimate.

    We expect this is only partially about revenue-raising, and partially about (very) slightly weighting the housing system in favour of UK residents.

    We should reiterate that we regard stamp duty land tax as a bad tax that should be abolished. However the non-resident charge is not its worst feature: it is somewhat complex, but reasonably well designed and doesn’t cause too many difficulties in practice.

    Private schools – £1.5bn

    “Labour will end the VAT exemption and business rates relief for private schools to invest in our state schools.“

    This is another proposal where many politicians say their position is based on a pragmatic assessment of whether it will gain or lose revenue, but in reality they are (on both sides) arguing from an ideological position. That is inevitable in any political system, and we make no criticism of it, – but we will ignore that political debate and focus on the numbers.

    The easy question is: if Labour ends the private VAT exemption then by how much will private school fees rise? The answer is “a bit less than 15%”, because the net cost of VAT for most private schools will be around 15%, and some will be able to take cost-saving measures to absorb part of that 15% net cost. But evidence suggests that, as with most VAT changes on single products/services, most of the net 15% cost will be passed onto parents.

    The hard question that follows is: how many parents will therefore take their children out of private school? And what effect will that have on the net tax revenue yield, given that the State sector will have to educate those children?

    This is ultimately a question of education policy and economics; areas where we do not have expertise. We have, however, noted that some of the high estimates reported in the press have no good statistical basis.

    We wrote about the difficulties of coming up with an estimate here. The only serious attempt to come up with an estimate is this from the IFS. The analysis is, as the authors note, subject to numerous uncertainties, but it takes a rigorous approach.

    We therefore expect that the correct answer as to the net tax impact of the change will be in the region of the Institute for Fiscal Studies’ estimate of £1.3–£1.5 billion per year. Labour’s figure is at the top end of this.

    Disclosure: Our founder, Dan Neidle, is a member of the Labour Party, and sits on its most senior disciplinary body. His tax policy analysis is widely regarded as non-partisan, and he was highly critical of Labour Party tax proposals in the 2017 and 2019 elections.

    Footnotes

    1. I don’t regard the various wartime and post-war emergency taxes as a useful precedent, economically or politically ↩︎

    2. See page 68 of the Office for Budget Responsibility’s March 2024 economic and fiscal outlook. ↩︎

    3. See page 31 of the CBI report ↩︎

    4. It’s not merely that HMRC funding has failed to keep pace with inflation; its most experienced personnel have been moved onto other projects, particularly Brexit and the pandemic. See paragraph 1.8 onwards in this National Audit Office report. This was probably sensible, but is having long term consequences. ↩︎

    5. A considerable simplification – in reality the domicile concept is much more complex ↩︎

    6. The impressive research from Arun Advani and Andy Summers on the effect of the 2017 non-dom reforms shows what happened to “ordinary” non-doms who lost that status – very few of them left. However the 2017 reforms permitted the very wealthy to use trusts to escape essentially all the effects of the reforms. Hence we cannot use evidence from 2017 to predict how the very wealthy will behave today if the benefits of trusts are removed. ↩︎

    7. i.e. £3.4bn x (47% – 28%). ↩︎

    8. There’s also a report from the Adam Smith Institute. It contains some valid criticisms of the IFS approach, but in our view is then fatally undermined by using figures with no statistical validity. ↩︎

  • Our take on the Green Party manifesto

    Our take on the Green Party manifesto

    The Green Party has published its manifesto. The Green Party propose raising taxes by £115bn in 2026/27 and £172bn in 2029/30 – about 4.5% of GDP. There is very little detail presented and the proposals are impossible to assess in any depth. It’s a huge missed opportunity to advocate for radical tax proposals, and move them into the mainstream.

    We set out the issues in more detail below.

    Lack of detail

    The Green Party manifesto has a very radical approach to tax, raising a large amount of money from complex new taxes. However this is covered in two brief pages, which present no detail and no figures.

    A statistical appendix then provides figures for the overall effect:

    I asked the Green Party press office, and they kindly sent me this breakdown between the various proposals:

    This is very unsatisfactory. It’s impossible to assess tax proposals, particularly radical ones, if they are not explained. Otherwise we are being asked to take these numbers on trust.

    Tackle avoidance and evasion

    The manifesto says:

    We will clamp down on tax dodging. When companies and individuals fail to pay their fair share, it deprives our vital public services of much needed investment.  

    Greens support small businesses that are currently paying taxes for the services they use, and will take steps to tackle the global corporations that are not. It will be a priority to strengthen global tax agreements to stop corporate tax avoidance and evasion, and to ensure a level playing field between UK and transnational businesses. We will also ensure that HMRC has the resources it needs to reduce the gap between taxes due and taxes paid.  

    This is all very vague. The Labour and Conservative parties have set out plans to raise £5-6bn of additional annual tax from “tackling tax avoidance and evasion”. The Lib Dems don’t have a published plan, but think they can raise £7bn. The Greens just have these two paragraphs.

    Wealth tax

    The manifesto says:

    “Elected Greens will push for a wealth tax. This will tax the wealth of individual taxpayers with assets above £10 million at 1% and assets above £1bn at 2% annually. Only a very small minority of people would be subject to the wealth tax, while the overwhelming majority would benefit. “

    The Green Party plans to raise a very large amount from this:

    There has never been a tax like this anywhere in the world, raising so much money from such a small number of people. The Green Party provide no calculations, no references, and no explanations of how this tax would work.

    The closest tax is the Spanish “solidarity tax on large fortunes“, which applies at 1.7% for wealth of €3m, 2.1% for wealth of €5.4m, and 3.5% for wealth of €10.7m. The rates are therefore not dissimilar to the proposed Green tax, but it raised €632m in 2023. UK GDP is about twice Spanish GDP, but it’s not at all obvious from this why the Greens think they can raise £14bn.

    Possibly the tax would be designed differently from the Spanish tax? But given we have no information at all on its design, it’s impossible to say.

    The Greens might well respond that the UK has many more internationally mobile billionaires living here than Spain does. That is certainly true – but their mobility means they are difficult to tax. One look at the Sunday Times Rich List shows that most of the billionaires associated with the UK have relatively limited ties here.

    The Wealth Tax Commission produced a magisterial report on wealth taxes in 2020. It recommended against an annual wealth tax because of implementation and administration difficulties, and the likelihood of avoidance. It instead suggested a one-off retrospective wealth tax – the retrospection would mean it was impossible to avoid. We have doubts about the political economy of such a retrospective tax, but technically we agree that (if it could be implemented) it would be effective.

    Inheritance tax

    The manifesto says:

    “We would reform inheritance tax, ensuring that intergenerational transfers of wealth are taxed more fairly”

    That is the only mention of “inheritance tax” in any of the Green Party materials. We do not know what reforms are proposed.

    Despite the absence of any proposals, the Green Party expects to book £4bn of new revenue from inheritance tax in 2026/27:

    That’s a significant amount from a tax that currently raises £7bn.

    Carbon tax

    A carbon tax is a tax that places a price on carbon dioxide emissions, either in-country or imported. So the tax incentivises businesses to cut emissions. It’s a conceptually brilliant design which we support.

    However, the Green manifesto has almost no detail:

    “Elected Greens will propose levying a carbon tax at an initial rate of £120 per tonne, rising to a maximum of £500 per tonne of carbon emitted within ten years. This is deliberately designed to make it cheaper for the emitter to take steps to reduce emissions rather than pay the tax.  We estimate we will be raising up to an additional £80bn by the end of the parliament, then falling back after that as carbon emissions reduce across the economy.”

    We asked the Green Party for more information and they kindly sent us a short explanatory document. The document provides calculations but little in the way of technical detail on how the tax should work. It’s an extremely brief treatment of a complex tax, particularly when it’s set to raise such a huge sum (4% of GDP).

    However those details they do provide suggest that the Greens are proposing a very unusual, and perhaps unique, carbon tax.

    A simple carbon tax is on either the carbon emitted by UK production or the carbon emitted by UK consumption.

    These days it’s more typical to talk about a “border adjusted” carbon tax. This means that we would tax domestic production and imports, but not exports. This has several advantages:

    • It works extremely nicely as an international system, if others then adopt the same tax. No credit system or complexity is required – each country just taxes the products entering (or produced and consumed in) its own borders.
    • And that’s the point: what the UK does with carbon taxes is irrelevant in global terms – the UK is responsible for 1% of global emissions. A more important aim is for the UK can help spearhead a global move to a carbon tax (e.g. as part of current OECD/Inclusive Forum discussions).
    • More practically: if we tax exports then UK cars sold to the US (for example) are subject to a UK carbon tax, but Chinese cars sold to the US would not be subject to a carbon tax anywhere in the world. UK industry becomes globally uncompetitive. That’s obviously bad for the UK; but it doesn’t help global carbon emissions, because demand for cars would shift from the UK to China – “emissions leakage”. There would be no carbon reduction. It’s pointless.

    The Green proposal is unusual, because it’s not border adjusted, and it applies to UK production, imports and exports. That does not seem very coherent or workable.

    Carbon tax proposals usually phase in the tax gradually, rather than risk creating an economic shock. However the Green Party carbon tax starts at a high rate of £120 per tonne – much higher than the EU carbon price (which has never gone over €105 per tonne). It then increases to £265 per tonne by 2030. The document explains this:

    “We apply a rising tax rate based on HMG carbon values (central estimate). These are the estimated prices at which iit is cheape [sic] for the emitter to reduce its emissions than pay the tax.”

    That’s not how a carbon tax usually works. The idea is to price it at the “social cost of carbon emissions”. It’s unclear why the Greens are taking a different approach.

    The regressivity problem

    An obvious problem with the carbon tax is that it is regressive. Costs resulting from the carbon tax will (inevitably) increase prices, not just of fuel but of all products. That will disproportionately impact the poor, and people on middle incomes will also lose out.

    For this reason, carbon tax proposals are usually accompanied by proposals to redistribute a significant proportion of the tax revenues to households in the form of tax rebates and/or benefits. Some have suggested simply distributing carbon tax refunds across the population. Others suggest more targeted subsidies.

    The Green Party’s carbon tax paper says: “We would provide funding for poorer households to convert to lower carbon alternatives” but provides no details, and no such funding is evident in their figures. In any case, “funding for poorer households” would be insufficient to undo the regressive effects of the carbon tax.

    The sad truth may be that the Greens wish to use carbon tax revenues for general spending, and this has eclipsed the more appropriate use of the revenues for redistribution.

    Incompatibility with their other proposals

    The rest of the Green manifesto speaks as if there is no carbon tax. It talks about an extended windfall tax on oil/gas production, and a new tax on frequent air passengers. The carbon tax document itself says “Carbon tax on aviation could include extensions to the existing Air Passenger Duty or a Frequent Flyer Levy.”

    All this should be irrelevant if a carbon tax is introduced.

    National insurance increase

    “Elected Greens will also call for the reform of tax rates on investment income, by aligning them with the tax and NIC rates on employment income

    We would remove the Upper Earnings Limit that restricts the amount of National Insurance paid by high earners. Tax rates should not fall as income increases. “

    What does “removing the cap on national insurance” mean?

    Here are the current Class 1 rates:

    £967 is the “upper earnings limit”. There used to be no national insurance past that point; it’s now 2%. “Uncapping” means removing the limit so that the 8% rate continues to apply past £967 a week.

    We should, however, discard the pretence there’s something special about national insurance. It’s just income tax by another name, with an antiquated weekly calculation, a complicated history and a funny national accounting treatment. A realistic approach looks at the overall combined rate of income tax and national insurance.

    In the current, 2024/25 tax year, this looks like this for an employee:

    • No tax on incomes below the £12,570 personal allowance.
    • £12,570 to £50,270 – a combined income tax and employee national insurance rate of 28%
    • £50,271 to £125,140 – a combined rate of 42%
    • Above £125,140 – a combined rate of 47%. 

    The Greens are therefore proposing that the third of these should rise to 48%, and the fourth to 53%. 

    However things aren’t that simple. The personal allowance starts to be withdrawn (“tapered”) when your income hits £100,000, and is gone by £125,140. This means that the marginal rate in the £100,000 to £125,140 range is much higher than the headline rate.

    This chart shows the effect, as things stand today (blue) and under the Green proposal yellow):

    There’s an interactive version of the chart here that lets you select different scenarios and touch/mouse over the chart to get exact figures.

    This is not the only factor that means the actual marginal rate is higher than the headline rate. There are a series of poorly thought-through tricks and gimmicks that have this effect, most significantly child benefit withdrawal and student loan repayments.

    Here’s the marginal rates under the Green proposal for a graduate with three kids under 18:

    So a graduate earning £60,000 with three kids pays a 72% marginal rate, and everyone earning £100k-£125k pays a 77% marginal rate. I don’t think this would be sensible or sustainable. There are many people (think: hospital consultants) who would prefer to reduce their hours than earn just 23p in the pound.

    Uncapping national insurance was a perfectly rational policy in the 90s, but it’s not viable today unless the various tricks and gimmicks in the system are fixed or removed. 

    Who would pay this?

    The Green proposal will affect quite a lot of people. 

    £50,270 is not that far above the average London salary. And, by 2027/28, one in five taxpayers, and one in four teachers will be affected; I expect a majority of households will have someone who earns that figure at some point in their life. To say this is a tax on the “richest” is not particularly accurate.

    Pension tax relief limit

    The manifesto says:

    We would equate the rate of pension tax relief with the basic rate of income tax to help fund the social care that will allow elderly and disabled people on low incomes to live in dignity. 

    This is, on the face of it, a sensible way to raise money from the upper middle class without too many distortive effects. It doesn’t affect the very wealthy because they’re past the pension cap.

    The Green Party’s annual revenue figures from this are:

    No justification for these figures is provided, but they are likely in the right ballpark.

    This will affect everyone earning £50k who makes a pension contribution. Many people would respond by stop making pension contributions – that will have obvious wider effects. There are also potential administrative complications.

    VAT on financial services

    “We would also propose a range of changes to VAT, reducing it on hard-pressed areas such as hospitality and the arts and increasing it on financial services and private education. “

    Some financial services are currently either exempt from VAT or outside VAT altogether. These include lending, operating accounts, and most transactions in shares and securities. This means that banks don’t apply VAT to interest or fees on these services; it also means banks can’t recover their input VAT.

    In principle it would be much preferable to end the financial services exemption. However there are significant technical difficulties in doing so; identifying the outputs and inputs is not straightforward (the issues are nicely set out in this paper, which also proposes a solution). There is also the significant practical problem that many customers of banks, such as household borrowers under mortgages, would not be able to recover any VAT they were charged – the likely impact of applying VAT to financial services would be to increase household mortgage bills.

    There have been numerous EU discussions about ending the financial services exemption, but all have failed. The most recent one was abandoned because it was thought too politically difficult to increase prices for consumers during the “cost of living crisis”. We recently spoke to a leading VAT academic who advocates for ending all VAT exemptions; but even she balked at the financial services exemption – “just too difficult”.

    Even if a solution was found, it would be preferable for the UK to proceed in lockstep with the EU; having two different VAT systems for financial services would complicate cross-border business and create the potential for avoidance and evasion.

    All of which is to say that, if the Greens really plan to end the financial services VAT exemption, they need to do better than three words, and be a little more hesitant than assuming they can start booking £8bn of new revenue from April 2025.

    Capital gains tax

    “Elected Greens will push too for the reform [of] Capital Gains Tax (CGT) by aligning the rates paid by taxpayers on income and taxable gains. This would affect less than 2% of all income-tax payers.”

    The Lib Dems think they can raise £5bn from aligning rates. The Greens show £16bn to £20bn:

    £16bn in 2026/2027 is a very large number compared to the actual CGT receipts in 2023/24 of £15bn.

    The problem with capital gains tax is that people can control when they pay it. If you say you’re going to increase the rate, they’ll sell early and take advantage of the current rate. And, if the above is to be believed, the Greens are planning to give people a year before they raise the rate (which is very strange).

    We expect it’s for these reasons that HMRC data shows a projected loss in capital gains tax revenues of about £3bn if rates are equalised. We talk more about this in our analysis of the Lib Dem CGT proposal.

    But the £16bn figure has to be regarded as very wrong.

    Bank tax

    The manifesto says:

    “We would introduce a windfall tax on banks when excessive profits are being made. 

    This seems to leave open whether and how the Greens are proposing taxing the banks, but they nevertheless book £4bn a year of projected revenue from 2027:

    Property tax

    We at Tax Policy Associates are strong supporters of land value taxation, something the Green Party has historically supported.

    So it’s very disappointing that the Green Party says this is a “long-term policy aim” and is just proposing modest tweaks to council tax and business rates:

    “Our long-term policy aim is a Land Value Tax so that those with the most valuable and largest land holdings would contribute the most. In the next parliament, elected Greens will take steps towards this by pushing for: 

    • Re-evaluation of Council Tax bands to reflect big changes in value since 1990s. 

    • Removal of business rate relief on Enterprise Zones, Freeports, petrol stations and most empty properties. 

    • A survey of all landholdings to pave the way for fair taxation of land.”

    There is no further detail on this, and no figures presented for the consequences.

    Disclosure: Our founder, Dan Neidle, is a member of the Labour Party, and sits on its most senior disciplinary body. His tax policy analysis is widely regarded as non-partisan, and he was highly critical of Labour Party tax proposals in the 2017 and 2019 elections.

    Footnotes

    1. We understand that the Green Party wealth tax may be modelled on proposals from the University of Greenwich which suggest a wealth tax could raise as much as £130bn. We regard such figures as pure fantasy. ↩︎

    2. The manifesto itself suggests that the carbon tax replaces fuel duty, which would result in a fuel duty cut – however it seems from the carbon tax document the fuel duty would be maintained until it was eclipsed by the rising carbon tax. ↩︎

    3. The self-employed pay slightly less ↩︎

    4. Uncapping the upper earnings limit was a key element of Labour’s “shadow budget” for the 1992 general election. The “shadow budget” in general, and this proposal in particular, are often blamed for Labour’s loss, although whether that is correct is contested. ↩︎

    5. Ignoring Scotland for the moment, and also ignoring weird marginal rate effects ↩︎

    6. Reports on the Green Party manifesto sometimes say the Greens will cancel student debt,and this has been a Green Party policy in the past. But the actual manifesto for 2024 just has this as a “long term plan” (see page 30), with no figure for this included in their costings. ↩︎

    7. Albeit after providing some new reliefs – there are no details. ↩︎

  • Our take on the Conservative manifesto

    Our take on the Conservative manifesto

    The Conservative manifesto is here, and an accompanying costings document is here. It proposes £6bn of tax cuts in 2024/25, rising to £17bn in 2029/30. The tax cut figures appear realistic; the question is whether they are affordable. But the bigger question is why the manifesto is almost completely silent on tax reform, when so much of the UK tax system is badly broken.

    And the manifesto itself falls into a tax trap our broken tax system creates. A proposed change to child benefit tax accidentally creates a new marginal rate of 70% for a parent earning £120k who has three children under 18.

    If the governing party can’t spot these kinds of problems, what chance for the rest of us?

    We set out the issues in more detail below.

    No tax reform. No pro-growth tax policies.

    From a tax policy perspective, the most important thing about this manifesto is what’s not in it – tax reform. We make the same criticism of the other parties’ manifestos.

    There are serious problems with many of the UK’s most important taxes:

    • VAT is inefficient; the VAT threshold is too high, and that stops small businesses from growing. The exemptions and zero rates are too broad, causing uncertainty for business and disproportionately benefiting the wealthy. The flat rate scheme is being widely abused by criminals.
    • Corporation tax has become impossibly complicated. The move to “full expensing” was incomplete. The constant changes to the rate (three in one year) make it difficult to plan. The OECD global minimum tax means that the largest companies now have to undertake two completely different corporate tax calculations.
    • Income tax has been damaged by a series of gimmicks, bodges and compromises employed to avoid increasing the rate. There’s an “accidental” top marginal rate of 62% (if we include national insurance) for people earning between £100k and £125k (and, if they’re a graduate, 9% more than that). Someone with three children under 18 faces a top marginal rate of 57%. Anyone claiming free childcare and earning £100k potentially faces a marginal rate of over one million percent.
    • Employer national insurance creates a massive difference between the cost of employing someone and the cost of engaging an independent contractor. This means that the thin – and ultimately notional – line between employment and self-employment becomes hugely important. Complex rules are created to guard the line. HMRC’s efforts to police it waste their time and that of taxpayers. And there remains plenty of avoidance and evasion.
    • Stamp duty land tax reduces labour mobility, results in inefficient use of land, and plausibly holds back economic growth.
    • Council tax is hilariously broken, based on 1991 valuations, and with bands which mean that the Buckingham Palace residence pays less council tax than a semi in Blackpool.
    • Inheritance tax is deservedly unpopular. The rate is too high. The burden falls on the upper middle class. The very wealthy easily escape it.
    • Bank taxation is unnecessarily complex, with an entire tax that has no reason to exist, and could easily be shifted to another, better, tax.
    • Capital gains tax has a rate that’s so low it invites avoidance from people shifting income into capital.
    • Our environmental taxes are a muddled mess. There’s an economic consensus across the political spectrum in favour of a carbon tax. This is hard to do unilaterally, but the UK could play an important role advocating for a carbon tax in current OECD discussions.
    • There is now a widespread view, amongst individual taxpayers, business and the tax profession, that HMRC is seriously under-resourced. That is highly inconvenient for taxpayers (and sometimes much more serious than that). But it also means that some tax is not being paid: taxpayers are making mistakes, and HMRC is not helping them.

    We believe a pro-growth agenda has to include tax reform. It’s therefore a shame that there is little discussion of any of these issues in the Conservative Party manifesto (and we fear we won’t see it in the Labour manifesto either).

    The only items in the Conservative Party manifesto which might qualify as tax reform are the income tax child benefit marginal rate change, and stamp duty – but in both cases their proposed solutions cause other problems. More on that below.

    That leaves us with a few Conservative tax cut pledges that are of limited relevance.

    To provide some context, this chart shows current tax receipts for 2023/24. We’ve overlaid a Conservative Party logo equal to the size of the Conservatives’ proposed tax cuts for 2024/25 (for ease of reference, the logo is in the top left of the chart, but the cuts are not to income tax).

    Cuts to national insurance – £5bn cost in 2025/26, rising to £13bn by 2029/30

    The manifesto says the Conservatives plan to:

    “Cut tax for workers by taking another 2p off employee National Insurance so that we will have halved it from 12% at the beginning of this year to 6% by April 2027, a total tax cut of £1,350 for the average
    worker on £35,000 – and the next step in our longterm ambition to end the double tax on work when financial conditions allow.

    Cut taxes to support the self-employed by abolishing the main rate of self-employed National Insurance entirely by the end of the Parliament.”

    We believe the figures presented for the cost of these tax cuts are realistic.

    If you are going to cut tax on income, then national insurance is a better tax to cut than income tax (because it’s only paid on working income, not investment income). Some have suggested the rich will benefit more from the cut – that misunderstands the nature of national insurance. Cutting the main rate of national insurance means it’s only income between £12,570 and £50,000 that benefits. So someone earning £1m benefits the same as someone earning £50,000.

    The key questions are around whether this is realistically funded. In part that is by closing the tax gap, for which more below. In part it is by cutting welfare expenditure, where we have no expertise, but we note that the Institute for Fiscal Studies is sceptical.

    Tackle avoidance and evasion – £6bn planned to be raised

    Partly to fund those tax cuts, the manifesto says:

    “It is vital we make sure people and companies are paying the tax they owe. That’s why, since 2010, Conservative Governments have introduced over 200 measures to tackle tax non-compliance. In total across all the fiscal events we have delivered since 2010, the OBR 16 has scored these measures as raising £95 billion across the forecasts it has produced – £6.7 billion for each year. Building on that, we will raise at least a further £6 billion a year from tackling tax avoidance and evasion by the end of the Parliament.”

    The three main parties have provided three very different sets of claims for how much revenue they could raise in each year of the next Parliament:

    Both Labour and the Conservatives cite the head of the National Audit Office, who said earlier this year that £6bn could be raised by cracking down on avoidance and evasion. But he didn’t say how, or how much it would cost.

    The Labour Party plan is in their “Plan to Close the Tax Gap” document. The Conservatives’ included a plan as part of their National Service press release. This doesn’t appear to be publicly available; we’re publishing it here. The Conservative figures weren’t in that press release, but are in their manifesto costings document. The Lib Dems haven’t published any kind of plan.

    Both Labour and the Conservatives cite figures for historic ninefold returns from compliance expenditure. In an email to us, the Lib Dems cited figures from nine to eighteen times. However, all these figures are derived from historic targeted compliance measures which were relatively small. We are a little sceptical that they can be extrapolated to very significant billion pound measures, as is now proposed.

    Comparing the Labour and Conservative plans: the Conservatives’ in large part reflects current Government initiatives (unsurprisingly). Labour’s plans are more detailed (as you’d expect, from an opposition with something to prove).

    We believe the Labour and Conservative figures are ambitious but may be achievable. We do not believe the Lib Dem figures are achievable in the early years, and the suggestion the £7.2bn figure is year-on-year may be a mistake.

    “Triple Lock Plus” for pensioners – £800m in 2025/26, rising to £2.4bn by 2029/30

    The manifesto says the Conservatives plan to:

    “Cut tax for pensioners with the new Triple Lock Plus, guaranteeing that both the State Pension and the tax free allowance for pensioners always rise with the highest of inflation, earnings or 2.5% – so the new State Pension doesn’t get dragged into income tax.”

    This means pensioners will receive a higher tax-free personal allowance than others. That used to be the case, but was phased out from April 2013. So this change is something of a reversal of policy.

    The general personal allowance is being frozen, which in real terms means it’s being reduced – a tax rise. So what’s really happening here is that pensioners are being exempted from this tax rise. It’s hard to see how that’s justified, given that pensioners’ incomes are on average higher than those of working age (and their poverty rate is lower).

    Abolish stamp duty for first time buyers. £320m cost in 2025/26 rising to £590m in 2029/30

    The manifesto says:

    “We will ensure the majority of first-time buyers pay no Stamp Duty at all, lowering the upfront costs of buying a first home. We will make permanent the increase to the threshold at which first-time buyers pay Stamp Duty to £425,000 from £300,000, which we introduced in 2022.”

    Abolishing stamp duty is easy. The question is whether it makes any actual difference to first time buyers – and the evidence is that it does not.

    Research has shown that stamp duty holidays and reductions just increase house prices. An HMRC working paper found that the 2011 stamp duty relief for first time buyers had no measurable effect on the numbers of first time buyers. We expect the same result here.

    Stamp duty is a terrible tax, and we should abolish it. But abolition needs to be carefully planned in conjunction with other tax reform – otherwise prices will rise, buyers won’t benefit, and the whole exercise just becomes a handout to existing property-owners.

    New landlord CGT exemption – £20m cost for two years

    The manifesto says:

    “To further support homeowners, we will introduce a two-year temporary Capital Gains Tax relief for landlords who sell to their existing tenants.”

    This sounded significant until we looked at the costings – the cost this measure is put at just £20m. That means it is almost irrelevant in the context of total CGT on residential property sales:

    There is also a serious problem with the proposal. This would be amazingly valuable to some people – there are individual landlords who potentially would have tens of millions of pounds of gains. There is much recent history of incompetent or unscrupulous tax advisers selling avoidance schemes to landlords – we would be confident that schemes would be marketed abusing this relief. It wouldn’t take much for the cost of that abuse to greatly exceed the £20m intended cost.

    This comes back to a point we’ve often made: tax reliefs are inherently dangerous: policing the margins of reliefs is difficult, and people will inevitably try to abuse them. It’s much better to have a wide base (i.e. few reliefs) and a lower base.

    In our view this is a gimmick which will benefit very few people and could badly backfire.

    Child benefit reforms clawback – £954m cost in 2026/27 rising to £1.3bn in 2029/30

    “End the unfairness in Child Benefit by moving to a household system, so families don’t start losing Child Benefit until their combined income reaches £120,000 – saving the average family which benefits £1,500.”

    This is another cure to a problem created by a previous Conservative Government.

    One of the worst of the gimmicks in the tax system is the “high income child benefit charge” (HICBC), which claws back child benefit once your income hits a certain threshold. Until the 2024 Budget, the HICBC meant that a family with three children where the highest earner was on £50k faced a marginal rate of tax of 68%.

    The HICBC was, therefore, a problem (with other serious practical issues too, which we discuss here). So Jeremy Hunt deserves credit for making it significantly less awful in this year’s Budget. He moved the HICBC phasing so instead of applying on incomes from £50k to £60k, it applies from 6 April 2024 to incomes from £60k to 80k. That reduced the marginal rates for a graduate with three children under 18 to from 71% to 57%:

    (Red is before the Budget; purple is after.)

    There’s a more readable interactive version here, that lets you play with and compare all the rates discussed in this article – you can click on the legend to select different scenarios, finger/mouse over to see exact figures, and zoom in/out of details of the chart. The code that creates the marginal rate charts is available on our github.

    The Conservative manifesto now proposes to move the threshold from £60k to £120k.

    That’s good news for people earning £60k – their marginal rate drops right back down to 42%.

    However, this creates a new and very high marginal rate of 70% for parents with three children under 18 earning between £120k and £125k:

    (Purple is after the Budget; blue is today’s announcement)

    Why? Because the personal allowance clawback already creates a 62% marginal tax rate for everyone earning between £100k and £125k. And the Tories are moving the child benefit clawback so it partially overlaps with the personal allowance clawback.

    The 70% rate is bad but temporary. The more serious effect is that, once earnings get past the £125k point, there’s a 55% marginal tax rate all the way up to £160k (after that, the marginal rate reverts to the standard 47%). Of course these rates will be less for people with less than three children under 18, and higher for people with more.

    This feels like a serious mistake. The Conservatives should have had the courage of their convictions, and ended the HICBC altogether.

    Moving to a household basis

    The manifesto also adopts current Government policy of changing the HICBC so, instead of applying by reference to the highest earner in the household, it applies to the overall household income.

    The difficulty is that the tax system doesn’t track household income. Married couples used to be taxed on their joint income – that was scrapped following a decades-long feminist campaign for independent taxation. There’s an almost unanimous view amongst tax policy wonks that this change will be technically complex, and in some cases cause hardship.

    It’s correct that applying HICBC to the highest earner is often unfair – a couple each earning £49k aren’t caught by the HICBC, but a couple where only one is working, earning £60k, are caught. But any change needs to fully think through the new unfairnesses that it will create. It’s not clear that has been done.

    Thanks to P and L for their work on this article.

    Disclosure: Our founder, Dan Neidle, is a member of the Labour Party, and sits on its most senior disciplinary body. His tax policy analysis is widely regarded as non-partisan, and he was highly critical of Labour Party tax proposals in the 2017 and 2019 elections.

    Footnotes

    1. See page 31 of the CBI report ↩︎

    2. It’s not merely that HMRC funding has failed to keep pace with inflation; its most experienced personnel have been moved onto other projects, particularly Brexit and the pandemic. See paragraph 1.8 onwards in this National Audit Office report. This was probably sensible, but is having long term consequences. ↩︎

  • Our take on the Lib Dem manifesto

    Our take on the Lib Dem manifesto

    The Lib Dem manifesto is here, and a separate costings document is here. It claims to raise £27bn from tax increases. There is very little detail, but five items seem questionable, representing over £9bn in total:

    First, the Lib Dems propose to raise £1.4bn from a tax on share buybacks. But the tax is badly flawed and likely will raise little or nothing.

    Second, the Lib Dems propose to raise £5.2bn by increasing capital gains tax. But historically it has been a mistake to pre-announce a rise in capital gains: people sell early and make gains before the rise comes into effect. In 1988 this resulted in the rise yielding no net revenue. The same may happen here.

    Third, the Lib Dems plan to raise £2.1bn by tripling the digital services tax. Digital Services Taxes are currently at a difficult moment. The OECD initiative that was supposed to replaced them has stalled. An agreement between the UK, United States and others (which would prevent any increase) expires at the end of this month. Unilaterally tripling the rate when the agreements expires is certainly possible, but likely to be seen as provocative by the US administration.

    Fourth, The Tories said they will raise £6bn by clamping down on avoidance. Labour says they can raise £5bn. Both parties ramp up to these figures over the course of a Parliament, with Labour booking only £700m of revenue in the first year. The Lib Dems seem to expect to book £7.2bn every year, with no ramping up. That looks like a mistake. They have also (unlike the other two parties) provided no details on how they would achieve this.

    Fifth, the manifesto says the Lib Dems will end the loan charge. This was a controversial anti-avoidance measure that raised about £3.2bn in total. Are the Lib Dems saying they’ll refund that? If they are, why isn’t it in their costings? And if not, what does this proposal mean?

    We set out the issues in more detail below.

    The overall tax effect of the manifesto

    We have previously said that the tax increases that Labour and the Conservatives were arguing about were so small as to be irrelevant.

    The Lib Dems’ £27bn of tax increases is still small in the context of total UK tax revenues, but not insignificant.

    This chart superimposes the size of the Lib Dem tax increases over all the figures for UK tax receipts in 2023/24 (and, for ease, it’s in the top left, but none of the Lib Dem increases are to income tax):

    Capital gains tax – £5.2bn

    The Lib Dems plan to significantly increase the current rate of capital gains tax:

    “Fairly reform Capital Gains Tax: Close loopholes exploited by the super-wealthy by adjusting the rates and basing them solely on capital gains while increasing the tax-free allowance from £3,000 to £5,000, on top of a new tax-free allowance for inflation, and introducing a relief for small businesses.”

    That’s not very specific, but their press release (not publicly available) said:

    “New rate of 40% for gains of between £50,000 to £100,000, and 45% for gains of over £100,000.”

    The Lib Dems say this will raise £5.2bn, but there’s no breakdown on the additional revenues from increasing the rate, the lost revenue from indexation allowance/reliefs and the cost of increasing the allowance.

    There is a good argument for raising CGT. Having so great a gap between income and capital gains enables avoidance, as people flip what would otherwise be income (taxed at 39.35% or even 47%) into capital gains (usually taxed at 20%). There is also a good argument for reintroducing an allowance for inflation.

    But there is a significant, albeit rather unfair, problem with this proposal.

    Schrodinger’s tax increase

    On 15 March 1988, Nigel Lawson announced he would increase the rate of CGT to 40% and introduce an indexation allowance. That was, I think, a good idea.

    However the new rate applied from 6 April 1988. In the intervening three weeks we saw a lot of share sales, as people “crystallised” their historic gains under the 30% rate whilst they still could.

    That resulted in a significant increase in CGT revenues before the change came in, and a significant decline afterwards:

    Taking both factors into account, in the next five years following the announcement, the rate increase raised no additional revenue.

    If the Lib Dems win the election (or form part of a coalition) then the Budget would likely be in the following Autumn. People would have rather longer than two weeks to crystallise gains. We could expect to see a similar, or larger, effect again (particularly with shares).

    I expect it’s for these reasons that HMRC’s figures on the amounts raised by increasing the CGT rate are very low – indeed their figure for raising the higher 28% rate (homes and carried interest) by 10% is negative:

    The Lib Dem plan is, broadly speaking, to raise the lower rate by 20% and the higher rate by an average of 15%. HMRC’s figures suggests that doesn’t raise the £5.2bn of revenue projected by the Lib Dems

    All in all, the consequence of applying HMRC’s figures to the Lib Dem proposals isn’t £5.2bn of revenue – it’s about a £3bn loss in 2026/27. And will be worse than that once you factor in the cost of the new reliefs the Lib Dems are proposing – inflation relief plus an increased annual exempt amount.

    So the rather unfortunate result is that if you are a politician who wants to raise revenues by putting up CGT, you shouldn’t tell anyone about it in advance. That’s not great in the context of an election campaign.

    The substance of the proposal

    What about the substance of the proposal? If we assume for the moment that the Lib Dems could turn back time and undo their announcement, then dramatically enact it in a Budget?

    The proposed 40% and 45% rates would be some of the highest in the developed world:

    When dividends on shares are taxed at a top marginal rate of 39.35%, taxing capital gains on shares at a higher rate doesn’t make much sense. Owners of e.g. private companies will opt to take their return by dividend. So any revenues from the higher rate would in the main come from real estate.

    However if this is combined with a sensible inflation relief then the effective rate (which is what matters) would in many cases be lower.

    So, all in all, the substance of the CGT proposal is in many ways sensible (however perhaps too great an increase)., but pre-announcing the measure completely undermines it, and (on HMRC’s figures) generates a loss.

    Bank taxes – £4.3bn

    The Lib Dems say this:

    “Reverse Conservative cuts to bank taxes: Reverse Conservative tax cuts for the big banks, restoring Bank Surcharge and Bank Levy revenues to 2016 levels in real terms.”

    This is not an accurate statement. There was no “tax cut”.

    The history looks like this:

    • In 2015, corporation tax was cut from 28% to 20%.
    • An 8% surcharge on banks was introduced for two reasons. First, to stop the banks getting the benefit of the tax cut. Second, to compensate for a reduction in the scope of the bank levy, so it would apply only to banks’ UK balance sheets, and not the worldwide balance sheets of UK banks (which was thought, I think correctly, to make UK banks uncompetitive).
    • In 2017, corporation tax was cut to 19%; the surcharge stayed the same.
    • From 2023/24, corporation tax went up to 25%. The surcharge was cut from 8% to 3%.
    • So banks are paying the same 28% tax on their profits that they were paying prior to 2017, and slightly more than the 27% they paid from 2017 to 2023..

    Banks’ overall tax position since 2016 – bank levy, bank surcharge, and corporation tax, looks like this:

    So total tax paid by banks has gone up.

    The £4.3bn the Lib Dems are proposing to collect represents about a 30% increase in bank taxation. It would be better to be up-front about that rather than claiming it’s reducing a cut.

    Who pays for the tax increase?

    Probably the approx £2bn increase to the bank surcharge will be borne by some mixture of bank shareholders and bank employees.

    The £2bn increase to the bank levy, on the other hand, is different.

    The bank levy is a bad tax that should be abolished (and replaced by increasing the surcharge). Not least because there is good evidence that the cost of the bank levy isn’t actually borne by banks, but by their mortgage customers in the form of higher rates.

    Buyback tax – £1.4bn

    The Lib Dems claimed a tax on share buybacks would raise £1.4bn. We believe it will raise much less, and plausibly nothing at all. The Institute for Fiscal Studies agrees.

    Cut VAT on electric vehicle charging

    The Lib Dems are proposing to cut VAT on electric vehicle charging. No separate figure is given for this – it’s part of their overall £570m transport figure.

    It is, however, a bad idea. All the evidence is that the tax cut would not be passed to consumers – it would be retained by suppliers. Even if one wanted to subsidise EV charging suppliers, this is a bad way to do it, because you’re giving existing suppliers a windfall, rather than incentivising the construction of new charging points. We wrote about these issues here, and about the evidence that single-product/service VAT cuts generally don’t cut prices.

    Windfall tax on oil and gas profits – £2.1bn

    The Lib Dems say:

    “A proper windfall tax on oil & gas super-profits: Scrap the ‘investment allowance’ loophole, increase the headline rate and extend it to profits since October 2021 when Liberal Democrats first called for its introduction.”

    We have previously criticised the existing windfall tax, and suggested it could raise considerably more. We can’t assess the Lib Dem proposal properly, as there are no details, however comments sent to us by the Lib Dem press office suggest that they are turning the windfall tax into a permanent tax:

    “We would expand the Energy Profits Levy by removing the “investment allowance” loophole, increase the headline rate, extend it to profits since October 2021 and extend it beyond March 2028. This would raise extra revenue in every year of the Parliament, with an extra £2.1 billion a year in 2028-29.”

    Digital services tax – £2.1bn

    The Lib Dems say:

    “Raise the Digital Services Tax on tech giants: Increase the Digital Services Tax on social media firms and other tech giants from 2% to 6%.”

    There is a lot of history here. Digital Services Taxes (DSTs) were introduced by the UK and others in 2018, applying from 2020. The US was most unhappy, considering it unfair to introduce a new tax which (in the main) only applied to US businesses. There was a threat of retaliatory action from the US, and eventually a compromise. A new multilateral tax on all cross-border businesses (not just digital ones) would be created by the OECD – “Pillar One”. Once it was adopted, DSTs would be abolished. A formal statement to this effect was agreed by the UK, United States, Austria, France, Italy and Spain (and later extended to end June 2024).

    The difficulty is that, whilst the OECD global minimum tax (“Pillar Two”) was a success and has been implemented, Pillar One is going nowhere.

    It is unclear what’s going to happen. The deal with the US expires at the end of this month, and in theory the UK could then increase its digital services tax rate. But for the UK to unilaterally triple the rate without any discussions is likely to be seen by the US administration as provocative.

    The Lib Dems say elsewhere in their manifesto that they want to:

    This (sensible) aim is likely to be undermined by taking unilateral action on DSTs.

    Sewage tax on water company profits – £260m

    “Sewage tax on water company profits: Apply an additional 16% tax on water company profits.”

    There could be an interesting proposal to apply a tax on water companies reflecting the amount of sewage they discharge. This isn’t that – it’s just a tax.

    So it won’t change behaviour. It’s also unclear how much it will raise given the well-publicised lack of profitability in the sector.

    Tackle avoidance and evasion – £7.2bn

    “Tackle tax avoidance and evasion: Narrow the £36 billion annual tax gap by investing an extra £1 billion a year in HMRC to improve customer support and boost compliance and anti-avoidance activities.”

    We assessed the potential to raise additional funds from avoidance/compliance here.

    The three main parties have provided three very different sets of claims for how much revenue they could raise:

    The Labour Party plan is in their “Plan to Close the Tax Gap” document. The Conservatives’ included a plan as part of their National Service press release. This doesn’t appear to be publicly available; we’re publishing it here. The Conservative figures weren’t in that press release, but are in their manifesto costings document

    The Lib Dems just present the £7.2bn figure as 2028/29 funding in their manifesto costings document. They don’t give figures for earlier years. There is no published plan. I asked them about this, and their press office told me:

    “We will invest an additional £1 billion a year in HMRC to tackle tax avoidance and evasion – more than Labour or the Conservatives. We are confident that this would enable us to raise an extra £8.23 billion a year by 2028-29 – an achievable and realistic figure. Jim Harra, Managing Director of HMRC, told the Public Accounts Committee that every £1 invested in cracking down on tax avoidance and evasion raises between £9 and £18. That would mean net revenue of £7.23 billion a year in 2028-29.”

    So unfortunately the Lib Dems stand out: for having no plan, for claiming the largest revenues, and for assuming the revenues ramp up faster than others.

    Reform aviation tax – £3.6bn

    “Fairly reform aviation taxes: Reform the taxation of international flights to focus on those who fly the most, while reducing costs for ordinary households who take one or two international return flights per year.”

    No further details are available, but this represents a doubling of existing air passenger duty. It’s difficult to combine an environmental aim with protecting “ordinary households” when the majority of flights are taken by ordinary households, for leisure. If the intention is to track the number of flights everybody takes then that would require a centralised individual flight system; the practicalities are outside our expertise, but it would presumably take time to implement.

    Private jet flights – £380m

    “Super tax on private jet flights: Introduce a new tax on each private jet flight and remove the VAT exemption for private flights.”

    No further details are available

    Loan charge – £3.2bn?

    The manifesto says the Lib Dems will end the loan charge:

    The loan charge was a controversial anti-avoidance measure that raised about £3.2bn in total. Are the Lib Dems saying they’ll refund that? If they are, why isn’t it in their costings? And if not, what does this proposal mean?

    If this is just saying “we won’t do that again” then a large number of loan charge taxpayers are going to feel very let down.

    Tax cuts and tax reforms

    There are no tax cuts in the manifesto. Nor are there any tax reforms (except, perhaps, the reintroduction of inflation relief for CGT). That is disappointing.

    Disclosure: Our founder, Dan Neidle, is a member of the Labour Party, and sits on its most senior disciplinary body. His tax policy analysis is widely regarded as non-partisan, and he was highly critical of Labour Party tax proposals in the 2017 and 2019 elections.

    Footnotes

    1. We expect that’s because HMRC anticipate a significant decline in sales; acceleration effects are much less likely given the difficulty of exchanging on a sale within three months. ↩︎

    2. I’ve had to estimate the figure for bank corporation tax by simply multiplying the surcharge by the appropriate ration of CT:surcharge. I then calculate the effect of the Lib Dem changes in 2024-25 by assuming profit is unchanged and we go back to 2016 levels of levy and surcharge. ↩︎

    3. 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. Business customers can go elsewhere. Consumers can’t. And this is what the EBRD study found: “the tax is shifted to customers with the smallest demand elasticity, such as households”. ↩︎

  • The Lib-Dem buyback tax won’t raise £1.4bn, and could raise nothing

    The Lib-Dem buyback tax won’t raise £1.4bn, and could raise nothing

    The Lib Dems are proposing a 4% tax on share buybacks that they say would raise £1.4bn/year. It’s based on a similar proposal in America. But circumstances in the US and UK are very different. This means that the rationale for the US tax isn’t relevant to the UK and, more importantly, that the Lib Dem proposal would raise much less than £1.4bn. It’s plausible it could raise almost nothing.

    UPDATED 9 June 2024 to reflect the latest Lib Dem proposal, which ups the main estimate to £2.2bn, but then knocks £800m off out of “caution”. There’s also a fair take on this from fullfact.org here.

    The US tax benefit of buybacks

    In 2022, the US imposed a 1% excise tax on share buybacks.

    Why?

    Primarily because two significant classes of investors in US shares receive a tax benefit from buybacks as opposed to dividends:

    • US retail investors directly hold about a third of the US equity market. Dividends they receive are taxed at up to 23.8% (plus State income taxes, where applicable). Capital growth from a buyback isn’t taxed immediately at all. Some investors will never sell and the gains will never be taxed; if they do sell, long term capital gains are taxed at 20% (plus any State capital gain taxes).
    • Foreign investors hold about 16% of the US equity market. The US imposes a withholding tax on dividends that ranges between 15% (for investors in countries with a favourable tax treaty with the US) and 30% (the worst case). But a buyback increases the value of an investor’s shares; any capital gain made on a subsequent sale by a foreign investor is not subject to US tax at all.

    We can therefore make a rough estimate that paying profit out as a buyback rather than a dividend means a reduction in overall US tax paid of somewhere between 4% and 14% of the amount of the buyback.

    It is therefore not that surprising that the 1% buyback tax did not noticeably reduce the volume of buybacks – the tax is significantly less than the tax benefit.

    How high would the buyback tax have to be to equalise the tax treatment? There is no simple answer, given the diversity of investors and their tax positions, but the simple calculations above suggest the answer is at least 4%.

    It is therefore probably not a coincidence that President Biden is now proposing to increase the tax to 4% (although we understand that this has little chance of becoming law in the current US political environment).

    The UK tax benefit of buybacks

    The differences between US and UK stock markets and tax rules mean that buybacks by listed companies have very little tax benefit in the UK.

    • UK individual investors who hold onto their shares have a big tax benefit from buybacks, as their eventual capital gain would be taxed at 20%, but dividends taxed at a top rate of 39.35%. However UK individual investors directly hold only about 4% of the UK equity market; another 7% is held through ISAs but, as ISAs aren’t taxable, these investors have no preference for buybacks vs dividends.
    • UK companies hold a small proportion of the equity market (1.4% in the 2020 figures). If they participate in a buyback then the position is the same as if they had received a dividend – it’s exempt. If they don’t, then buybacks provide them with a worse tax treatment: corporate capital gains are taxed at 25% but dividends are exempt.
    • Foreign investors hold almost 60% of UK listed shares, but the UK doesn’t tax them on either dividends or capital gains.

    We can therefore make a rough estimate that paying profit out as a buyback rather than a dividend means a reduction in overall UK tax paid of about 0.8% of the amount paid out in the buyback. This is pleasingly close to the existing 0.5% stamp duty charged on buybacks, leaving a surplus benefit of probably no more than 0.3%.

    It is therefore unsurprising that, whilst tax is often cited as a driver of US buybacks, it is not usually cited by market observers as the reason for UK buybacks.

    The consequences

    The lack of a material tax benefit from UK buybacks has two important consequences.

    First, it makes it hard to understand the rationale for a buyback tax. If the Lib Dems want to increase tax on companies, they could increase corporation tax (although I would be sceptical this is a good idea right now).

    Second, it means that the Lib Dems’ revenue projection is wrong.

    The Lib Dems say their 4% tax would raise £1.4bn annually. They haven’t published their methodology – they just say this:

    It’s reasonably clear all they’ve done is multiply 4% by the approximately £50bn volume of buybacks in 2022 and 2023, to come up with a static estimateo f £2.2bn. They then “take a cautious approach to account for potential changes in company behaviour”, and reduce this to their claimed £1.4bn.

    That is, however, not a realistic basis for estimating the revenues for a tax. You have to properly take into account the taxpayer response – the tax elasticity. If we impose a £10,000 tax on men with beards then we cannot calculate the revenue as (£10,000 x 15 million men with beards). There would be an obvious taxpayer response (shaving), and the actual revenue would be close to zero.

    In the case of buyback taxes there is an equally obvious taxpayer response – paying a dividend instead of buying back shares.

    The Lib Dems cite an IPPR paper from 2022 which proposed a 1% tax on buybacks. The IPPR said their proposal would raise £225m, using the same simple methodology now adopted by the Lib Dems, but with an important caveat:

    • A 1 per cent tax on the share buyback schemes of FTSE-listed companies could raise an additional £225 million in a single year at current levels of buybacks. In the US, the Biden administration is seeking to rein in rising levels of share buybacks with a 1 per cent tax on stock repurchasing schemes. The tax will raise revenues to reduce the deficit and invest in renewable energy.

    And the IPPR explicitly warned about the risk of a higher tax:

    Taxing shareholder payments at a higher level would raise more revenue while encouraging companies to reinvest their profits in the productive economy. However, levying a higher tax on buybacks is likely to discourage companies from repurchasing their own stock. It is therefore fair to assume that the revenues raised from a buyback tax will change in line with the level at which they are taxed.

    The current US buyback tax at 1% is considerably lower than the overall tax 4% to 14% tax benefit from buybacks. Biden’s new proposal at 4% approaches the bottom-end estimate, but does not exceed it, and that is surely deliberate. So it would be rational to expect the 4% tax to somewhat reduce the volume of buybacks, but only to a degree.

    The Lib Dem tax is very different, because it is at least four times greater than the tax benefits of buybacks (particularly once we take account of the existing 0.5% stamp duty). There are other benefits of buybacks; they can be more flexible, and they send out price signals (inflating EPS but without a “real” economic effect). It is not at all obvious that these, rather ephemeral, benefits are worth 3% of the value of a buyback.

    The natural conclusion is that a 4% buyback tax will simply result in companies switching from buybacks to dividends. And because 95% of investors receive no tax benefit at all from buybacks, but would bear the cost of the 4% buyback tax, there would likely be significant shareholder pressure to drop buybacks entirely.

    The other justification provided for the tax is that it would increase investment. This doesn’t make any sense. If a company has decided to return cash to investors then a buyback tax may incentivise it to move to a dividend; it’s unclear why it would incentivise it to retain the cash. It also seems simplistic to regard cash retained by a company as investment, but cash returned to shareholders as simply disappearing.

    So the cautious estimate is not £1.4bn – it’s nothing.

    We agree with Stuart Adam from the Institute of Fiscal Studies:

    That is, however, not the end of the analysis, because there are second order effects:

    • Buybacks are currently subject to 0.5% stamp duty/stamp duty reserve tax. So an end to buybacks would mean a loss of c£250m of stamp duty revenue.
    • An end to buybacks means more dividends, so the c4% of UK individuals directly holding shares would pay more income tax. On the basis of our top-end estimate above, this amounts to somewhere less than 0.8% of buyback values i.e. £400m of additional tax revenue.
    • Then there are the costs to Government/HMRC of creating the tax, and the cost to business of complying with it.

    We don’t have enough data to properly estimate the net result of these effects. They would probably be small, but the direct revenues from the tax would also probably be small.

    There are many historical examples of people taxing shares without thinking through how people would respond. These usually ended badly – the Swedish financial transaction tax and US interest equalisation tax are the most notorious examples.

    The general rule remains that your motive for introducing a tax is irrelevant. The key questions are: what will happen in practice? What incentives are you creating? How will people respond?

    It’s all very tedious. It’s also necessary.

    Photo of Ed Davey by Dave Radcliffe, licensed under Attribution-NoDerivs (CC BY-ND 2.0)

    Footnotes

    1. “directly” meaning this is excluding holdings through ETFs, mutual funds and pensions, which have different tax treatment ↩︎

    2. i.e. because the minimum saving will be (34% x 3.8% + 16% x 15%) and the maximum saving will be (34% x 23.8% + 16% x 30%). This ignores State taxes and a large number of other complications, so should be regarded as no more than a very rough approximation ↩︎

    3. In principle one might say that there should be a different result, because the majority of investors in US equities obtain no tax benefit from buybacks, but now suffer the cost of the excise tax, and they could be expected to agitate against buybacks. A plausible answer is that retail investors have an outsize influence. ↩︎

    4. After writing the first draft of this piece, we found this analysis by the left-leaning Tax Policy Center, which uses different data and a slightly different approach but also concludes the answer is around 4%. ↩︎

    5. There is a separate question about unlisted/private companies engineering a return of capital rather than a dividend to obtain a tax advantage, i.e. because of the large differential between the 39.35% top rate of income tax on dividends and the 20% capital gains tax rate. The Lib Dems aren’t proposing to tax private companies but, even if they were, a buyback tax would not come close to reversing this benefit. The more effective and simpler answer would be a specific anti-avoidance rule. ↩︎

    6. Investors whose shares are bought back are mostly taxed on the buyback as income, as generally only the nominal value of the share is treated as a capital gain. Hence a rational UK individual investor will not take-up a buyback; the tax treatment is much worse than simply selling their shares in the market. ↩︎

    7. UK individual investors hold about 11% of the UK listed market, equating to about £250bn. However ISA investors hold about £400m of stocks/shares and have a 37% weighting towards the UK, implying they hold about £150bn of UK equities. Thus only 40% of UK individual investors’ holdings in UK listed equities are held directly. ↩︎

    8. There are exceptions to both rules, but for listed companies the exceptions generally won’t apply. ↩︎

    9. i.e. because 4% x 19.35% = 0.8%, but that’s a top-end estimate because many investors won’t pay the additional rate, and any investors actually participating in the buyback pay more tax as a result. ↩︎

    10. As an aside, whilst it’s a very good idea to benchmark tax policy proposals against other countries’ experiences, it’s dangerous to assume that a tax policy that’s successful in one country will also be successful in another. There are a myriad of tax, legal and societal reasons why that is often not the case. In this instance it’s the difference between the US and UK markets plus the difference in the tax treatment of foreign investors – both are sizeable differences, and together they make the buyback landscape in the US markedly different from the UK ↩︎

    11. There has been research into the impact of stamp duty on share trading, and the elasticity of share prices with respect to transaction costs. In principle similar research could look at the impact of existing stamp duty on buybacks (by reviewing data from when the rate changed from 1% to 0.5% in 1986. However I’m not aware of anyone doing this; possibly the volume of buybacks around 1986 was too small to make this feasible. ↩︎

    12. There are other problems with the estimate. The US buyback tax exempts certain types of mutual funds because they engage in buybacks to minimise their share price discount vs their NAV. Realistically a UK buyback tax would have to exempt investment trusts, and probably create other exemptions too. So the £2.2bn estimate is wrong even if we ignore elasticity/taxpayer response, but elasticity is by far the most important effect. ↩︎

    13. Not quite zero, because some people would make a mistake; some people would try and fail to avoid the tax (with complex boundaries between moustaches and beards, and difficult caselaw around false beards). And having a beard would become a signal of enormous wealth ↩︎

    14. It’s sometimes suggested that buybacks are used by executives to manipulate their own remuneration targets. This would be possible in theory if executive remuneration packages are not designed and implemented carefully. A detailed study looked at the FTSE 350 to see if there was evidence of buybacks inflating executive pay – it found that there was not. ↩︎

    15. Warren Buffet said “When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive).” ↩︎

  • Stamp duty is a terrible tax. We should abolish it – but there’s a price.

    Stamp duty is a terrible tax. We should abolish it – but there’s a price.

    Stamp duty is a terrible tax. The Tories want to abolish it for most first time buyers. But the evidence shows that cutting stamp duty increases house prices, and that previous attempts to provide relief for first time buyers were ineffective.

    Council tax is also terrible tax – with Buckingham Palace paying less council tax than a semi in Blackpool.

    We can solve both problems together, and tax land in a way that encourages housebuilding and economic growth. But that requires smart thinking and brave politics.

    The problem with stamp duty

    Stamp duty land tax (SDLT) is a deeply hated tax.

    It reduces transactions, distorts the housing market, and often stops people moving when they want to. Stamp duty makes it harder to borrow from a bank (because the stamp duty is “lost value”). All of this means it reduces labour mobility, results in inefficient use of land, and plausibly holds back economic growth.

    And the rates are now so high that the top rates raise very little; HMRC figures suggest that increasing the top rate any further would actually result in less tax revenue.

    It also makes people miserable.

    Stamp duty only exists because, 300 years ago, requiring official documents to be stamped was one of the only ways governments of the time could collect tax. We have much more efficient ways to tax today – but stamp duty remains. Until four years ago HMRC even still used the Victorian stamping machine in the picture at the top of the page.

    The problem is that, like many bad taxes, politicians have become addicted to it. SDLT now raises £12bn each year – an amount that’s hard to ignore.

    And there’s an even worse problem: abolition would inflate property prices.

    The problem with abolishing stamp duty

    The link between stamp duty and prices is clear when we look at the impact on house prices of the stamp duty “holidays” in 2021:

    The spikes in June and September coincide with the ends of the “holidays”. A rush of people to take advantage of the discounted stamp duty.

    Of course the “holidays” were temporary – but the chart suggests that there was a permanent upwards adjustment in house prices (probably due to the “stickiness” of house prices).

    Previous stamp duty holidays had less dramatic effects. There’s good evidence that the 2008/9 stamp duty holiday did lead to lower net prices, but 40% of the benefit still went to sellers, not buyers. I’d speculate that the difference is explained by the much lower stamp duty rates at the time.

    A detailed Australian study looked at longer-term changes than the recent UK “holidays” – it found that all the incidence of stamp duty changes fell on sellers (and therefore prices). This is what we’d expect economically in a market that’s constrained by supply of houses.

    These effects mean that stamp duty cuts aimed at first time buyers may end up not actually helping first time buyers. An HMRC working paper found that the 2011 stamp duty relief for first time buyers had no measurable effect on the numbers of first time buyers.

    The problem with council tax

    Stamp duty isn’t our only broken property tax. Council tax is hopeless – working off 1991 valuations, and with a distributional curve that looks upside down.

    We can see the problem immediately from the Westminster council tax bands:

    The bands cap out at £320k – equivalent to about a £2m property today. So there are two bedroom apartments paying the same council tax as Buckingham Palace.

    And the top Band H rate – restricted by law to twice the Band D rate, is pathetically small compared to the value of many Westminster properties.

    The problem is then exacerbated by the fact that poorer areas tend to have higher council taxes. Here’s Blackpool:

    So Buckingham Palace pays less council tax than a semi in Blackpool.

    That’s why, if we plot property values vs council tax, we see a tax that hits lower-value properties the most:

    In a sane world, this curve would either be reasonably straight (with council tax a consistent % of the value of the property), or it would curve upwards (i.e. a progressive tax with the % increasing as the value increases). This curve is the wrong way up.

    The solution

    The solution is to fix council tax and stamp duty at the same time.

    Abolish stamp duty altogether, and change council tax to make it fairer… calibrating that change so that end of stamp duty doesn’t just send house prices soaring. This is not an original proposal – it was one of the recommendations of the Mirrlees Review in 2010. Paul Johnson of the Institute of Fiscal Studies has also written about it.

    But we can go further. The really courageous answer is to scrap council tax, business rates and stamp duty – that’s about £80bn altogether – and replace them all with “land value tax” (LVT). LVT is an annual tax on the unimproved value of land, residential and commercial – probably the rate would be somewhere between 0.5% and 1% of current market values. This excellent article by Martin Wolf makes the case better than I ever could.

    There are two amazing things about LVT.

    The first is that it has support from economists and think tanks right across the political spectrum. How many other ideas are backed by the Institute of Economic Affairs, the Adam Smith Institute, the Institute for Fiscal Studies, the New Economics Foundation, the Resolution Foundation, the Fabian Society, the Centre for Economic Policy Research, and the chief economics correspondent at the FT?

    The second is that everyone says it’s politically impossible.

    I wonder how true that is.

    So let’s definitely not do land value tax. Let’s instead abolish stamp duty and fund it by adding some bands to council tax, so it more closely tracks valuations. Most people will pay a bit more tax, but not much more – and it’s worth it to get rid of the hated stamp duty. Whilst we’re at it, let’s update valuations more regularly, so it’s fairer. And why not make it apply to the unimproved value of land, so people aren’t punished for improving their property?

    Everyone agrees business rates need reform – so let’s make similar changes to business rates.

    What we end up with won’t be called “land value tax”, and won’t exactly be a land value tax. But it’s getting awfully close.

    The price

    That’s the price of abolishing stamp duty: some of us have to pay a bit more council tax (or, in my fantasy world, land value tax). That’s worth doing for a saner housing market that doesn’t hold back growth. And a land value tax should encourage house-building and actually boost growth.

    But if all we do is abolish stamp duty, most or all of the tax saved by buyers will be eaten up in higher property values. It becomes a £12bn government handout to sellers.

    There’s no free lunch. But there is an opportunity for a big pro-growth tax reform. It might even be popular.

    Photo of original stamping machine is Crown copyright, and reused here under the Open Government Licence

    Many thanks K for assistance with the economic aspects of this article.

    Footnotes

    1. Apologies to all tax professionals, but I’m going to call SDLT “stamp duty” throughout this article. ↩︎

    2. The elasticities found in HMRC research are incredible; a 1% change in the effective tax rate results in almost a 12% change in the number of commercial transactions and a 5-7% change in the number of residential transactions. (Strictly semi-elasticities because they are by reference to absolute % changes in the tax rate, not percentage changes in the % tax rate). ↩︎

    3. Hello tax professionals. Yes, I know stamp duty and SDLT parted ways in 2003… but the point about the antiquated nature of stamp taxes remains valid. And I like the picture. ↩︎

    4. There’s some published research on the 2021 holiday, but it’s qualitative as it was completed too soon to catch the September heart attack. I’m not aware of anything more recent, which is a shame – 2021 was a brilliant double natural experiment. ↩︎

    5. i.e. because tax incidence theory says that where supply is inelastic and demand is elastic, the seller bears the incidence. ↩︎

    6. Meaning the Royal Residence at Buckingham Palace – most of the rest of the complex isn’t a dwelling, and pays business rates not council tax. I haven’t seen any data on the value of the Royal Residence, but safe to assume it is very high indeed. ↩︎

    7. i.e. because economically we can expect the present value of future council tax payments to be priced into house prices, and if we increase council tax slightly at the low end and significantly at the high end, we should be able to undo the price effects of abolishing stamp duty. ↩︎

    8. A quick health warning: many of the people and websites promoting land value tax are eccentric. I once had a lovely discussion with someone from a land value tax campaign. After a while I asked what kind of rate he expected – 1% or 2% perhaps? His answer was 100%. Land value tax’s supporters remain one of the biggest obstacles to its adoption. They often suggest income tax/NICs, VAT and corporation tax could all be replaced with LVT – a look at the numbers suggests this is wildly implausible. ↩︎

    9. i.e. as if there was nothing built on it. ↩︎

    10. Meaning a higher % of the unimproved value; but it’s the % of market value that people will care about when the tax is introduced. ↩︎

    11. That would be quite unfair on someone who has just paid a large SDLT bill to buy an expensive property – they get punished under the new rules and the old. It would make sense to give some form of relief for recent SDLT… for example allowing SDLT to be written off over ten years worth of neo-council tax/LVT. So for example someone who paid SDLT nine years ago would get 1/10th of that credited against the new tax for one year. Someone who paid SDLT yesterday would get 1/10th of that credited for each of the next ten years. But this is one of many ways it could work. ↩︎

  • Matrix Freedom – the scam conspiracy theory that makes £500k a month from the vulnerable

    Matrix Freedom – the scam conspiracy theory that makes £500k a month from the vulnerable

    Iain Clifford Stamp and his business, “Matrix Freedom”, are selling a scheme which falsely claims to make their clients’ mortgages disappear. The scheme relies upon “freeman on the land” conspiracy theories about how the world and the legal system work. The High Court just threw out Stamp’s claims, and said those behind the schemes may have committed criminal offences. The police and the FCA should investigate before more consumers are defrauded, and more court time is wasted.

    The High Court judgment makes for alarming reading. We believe the increasing prevalence of pseudolaw scams like this represent a threat to vulnerable people in financial difficulties. The authorities should act.

    UPDATE 24 June 2024: Iain Stamp brought a defamation claim against openDemocracy for their excellent article on Stamp and Matrix Freedom. That has just been dismissed as “totally without merit”, with the case being transferred to a High Court judge, which made a general civil restraint order against Stamp.

    UPDATE January 2025: In response to this article, Stamp sent me a very long pseudo-legal document demanding that I respond to a number of nonsensical claims (including that “The UNITED KINGDOM is a UK limited company registered at 6 Sharon Court, London, N12 8NX”). I ignored it. Stamp sent a second similar document – I sent him a short response, asking him to stop sending me meaningless documents. Stamp didn’t reply, but sent me a third document on 6 January 2025, threatening to impose a $1.5m “lien” on me if I don’t agree to all manner of bizarre things. Finally on 20 January 2025 they served that fake “lien” on me. This is probably just playacting to impress his followers/victims, but if Stamp makes any attempt to collect on his fraudulent “lien” then he should expect serious consequences.

    UPDATE JULY 2025: the FCA is pursuing a prosecution against Stamp for undertaking unauthorised related activity. It obtained an restraint order in 2023 preventing Stamp from hiding his assets, and a disclosure order in 2024 requiring Stamp to disclose all his assets. Stamp ignored the orders. As a result, he was found in contempt of court and sentenced to one year’s imprisonment. Here’s Stamp’s pseudo-legal defence (which the court described as “nonsense”).

    UPDATE AUGUST 2025: Instead of complying with the contempt order, or indeed appealing Stamp, has raised complaints to the ECHR and the International Criminal Court (both of which complain about this report and name Dan Neidle).

    Iain Clifford Stamp and Matrix Freedom

    Stamp runs a company, a website and a “private members association”, all called “Matrix Freedom”.

    Stamp himself has a background of business failure and losing investors’ money in dubious circumstances.

    Matrix Freedom uses their website, Facebook, TikTok, and traditional doorstep leaflets to make a series of spectacular “get rich quick” claims.

    The website includes a calculator that lets you see how much you can “claim”, based on their theories. It says that someone earning £50,000 could claim £80,000 “recoupment and compensation”.

    The internet is full of weird conspiracy theories about the nature of the financial and legal systems. This element of Matrix Freedom’s pitch is typical:

    But Matrix Freedom are unusual in that they aggressively monetise their conspiracy theories. The first step is a “facilitation fee”:

    And Matrix Freedom seems to operate like a normal business, complete with management meetings by Zoom (some of which were leaked here).

    In February 2023, OpenDemocracy published a detailed analysis by Dimitris Dimitriadis into Stamp’s history and activities. It’s well worth a read.

    The mortgage scam

    The materials on the website claim that you can “discharge your mortgage and get your payments back”. This is all set out in more detail in this webinar:

    Here’s the key slide explaining how it works:

    That list makes no legal sense at all, and neither do the “references” Stamp provides:

    None of these are UK Acts of Parliament; most relate to US Federal and state law.

    There is more detail, but no more sense, in the ebook Stamp makes available on his website:

    Most of this is taken directly from the “pseudolaw” Freeman on the Land and Sovereign Citizen conspiracy theories, which started in the US but are now increasingly common here. The footnote here has more background.

    But everything starts to make sense once we see this:

    In other words, Stamp and his associates charge people a £3k fee to give them template documents that (they claim) will make their mortgage magically disappear.

    How much money does Matrix Freedom make?

    A leaked Zoom management meeting shows that in its best month in 2022, Matrix Freedom made £500,000 from its clients:

    The High Court case

    Prior to 2022, it seems that Matrix Freedom’s main strategy was persuading clients to reverse previous direct debits made on their mortgages. On a leaked management video, one of Stamp’s colleagues says (while laughing) that some people actually managed to recover ten years’ of mortgage payments in this way, but the banks got a “little bit more careful”.

    In that same video, Stamp says that using the “public” courts was not going to be effective. But, nevertheless, in 2023 and 2024, he appears to have coordinated over 200 people to bring court claims against various mortgage lenders. Stamp was the lead claimant. The High Court handed down judgment on 9 May 2024.

    The claims were completely incoherent; in Stamp’s case he had borrowed £312,500, repaid the mortgage in 2016, and now claimed £265,000. He said he had been mis-sold because the mortgage had been securitised – but was unable to explain why securitisation (which doesn’t affect a borrower’s rights) amounts to mis-selling, or why it caused him any loss. He claimed that the securitisation hadn’t been registered with the Land Registry (which it couldn’t have been, because securitisation doesn’t affect the legal title to security).

    Stamp’s further legal justification for his claims was summarised by the court as follows:

    The other claims all took the same form (almost identically), with some of the mortgages still being in existence, and some being in default. None of the 200 claimants was represented by a solicitor, but all the filings shared “a near miraculous uniformity of common purpose, style and prose”.

    The defendant lenders applied for the claims to be struck out, and the court readily agreed:

    Stamp didn’t turn up to the hearing – he said he was “beyond the seas” and would rely on the documents already delivered to the court.

    There is a comprehensive summary of the judgment here, from Henderson Chambers.

    The High Court’s view of the behaviour

    The Court had previously ordered five of the claimants to explain why they had all filed identical claims with the courts, despite not identifying a legal representative. They did not comply.

    The Court asked the same question of the claimants present at the hearing. One admitted to buying this scheme from Stamp. Given the near-identical documents the claimants submitted, however, it’s a reasonable inference that many or most of the 200 bought the scheme.

    The conclusion was that whoever was behind these claims had likely committed a contempt of court, and it was “potentially criminal conduct”.

    Contempt of Court 30. It is a contempt of Court for any person to do any act in the purported exercise of a right to conduct litigation where none exists or has been sought or conferred. It is central to the efficient administration of justice that the Court takes a firm line with any person who appears to offer services to litigants in the higher courts where that person does not have the disciplines and competence of those who are professionally qualified and members of an appropriate professional body. 31. The present claims and the larger group of claims feature over two hundred claimants, apparently acting in person and sharing a near miraculous uniformity of common purpose, style and prose. In the absence of greater explanation than has so far been made available, they have the appearance of involving a person, or more likely persons, whose involvement may well amount to the conduct of litigation and a conduct that is likely to be a contempt of this Court. It is worth being clear; this is potentially criminal conduct. 32. With such claims there must inevitably be doubts as to the competence of anyone having an unaccounted involvement with, or co-ordination, of them. Such doubts arise in relation to the present claims and the large group of claims of which they are representative.

    The court was deeply concerned at all this:

    37. The totality of claims that are the subject of this judgment have not revealed the full extent of the source, and nature, of encouragement and co-ordination that lies behind them but there is every appearance of deceit, of abuse and contempt of Court, and it is a matter of time before a full picture of these comes to light. Anyone drawn into bringing claims like this should be cautious. Those that promote them are duly warned. Claims that are presented with these characteristics can expect the Court’s mercy and forbearance to be particularly limited. Claimants that are unable to explain the meaning of words that they appear to rely upon can expect to be frustrated and to lose money in the payment of fees that cannot be recovered and in costs ordered against them. Claimants that rely upon stock templates that are purchased by or given to them and that are nonsensical can expect to incur the Court’s displeasure. Those indifferent towards wasting the Court’s resources can anticipate having claims stayed or struck out and costs ordered against them. Claims listing elderly statutes and home-made legal labels and maxims can expect to be identified as being totally without merit. Those failing to comply with orders directing them in ways clearly aimed at providing assistance to the Court cannot expect to cast themselves in the light of being genuine and credible parties to justice. Those that pursue abusive claims can expect to be made the subject of orders that curtail their ability to adversely impact upon the proper and efficient administration of justice.

    … and concludes by saying that:

    We have never seen this before. There is a procedure for “civil restraint orders” to be obtained to prevent vexatious litigants filing repeated meritless claims, but here the court is saying that that the courts will ignore Stamp’s attempts to file claims, because they’re invalid on their face. Defendants won’t even need to file a defence.

    Stamp appears to have a number of other active claims, referred to obliquely in the judgment. Most of these seem to relate to a feud or falling-out with others providing similar “services” to Stamp. It is unclear whether the Court’s pragmatic attitude to Stamp’s claims against lenders will extend to his claims against private individuals.

    Stamp and tax

    The Matrix Freedom website makes predictably far-fetched claims about tax:

    “To learn how you can benefit from the fact that no Acts and Statutes have Royal Assent since 1973, meaning no tax Acts, including the council tax, applies, and all other Acts and Statutes from 1973 are void, attend the webinar.”

    Stamp also appears to offers various tax services under companies called Creditor Tax Rebates Ltd, CQV Tax Rebates Ltd, Creditor Tax Filings Ltd and Creditor Tax Assessments Ltd. We haven’t been able to find out any further details, but anyone who has any information should get in touch.

    He has another company probably called MTRXF Ltd, which claims to offer an “IRS tax filing service“. It is doubtful they have the US IRS authorisation required to do this; their directors aren’t registered with the IRS as tax preparers. We asked them why this was and received no response.

    Stamp also appears to have attempted to file some kind of claim of his own against HMRC. It wasn’t the usual tax appeal in a tribunal, but a high court claim for (we infer, given it’s under Part 7) over £100,000 which was dismissed.

    It seems from Stamp’s failed defamation claim that the HMRC claim was struck out as “wholly without merit“.

    Others appear to be actively using these kind of theories to attempt to defraud HMRC.

    Who will protect the public?

    These kinds of scams tend to be marketed to people who are vulnerable and in financial trouble. They’re precisely the kind of people who are supposed to be protected by the rules preventing non-lawyers from litigating. But, at the moment, nobody seems to be taking any action to stop Stamp and Matrix from ripping off their clients, wasting valuable court time, and wasting the time and money of the people and organisations they bring claims against.

    We don’t know whether Stamp and his colleagues genuinely believe the bizarre legal theories they are promoting, but we don’t think that matters. Here are some steps that could be taken:

    • The police could investigate what the High Court has already described as “having every appearance of deceit, of abuse and contempt of court”, and “potentially criminal conduct”.
    • The police could also investigate whether Stamp and his associates defrauded their own clients, given the High Court’s suggestion that the long list of “elderly statutes” may have been intended to deceive them. OpenDemocracy published other evidence of potential fraud last year. There are also numerous claims on this website of fraud by Matrix Freedom – we do not know whether these reports are reliable or not. And, in their own management meetings, Stamp admitted that it was their fault that their “solutions” had caused problems to their own clients.

    We are not aware of any active criminal proceedings.

    Matrix Freedom has posted documents on the internet suggesting that the FCA is already taking action. Matrix Freedom haven’t stopped marketing their schemes. But they have demanded £100m in gold or silver from the FCA and the judge, failing which Stamp says he will “employ the US Secretary of the Treasury and the IRS” to collect it.

    We’d like to see Stamp try to do that. But we’d prefer to see a criminal investigation into what looks like a conspiracy to defraud the public, mortgage lenders, and tax authorities.

    Many thanks to K and I for their research and other contributions to this article, and thanks to B for technical review of the videos.

    All videos/images (c) Iain Clifford Stamp/Matrix Freedom Limited, and reproduced in the public interest, and as fair dealing for the purposes of criticism.

    Footnotes

    1. Iain Clifford Stamp & Ors v Capital Home Loans Limited T/A CHL Mortgages & Ors [2024] EWHC 1092 (KB) ↩︎

    2. It unlawfully uses a PO Box for its registered office, has never filed accounts, is late filing its confirmation statement, and is about to be struck off. ↩︎

    3. Registration is required; it’s easy to do that with a disposable email address. This and all other links to Stamp’s business are marked “nofollow” so that our link does not increase their search engine prominence. ↩︎

    4. Not an actual legal term, but one that appears to be used exclusively by “sovereign citizens” and similar pseudolaw practitioners ↩︎

    5. There are also reports he used a company called SENJ Limited (Seychelles); however we can find no evidence that this company exists. Possibly it was dissolved at some point after the FCA started asking questions. ↩︎

    6. This appears to have led to a libel claim by Stamp against OpenDemocracy. ↩︎

    7. The second item on the list may be intended to refer to the Bills of Exchange Act 1882, which is mostly still in force, but of no relevance. ↩︎

    8. There is a magisterial analysis of all these theories in the Canadian judgment Meads v Meads. Yisroel Greenberg has written about UK adherents to these theories, from the perspective of a local government lawyer. The criminal barrister who tweets as @CrimeGirl has compiled a useful summary of UK caselaw. The Ministry of Justice recently sent an impressively complete FOIA response to someone asking about these theories. We recently covered a tax-flavoured variant of this conspiracy theory, which used the war in Gaza as an excuse for tax evasion. ↩︎

    9. The video was made available here. We would be cautious about believing many of the claims on this website, as the owner appears to have some kind of feud with Stamp. However, this video has every sign of being genuine (we showed it to an expert in “deep fake” video creation and he was confident that such techniques were not used). ↩︎

    10. See the 31 May 2022 “full council meeting” video on this website, around the 31 minute mark ↩︎

    11. Two of whom were wrongly identified; see the front page of the judgment ↩︎

    12. The court had already struck out some of the claims on its own, without an application from the defendant lenders; the 9 May judgment includes an appeal against that decision by the affected claimants. ↩︎

    13. A quick and simplified summary of securitisation: Banks can make only a limited amount of mortgage loans before running out of regulatory capital. So many banks will sell the beneficial interest in their loans to a “special purpose vehicle” which has raised funds issuing bonds on the capital markets. The risk of the loans not performing is now mostly borne by the bondholders, not the bank, meaning the bank has freed up regulatory capital and can make more loans. The bank remains the legal owner of the mortgage loans, and so has the relationship with the borrower. By definition, that means the arrangement doesn’t affect the borrower’s legal rights. ↩︎

    14. A term very redolent of the “Freeman on the Land” movement ↩︎

    15. As is typical of the genre, the claims are not even internally consistent – in the (impossible) event that all statutes since 1973 were void, we would have to pay tax under the pre-1973 statutes. This would not necessarily be a good outcome for their clients. There’s a not-entirely-serious comment below from Richard Thomas, the respected retired tax tribunal judge, on how this could play out. ↩︎

    16. That is a little unclear, as the company number on its website is in fact the company number for Creditor Tax Rebates Ltd ↩︎

    17. And despite the claims on the Matrix Freedom website that Matrix Freedom doesn’t have clients, Stamp freely uses that word in their own management meetings. ↩︎

    18. Why a contempt of court? Because of the High Court’s statement that the activities “could well amount” to the conduct of litigation. That’s a “reserved legal activity” under the Legal Services Act, and it’s a criminal offence to carry on a reserved legal activity if you are not a qualified/regulated legal professional; and in addition to that specific offence, it’s also a contempt of court. ↩︎

    19. See the 31 May 2022 “full council meeting” recording, at 37:00 ↩︎

    20. This document claims that the FCA applied for, and obtained, some form of court order against Stamp at Southwark Crown Court 7th June 2023 (No 34 2023). This document attempts to appoint a judge and an FCA lawyer as “trustees” of Stamp’s “estate” (with both terms used in ways that have little in common with their actual meaning). It is unclear whether all of this relates to the mortgage scam, or other activities of Stamp/Matrix Freedom – we asked the FCA and they said they couldn’t comment on individual cases. ↩︎

  • The Green Party – very shy about a big tax increase

    The Green Party – very shy about a big tax increase

    The Green Party says it will raise £50bn in tax from the “richest”. But their proposal will probably end up affecting half of all households. Whilst some of the very wealthiest will pay no additional tax at all, there will be people on fairly ordinary incomes facing marginal tax rates of 70%. The Greens should go back to the drawing board.

    This is twice in one day we saw a political party proposing a tax change that’s kiboshed by the tricks and gimmicks embedded in the income tax rules. It’s time we had real political focus on ending those tricks and gimmicks for good.

    Here’s Carla Denyer, co-leader of the Green Party, on Question Time yesterday:

    “Capital gains tax, the tax you pay on assets, so that’s pretty much the wealthy that have those, you pay less tax than the income you get from work. We think that’s unfair, so we would equalise those and we would also remove the cap on national insurance that means that the richest pay less. Those three changes together would raise over £50 billion by the end of the next Parliament.”

    The casual viewer may have come away with the impression that the Greens will be raising £50bn by taxing the wealthy.

    That’s mostly true for the Greens’ proposal to raise capital gains tax. It would indeed affect mostly the wealthiest. Complete equalisation with income tax could perhaps raise £8bn.

    However it’s not an accurate description of where most of the £50bn is coming from.

    The Green proposal

    What does “removing the cap on national insurance” mean?

    Here are the current Class 1 rates:

    £967 is the “upper earnings limit”. There used to be no national insurance past that point; it’s now 2%. “Uncapping” means removing the limit so that the 8% rate continues to apply past £967 a week.

    We should, however, discard the pretence there’s something special about national insurance. It’s just income tax by another name, with an antiquated weekly calculation, a complicated history and a funny national accounting treatment. A realistic approach looks at the overall combined rate of income tax and national insurance.

    In the current, 2024/25 tax year, this looks like this for an employee:

    • No tax on incomes below the £12,570 personal allowance.
    • £12,570 to £50,270 – a combined income tax and employee national insurance rate of 28%
    • £50,271 to £125,140 – a combined rate of 42%
    • Above £125,140 – a combined rate of 47%.

    The Greens are therefore proposing that the third of these should rise to 48%, and the fourth to 53%.

    However things aren’t that simple. The personal allowance starts to be withdrawn (“tapered”) when your income hits £100,000, and is gone by £125,140. This means that the marginal rate in the £100,000 to £125,140 range is much higher than the headline rate.

    This chart shows the effect, as things stand today (blue) and under the Green proposal yellow):

    There’s an interactive version of the chart here that lets you select different scenarios and touch/mouse over the chart to get exact figures.

    This is not the only factor that means the actual marginal rate is higher than the headline rate. There are a series of poorly thought-through tricks and gimmicks that have this effect, most significantly child benefit withdrawal and student loan repayments.

    Here’s the marginal rates under the Green proposal for a graduate with three kids under 18:

    So a graduate earning £60,000 with three kids pays a 72% marginal rate, and everyone earning £100k-£125k pays a 77% marginal rate. I don’t think this would be sensible or sustainable. There are many people (think: hospital consultants) who would prefer to reduce their hours than earn just 23p in the pound.

    Uncapping national insurance was a perfectly rational policy in the 90s, but it’s not viable today unless the various tricks and gimmicks in the system are fixed or removed.

    It’s remarkable that this was the second proposal yesterday which was undone by a failure to understand the complexity in the tax system. That says something about the need for reform.

    Who would pay this?

    The Green proposal will affect quite a lot of people.

    £50,270 is not that far above the average London salary. And, by 2027/28, one in five taxpayers, and one in four teachers will be affected; I expect a majority of households will have someone who earns that figure at some point in their life. To say this is a tax on the “richest” is not particularly accurate.

    But some very wealthy people won’t be affected much, or even at all. The big problem with increasing national insurance is that it only affects wages. The retired don’t pay it. Investors don’t pay it. Landlords don’t pay it. It’s a funny choice of tax rise for a progressive political party. It’s a bit odd, because only three years ago the Greens were proposing abolishing national insurance and rolling it into income tax. Perhaps Ms Denyer got the policy wrong. Or the more cynical version: they chose to raise national insurance because they think people don’t understand it.

    One of Jeremy Hunt’s best decisions was starting to phase out employee national insurance. No sensible political party should be looking to reverse this, and particularly not one of the Left.

    Some suggestions

    I have three suggestions for the Greens:

    • The tax rise should apply to income tax, not national insurance, so it impacts landlords/investors as well as working people
    • Realistically you have to scrap the child benefit and personal allowance clawback at the same time, or you end up with indefensibly high marginal rates. Student loans also need thought.
    • Be clear about what this proposal is, and who it applies to, instead of suggesting it’s a tax on the “richest”.

    It’s great that there’s a political party offering people the choice of significantly higher taxes and significantly higher spending. However this needs careful consideration to ensure the result is fair and workable. And it also needs the Greens to be clear and honest about what they’re proposing, and who it affects – and I don’t think Ms Denyer’s description of this policy was.

    Video (c) British Broadcasting Corporation and reproduced here as fair dealing for the purposes of criticism and review.

    Footnotes

    1. I initially thought “three” was a mistake, but possibly she says “three” because she forgot to mention the Green Party’s wealth tax proposal. ↩︎

    2. However that would give us one of the highest rates in the developed world; a more modest increase would seem sensible and/or one that was combined with a return to an indexation allowance (which prevents inflationary gains being taxed). ↩︎

    3. The self-employed pay slightly less ↩︎

    4. Uncapping the upper earnings limit was a key element of Labour’s “shadow budget” for the 1992 general election. The “shadow budget” in general, and this proposal in particular, are often blamed for Labour’s loss, although whether that is correct is contested. ↩︎

    5. Ignoring Scotland for the moment, and also ignoring weird marginal rate effects ↩︎

  • The Tories’ accidental 70% tax on people earning £120k

    The Tories’ accidental 70% tax on people earning £120k

    The Conservative Party has just proposed moving the point at which child benefit is phased out from income of £60k to £120k. This will greatly reduce the marginal rate for parents earning £60-80k. But it means that a parent earning £120k who has three children will face a 70% marginal rate. And they’ll face a long stretch of earnings (£100k to £160k) with a marginal tax rate of over 50%.

    The Conservative Press was released at 10.30pm on Thursday 6 June 2024 – we’ll link to it if it’s published online, but for the moment there’s a copy at the end of this article.

    Our income tax system is a mess of awkward gimmicks, bodges and compromises. One of the worst is the “high income child benefit charge” (HICBC), which claws back child benefit once your income hits a certain threshold.

    The HICBC

    Until the 2024 Budget, the HICBC meant that a family with three children where the highest earner was on £50k faced a marginal rate of tax of 68%.

    The “marginal rate” is the rate of tax on the next £ earned – it’s important because it affects the incentive to work. It’s slightly counter-intuitive, but marginal rates can be more important than headline rates and overall/effective rates. If my overall rate of tax is 20%, but I’ll be taxed 100% on the next £1,000 I make then I’m unlikely to want to work for that extra £1,000.

    The HICBC was, therefore, a problem (with other serious practical issues too, which we discuss here). So Jeremy Hunt deserves credit for making it significantly less awful in this year’s Budget. He moved the HICBC phasing so instead of applying on incomes from £50k to £60k, it applies from 6 April 2024 to incomes from £60k to 80k. That reduced the marginal rates for a parent with three children under 18 to from 71% to 57%:

    Red is before the Budget; purple is after.

    There’s a more readable interactive version here, that lets you play with and compare all the rates discussed in this article – you can click on the legend to select different scenarios, finger/mouse over to see exact figures, and zoom in/out of details of the chart. The code that creates the marginal rate charts is available on our github.

    The new Tory proposal

    The Conservatives have just put out a press release (copied below). They say their manifesto will move the HICBC phasing out to £120k-£160k. That’s good news for people earning £60k – their marginal rate drops right back down to 42%.

    However, this creates a new and very high marginal rate of 70% for parents with three children under 18 earning between £120k and £125k:

    (Purple is after the Budget; blue is today’s announcement)

    Why? Because the personal allowance clawback already creates a 62% marginal tax rate for everyone earning between £100k and £125k. And the Tories are moving the child benefit clawback so it partially overlaps with the personal allowance clawback.

    The 70% rate is bad but temporary. The more serious effect is that, once earnings get past the £125k point, there’s a 55% marginal tax rate all the way up to £160k (after that, the marginal rate reverts to the standard 47%). Of course these rates will be less for people with less than three children under 18, and higher for people with more.

    This all feels like a big mistake.

    They also want to move the HICBC so instead of applying by reference to the highest earner in the household, it applies to the overall household income. This isn’t a surprise – the Government announced it in the Budget. Problem is, the tax system doesn’t track household income. Married couples used to be taxed on their joint income – that was scrapped following a decades-long feminist campaign for independent taxation. There’s an almost unanimous view amongst tax policy wonks that this change will be technically complex and in some cases cause hardship.

    It’s true that applying HICBC to the highest earner is often unfair – a couple each earning £49k aren’t caught, but a couple with one not working, another earning £60k are caught. But any change needs to fully think through the new unfairnesses that it will create, and I fear the Government, and the Tories, haven’t done this.

    So what?

    Why does it matter if people earning £120,000 pay a 70% marginal tax rate, and those earning £125k-£160k pay a 55% marginal tax rate?

    • First, because going past the 50% mark is psychologically significant, and this change creates a long stretch of the tax system (£100k to £160k) where the marginal rate is over 50% for people with three children under 18.
    • Second, because it’s irrational. It’s perfectly reasonable to support a 55% tax rate on high earners. It’s not reasonable or rational to have a 70% or 55% marginal tax rate on a particular segment of high earners earning £120k-£160k, but 47% on those earning more than £160k.
    • And both these factors mean that some high earners, who often have control over how, when and where they work, have a reduced incentive to work in the UK. That’s not good for growth.

    This is the problem with gimmicks like the child benefit and the personal allowance clawback. They’re introduced as cute tricks to avoid increasing the headline rate of tax. They then become more and more significant over time, capturing more and more taxpayers… and therefore become more expensive to remove. And tweaking them without repealing them altogether is complicated by all the other gimmicks in the system.

    The answer is to end the gimmicks.

    Original text of Conservative Party press release

    EMBARGOED STRICTLY NO APPROACH: 2230 Thursday 06 June 2024 

    Conservatives pledge £1,500 tax cut for parents 

    ·     Threshold at which families pay the Child Benefit Tax Charge will rise from £60,000 to £120,000 

    ·     Major reform to the Child Benefit system to make it fairer by treating parents as households rather than individuals  

    ·     700,000 families will benefit by an average of £1,500 from this tax cut 

    The Conservatives will cut taxes for 700,000 families by an average of £1,500 as Labour continue to refuse ruling out tax rises of £2,094 per working household to plug their financial black hole. 

    We will do this by raising the threshold at which people start to pay the High Income Child Benefit Tax Charge (HICBC) to £120,000, up from £60,000 currently. 

    And to end the unfairness that means single earner households can start paying the tax charge when a household with two working parents and a much higher total income can keep Child Benefit in full, we will move to a household rather than individual basis for assessing the tax charge.  

    Single-earner households and households where one individual earns substantially more than the other will be the biggest beneficiaries. 

    The announcement underlines the Conservatives’ commitment to rewarding aspiration, boosting households’ financial security and incentivising work by allowing hard-working families keep more of what they earn. 

    It builds on our tax-cutting plan announced in April to raise the threshold at which individuals start to pay the Child Benefit tax charge from £50,000 to £60,000. 

    These changes have taken 170,000 families out of paying the tax charge, and mean that almost half a million families gain an average of £1,260 to help with the cost of raising their children this year.   

    Chancellor of the Exchequer, Jeremy Hunt said:  

    “Today we have announced a £1,500 tax cut for parents to boost families’ financial security and give them more money to spend on the things that matter most. 

    “Raising the next generation is the most important job any of us can do so it’s right that, as part of our clear plan to bring taxes down, we are reducing the burden on working families. 

    “There is a clear choice for voters at this election: bold action to cut taxes for working families under the Conservatives, or a £2094 tax rise to fill Labour’s £38.5 billion spending black hole”.

    The pledge is fully funded, paid for by clamping down on tax avoidance, which is expected to raise a total of £6 billion. Labour have said they would raise a similar amount from tax avoidance, but have said they will spend it on other things. 

    Notes to Editors:  

    Costing and funding

    ·      Our policy to end the unfairness of the High Income Child Benefit Charge has been fully funded and costed. Increasing the threshold to £120,000 and the taper rate to £160,000 will cost £1.3bn in 2029/30. It will be paid for by our previously announced plan to raise £6 billion from further clamping down on tax avoidance and evasion. So far, of this £6 billion we have committed:

    o £1 billion for National Service

    o £2.4 billion for the Triple Lock Plus

    o £60 million for 30 news towns

    ·      The Labour Party has said it will raise £5.1 billion from tax avoidance and evasion by the end of the Parliament. It has decided to spend this money on other things.

    In April 2024, the Conservatives reformed the High-Income Child Benefit Charge, cutting tax for half a million families:  

    ·     In April, the Conservatives reformed the High-Income Child Benefit Charge, cutting tax for nearly half a million families. As of April 2024, the Conservatives raised the threshold for the High-Income Child Benefit Charge from £50,000 to £60,000 and halved the rate so that it is not paid in full until you earn over £80,000 – estimated to support nearly half a million families with an average gain of up to £1,260 in 2024-25 towards the costs of raising their children (HM Treasury, Spring Budget, 6 March 2024, link).  

    ·     Reforms to the High Income Child Benefit Charge are predicted to boost economic growth and support jobs across the country. The OBR estimated that the changes to the HICBC we introduced this year will increase economic growth and increase the average hours worked by workers employees by an amount equivalent to 10,000 full-time employees (Office for Budget Responsibility, Economic and Fiscal Outlook, March 2024, link).   

    However, the current system is still unfair, which is why the Conservatives have set out a clear plan to deliver the support working families across the country need:  

    ·     We will end the unfairness of the High-Income Child Benefit Charge by moving to a system based of households, cutting taxes for 700,000 households by an average of £1,500 per year. We will ensure that the High-Income Child Benefit Charge is only paid by households with a combined income of more than £120,000 per year and increase the threshold at which Child Benefit is fully withdrawn to £160,000 per household.  

    ·     Following consultation, we will legislate and deliver these changes by Autumn 2025. Moving to a household basis requires significant reform to how HMRC administers the High-Income Child Benefit Charge and so we will first launch a consultation to resolve the key design issues to deliver the new system by April 2026.

    Image by DALL-E 3 – “a children’s buggy overflowing with pound notes”

  • Why the general election tax debate is irrelevant

    Why the general election tax debate is irrelevant

    The general election tax debate has been irrelevant. The few £bn being discussed is dwarfed by the actual tax UK tax increases over the last few years, and the further tax increases we’ll almost certainly see in the future.

    I summarised this point on Sky TV on Wednesday.

    Here’s all UK taxes paid in 2023-24:

    Here’s what happens if we add on the Conservative Party’s extremely debateable claim that Labour will increase household taxes by £2,000 over four years – that’s about £10bn in total:

    £10bn is just an irrelevance in the context of almost a trillion pounds of total tax receipts. And it vanishes into statistical noise when we remember that OBR tax receipt forecasts are lucky to get within £30bn of the true figure.

    And here’s Labour’s actually announced tax increases::

    Also an irrelevance.

    By contrast, here’s the OBR’s projections for the overall increase in taxation as a % of GDP from 2023/24 to 2028/29:

    The bigger picture

    The current level of taxation follows a few years of significant increases in tax.

    Here’s how much of the 2023/24 tax burden reflects an increase since 2010:

    And here’s the OBR’s expected overall increase in taxation from 2010 through to 2028/2029:

    This is dramatic, but not in the main the result of policy choices – it’s largely a function of demographic change and systemic shocks from the financial crisis and the pandemic (and, to a smaller degree, Brexit). And any attempt to convert these figures into “per household” numbers would be highly misleading given that many ordinary households have not seen an increase at all.

    The European picture

    Even the charts above leave us a long way off European levels of taxation.

    Here’s the additional tax we’d be paying if we increased UK tax to the average 2023/24 level in the Euro-area:

    And here’s the increase if we matched France:

    The difference is massive – more than the total UK VAT and corporation tax receipts.

    The tax debate I’d like to see

    So my plea to everyone is: stop discussing irrelevant amounts of tax as if it matters.

    Here are three honest positions politicians could take:

    • Accept the status quo, and that the UK will, by 2028/29, pay about £100bn more tax than it did in 2010/11 (in 2023/24 money). Make changes at the margins but acknowledge that’s all they are. The question then is: where will this burden fall? And what will the consequences of that be?
    • Advocate for significantly lower taxes, and (assuming you don’t want to crash the markets) explain which public services you’ll cut to fund the tax cuts, and the consequences of this for households and the wider economy.
    • Advocate for a significantly higher level of state spending, comparable with the European or even French figures. Again assuming you don’t want to crash the markets, explain what taxes you’d increase, and the consequences of that for households and the wider economy. And expect everyone to be sceptical if you claim only the rich would pay, because that’s not what happens in any of the countries that actually do have significantly higher spending than the UK.

    And let’s please try to be careful not to fall for simple stories about political parties and levels of tax. If we take tax as a % of GDP over the last eighty years, and shade in periods of Labour government (red) and Conservative government (blue), it’s reasonably clear that the economic cycle has been much more important than the political cycle:

    Finding answers is hard – but let’s at least try to ask the right questions.

    Footnotes

    1. The source is the receipts figures from the OBR’s public finances databank. This is the raw data – the only change I’ve made is aggregating taxes that raise less than £3bn into the “other taxes” bucket. The OBR’s most recent economic and fiscal outlook is here. ↩︎

    2. Here I’ve just taken their £38.5bn over four years and divided it by four, i.e. £9.6bn. ↩︎

    3. The most recent error was £36bn – see the OBR’s October 2023 forecasting evaluation report, table 3.1. ↩︎

    4. About £10bn in total – a very similar amount to the Conservative estimate, but raised from different people. £5bn from “cracking down on tax dodgers“, £1.7bn from VAT on private school fees, about £1bn from “closing non-dom loopholes“, about £2bn from extending the energy “windfall tax” ↩︎

    5. The source is the receipts figures from the OBR’s public finances databank. The tax increase is calculated by simply taking the difference between tax receipts as a % of GDP in 2023/24 vs 2028/29 (1.2%), and multiplying this by the UK GDP figure used in that same dataset. This results in £30bn. We’d of course get a much larger number if we looked at the real terms difference between cash tax receipts over that period – £114bn – but it’s a fairer comparison to calculate by reference to GDP. ↩︎

    6. Same OBR source. The tax increase is calculated by simply taking the difference between tax receipts as a % of GDP in 2023/24 vs 2010/11 (2.7%), and multiplying this by the UK GDP figure used in that same dataset. This results in £70bn. We’d of course get a larger number if we looked at the real terms difference between cash tax receipts over that period – £216bn – but it’s a fairer comparison to calculate by reference to GDP. ↩︎

    7. Same methodology but looking at the 2028/29 OBR receipts figures and forecast. The increase in tax as a % of GDP over this period is 3.9% which equates into £100bn in 2023/24 money. If we look at the real terms difference between cash tax receipts over this period we’d get £330bn. ↩︎

    8. Source is Eurostat – average 2023/24 figure is 41.9%, equating to £152bn more tax if we apply to UK GDP for 2023/24. We aren’t aware of projections for 2028/29, but we assume the figure will be materially higher. So the fair comparison isn’t with the 2028/29 chart immediately above, but the 2023/24 chart before that. ↩︎

    9. Source again is Eurostat – the French figure for 2023/24 is 49%, equating to £334bn more tax if we apply to UK GDP for 2023/24. One would assume the figure will be higher for 2028/29 but it’s not clear how high it can realistically go. But again the fair comparison is with the UK 2023/24 chart not the 2028/29 chart. ↩︎

    10. In principle there is an alternative; boost productivity and grow the economy. It was economic growth that enabled significant rises in public spending in the 2000s without significant tax rises. But even if this could be achieved, it’s not going to move the dial much in the next few years. ↩︎

    11. And from 2010-2015, Conservative/Lib Dem coalition ↩︎

  • Did Jeremy Hunt avoid SDLT in 2018?

    Did Jeremy Hunt avoid SDLT in 2018?

    Some people on social media are convinced that Jeremy Hunt avoided tax when he bought seven flats through a company in 2018. We’ve analysed the transaction and believe it’s clear that he didn’t.

    Here are the claims (click to expand):

    Probably originating from this piece in the Mirror in 2018, itself based on this Telegraph report:

    The basic accusation is that Jeremy Hunt “exploited a Tory loophole“ when he bought, through his company, seven flats in Ocean Village in Southampton.

    These are different from the false claims that Hunt avoided tax when he sold his education business – we wrote about these back in 2022.

    Hunt’s transaction

    In 7 February 2018 Hunt’s company, Mare Pond Properties Limited, acquired seven apartments. We can see the price paid data on the land registry or from various other online sources:

    i.e. a total price of £3,568,400.

    How much stamp duty land tax (SDLT) was payable on that?

    The actual SDLT result

    SDLT rates are very different for residential and commercial property.

    Residential property is taxed at escalating rates from (in 2018) 0% to 12%, with an additional 3% if you were acquiring a second (or further) residential property. Commercial property, on the other hand, is taxed at much lower rates, which only reach 5%.

    So was this a residential or commercial purchase?

    One might expect the answer to be obvious: it’s residential, because these were flats that people would live in – and therefore there’s SDLT of around £450k.

    But here the obvious answer is wrong, because of section 116(7) Finance Act 2003:

    Where six or more separate dwellings are the subject of a single transaction involving the transfer of a major interest in, or the grant of a lease over, them, then, for the purposes of this Part as it applies in relation to that transaction, those dwellings are treated as not being residential property.

    This is the 6+ rule. If you buy six or more dwellings, then it’s treated as a purchase of non-residential property. So you get lower rates, and no 3% additional tax. The rule was included in the original SDLT legislation back in 2003.

    And those were the facts here. Hunt’s company was buying seven dwellings from the same seller on the same day in a single transaction.

    This means that, instead of £450k, the SDLT due would be £167,920. We can be reasonably sure this is what happened, because it’s consistent with the fixed assets reported in Mare Pond Properties Ltd’s accounts.

    The Mirror and the social media posters therefore all understate the benefit to Hunt of the 6+ rule. He didn’t save £100,000 – he saved almost £300,000.

    But the critical point is that this wasn’t a choice – s116(7) applies automatically. Hunt didn’t “claim” the 6+ rule – the way the rule works made this inevitable. It wasn’t actually possible for Hunt to pay £450k SDLT.

    The alternative SDLT result

    Whilst it’s not possible to opt out of s116(7), Hunt’s company could have obtained a different SDLT result if it had claimed “multiple dwellings relief” (MDR).

    MDR means that, when you buy multiple properties at once, instead of applying SDLT to the overall purchase price, you can opt to pay the average SDLT for each property. That will usually result in less tax, because the average property will be in a lower band than if the full purchase price was taxed.

    An example:

    • Say you are buying one £2m property (as a second home) plus one £20k property.
    • On the face of it (using 2018 rates, including the 3% surcharge), SDLT on the overall £2,020,000 transaction is £217k.
    • But if you claim MDR then you instead work out SDLT on the average property price of £1,010,000. That would be £75k.
    • MDR gives a result of 2 x £75k, i.e. £150k
    • MDR has saved you £67k.

    This might be a straightforward transaction, but it could also be avoidance, where the £20k property is an artifice created to reduce the stamp duty. Here are some examples HMRC has seen:

    Because of HMRC’s concern there was widespread abuse, MDR was abolished earlier this year.

    What if Jeremy Hunt had claimed MDR?

    We can calculate the result like this:

    • The average price paid for his seven properties: £510k
    • SDLT on a £510k property would have been £31k
    • MDR therefore gives a result of 7 x £31k = £215k.

    So if Hunt had claimed MDR, his company would have paid £48k more tax.

    Why in this case does MDR give a worse result? Because the 6+ rule converts residential properties to non-residential, and that’s more valuable than the MDR effect of applying lower bands.

    Did Jeremy Hunt avoid tax?

    We would say clearly not.

    He bought seven flats and paid the SDLT on that transaction. He didn’t make any kind of claim or election. The fact he benefited from the 6+ rule is a natural consequence of how the tax system works. It’s not just the legal outcome, it’s the fair outcome – whether or not you think the 6+ rule is itself fair.

    Now if he’d bought five flats plus one teensy-tiny property just to get within the 6+ rule, then it would be fair to say he avoided tax. But he didn’t.

    The fact Jeremy Hunt could have paid more tax by claiming MDR is hardly relevant. There are often things one can do voluntarily to trigger more tax; the failure to do that isn’t tax avoidance.

    There is no single definition of tax avoidance, but we’ve written an FAQ explaining the conventional view is that tax avoidance is using “loopholes” or other features of the tax system to save tax (“obtain a tax advantage”) in a way that wasn’t intended by Parliament. The 6+ rule was absolutely intended by Parliament.

    Some people will disagree with that. But we can’t see any coherent definition of “tax avoidance” that includes Jeremy Hunt. He literally did nothing.

    Many thanks to S, who researched and wrote almost all of this article (but the views expressed are the views of Tax Policy Associates).

    Daily Mirror front page © Reach Plc, and reproduced here for purposes of review/criticism.

    Footnotes

    1. We very often look at claims that businesses or politicians avoid tax. Sometimes this follows queries from journalists; sometimes tips from professionals or the public. The great majority of the time we conclude there is no avoidance. Where the accusation hasn’t been publicised, we don’t generally publish our conclusion that there is no avoidance. Where the accusation is published or, as here, gaining traction on social media, we generally do. ↩︎

    2. When a company acquires, in some cases there can be a 15% flat rate but not, as here, when it is acquiring to lease out the properties. ↩︎

    3. The accounts show “fixed assets” of £3,751,666 for 2018. Accounting rules require assets to booked in their historic costs – meaning that this figure will reflect the purchase price, stamp duty and other costs. £3,751,666 = £3,568,400 + £167,920 + £15,346. Suggesting that we have the correct figure for stamp duty, and Hunt’s other costs (legal etc) were £15k, which is in the right ballpark. ↩︎

    4. The £100k is the figure from escaping the additional 3% SDLT, but the 6+ rule also saves the higher residential rates. ↩︎

    5. i.e. compared to the standard SDLT result, with no 6+ rule and no MDR. ↩︎

    6. A tweet I posted last week suggested Hunt had used MDR. That was incorrect. ↩︎

    7. Subject to a minimum SDLT amount of 1% of the overall purchase price – that’s relevant if the average falls below the threshold at which SDLT starts to apply. ↩︎

    8. As an aside, he also didn’t properly declare his interest in the flats in his Parliamentary disclosure, or to Companies House. ↩︎

    9. The likely intended purpose of the 6+ rule, in conjunction with the 3% surcharge, was to continue the Osborne policy of encouraging large-scale professional/institutional landlords, and discouraging small-scale/”accidental” landlords. However there certainly is an argument that the 6+ rule is an unjustifiable relief for landlords. ↩︎

    10. Indeed if he had claimed MDR we would have been suspicious that there was something untoward happening; going out of one’s way to pay more tax is a red flag. ↩︎

  • How the Independent Schools Council created a misleading headline on VAT

    How the Independent Schools Council created a misleading headline on VAT

    The Independent Schools Council received a survey on parents’ responses to VAT on private school fees. It was statistically meaningless, and the authors of the report say this was clear in the report. The ISC then gave the survey results to the Daily Mail without this vital context, and the result was a highly misleading headline suggesting that 40% of children would leave private schools. The ISC should be ashamed.

    UPDATE 5 June 2024: Baines Cutler have published a statement saying that their research was misused and wasn’t representative of the sector, and distancing themselves from the 42% figure. Coverage in ipaper here.

    We’ve written before about interest groups generating headlines using dodgy statistics. There was a particularly bad example last week in The Daily Mail.

    If you tried to find the report in question, from education consultancy Baines Cutler, you won’t have succeeded – it’s not published anywhere.

    The methodology

    Baines Cutler kindly provided us with background on the report. They sent a full copy to the Independent Schools Council, who sent the Mail a short summary and these two charts:

    We should immediately be sceptical of this result. Would a 15% fee increase really cause 40% of private school pupils to leave, when significant historic increases haven’t had measurable effects? And how reliable a guide is this kind of question to what people will actually do? And doesn’t the second chart contradict the first?

    But the more fundamental issue is that the survey was not statistically representative. Here’s what Baines Cutler told me about their methodology:

    “The data is from parental surveys which represent 30,000 parents and 35,000 pupils.”

    In other words, they sent a survey to parents, and then just collated the responses and published the results. Baines Cutler applied no statistical controls of any kind. It’s no more reliable than a Twitter poll.

    The problem is that, whether for systematic reasons or sheer chance, those responding to surveys will usually be unrepresentative of those who don’t respond. There are two ways of dealing with this.

    • Traditional opinion polling surveys a random sample of the population (e.g. by calling randomly selected numbers).
    • The newer approach, pioneered by YouGov and others, has a panel of registered users, and then sends surveys to a statistically representative sample of that panel.

    In both cases, the results are statistically adjusted (“weighted”) so they are representative of the population.

    The fallacy that a large survey will be accurate was most famously illustrated by the Literary Digest, who surveyed 2,376,523 readers for their poll of the 1936 US Presidential election, and got it spectacularly wrong.

    The importance of random sampling is literally GCSE-level maths.

    The professional view

    I have studied advanced statistics, and am reasonably proficient – but I would never claim to be an expert. Matt Singh of Number Cruncher Politics very much is. Here’s his take on the presentation of the Baines Cutler report:

    Dan Neidle of Tax Policy Associates drew my attention to a report in the Daily Mail claiming that 4 in 10 private school pupils could be “driven out” by VAT on fees. Dan dug into the background to this research and the consultancy that did it, and was told only that it had an impressive sounding sample size and response rate.

    Regular readers will know that those things are, on their own, meaningless– the sample has to be scientific for you to generalise to people that haven’t taken part from those that have. And based on the information provided, this survey appears to be unscientific, not being a quota or random sample, and therefore cannot be generalised.

    Additionally, even with a representative sample, this would still be difficult to poll. For one thing, people are not good at predicting their behaviour in the future, and for another, people may “preference signal” by exaggerating their likelihood of taking an action, in order to emphasise their view (in this case on charging VAT).

    I doubt this will be the last time something like this pops up during the campaign. My advice to all is to be on your toes and exercise appropriate scepticism.

    This is from Matt’s latest newsletter – you can subscribe to it here.

    The Baines Cutler and ISC response

    I asked Baines Cutler about this. They told me:

    “The full report makes it clear that 30,000 parents is not statistically representative of the entire sector “

    and:

    “The entire point of this data in our report was to give schools “something to model” – because there is such lack of clarity from Labour’s actual plans. 

    It was never designed to be grossed up to the entire population of pupils like the Daily Mail have done, and the 224k number has never been published anywhere in our reports and is in our eyes too high for many reasons.”

    This is pretty astonishing, because it implies that the ISC received a report that said it wasn’t representative, but then press-released a summary without this caveat.

    I asked the Independent Schools Council if this was true. They denied that the report said it was unrepresentative but refused to go into more detail. I put to them that anyone with any knowledge of statistics would know a survey of this kind was meaningless – they didn’t respond.

    There are really only two possible conclusions here.

    • If we believe Baines Cutler, then the ISC cynically presented their report as meaningful when they knew it was not.
    • If we believe the ISC, then they didn’t know what they were doing, and would fail GCSE maths.

    Either way, it seems clear that nobody should trust any statistics from the ISC. And private schools should speak to their Year 11 maths classes before they use any of this data themselves.

    What’s the correct figure?

    I have no view on this question, as it requires expertise in econometrics and education policy which we do not have.

    We wrote about the difficulties of coming up with an estimate here. The only serious attempt to come up with an estimate is this from the IFS. The analysis is, as the authors note, subject to numerous uncertainties, but it takes a rigorous approach.

    There’s also a report from the Adam Smith Institute. It contains some valid criticisms of the IFS approach, but is then fatally undermined by using Baines Cutler figures employing the same worthless methodology as those discussed above.

    Many thanks to polling expert Matt Singh for his comments. And a quick plug for How to Lie with Statistics, which is brilliant.

    Daily Mail front page © Associated Newspapers Limited, and reproduced here for purposes of review/criticism.

    Footnotes

    1. The original version of this article said that the ISC commissioned the report. The ISC tells me that is not correct. ↩︎

    2. It’s generally agreed, by the ISC and individual schools, that VAT recovery means the net cost of VAT will be 15% not 20%. Baines Cutler surveyed the effect of a 20% increase and then reduced that by 1/4 to reflect the expected 15% increase. ↩︎

    3. As the pollster Matt Singh put it to us, “people are not good at predicting their behaviour in the future… and may “preference signal” by exaggerating their likelihood of taking an action, in order to emphasise their view”. ↩︎

    4. Most obviously: more engaged people, not representative of the population, are more likely to return the survey ↩︎

    5. Many thanks to Matt Singh for this. A mistake in the first draft read “Readers Digest” – that was my error, and (again) shows the danger of writing anything from memory without checking it first. ↩︎

  • Is there a tax avoidance magic money tree?

    Is there a tax avoidance magic money tree?

    All three political parties say they can raise £5bn or more from cracking down on tax avoidance and evasion. How plausible is this?

    UPDATED with the June 2024 tax gap figures

    James Cleverly said on 26 May that the Conservatives would raise £6bn by clamping down on tax avoidance, £1bn of which will fund their national service proposal:

    And here’s Rachel Reeves in April, saying Labour would raise £6bn:

    So how plausible are these claims?

    What is the tax gap?

    The “tax gap” is HMRC’s estimate of the difference between the tax it should collect, if all taxpayers behaved perfectly, and the amount HMRC actually collect. HMRC’s total tax gap estimate is £36bn.

    The obvious first question is: who causes the tax gap? And the answer is not quite what we’d expect:

    The next question: what kind of behaviour causes the tax gap? Again, it’s a bit surprising:

    So most of the tax gap isn’t the wealthy, or multinationals… it’s us. Most of it is small businesses receiving payment in cash and not filing properly (accidentally or deliberately). This is not a very politically convenient answer, but it is nevertheless the truth.

    Now these figures are estimates, subject to numerous uncertainties, and shouldn’t be taken as absolutes; but they are also unlikely to be very far off the mark.

    So we can say with some confidence that neither Labour or the Conservatives can raise £6bn from clamping down on tax avoidance, because there probably isn’t £6bn of tax avoidance. But that’s not the end of the story.

    So how can the tax gap be reduced?

    Here’s a short agenda for closing the tax gap:

    More resourcing

    • There is now a widespread view, amongst individual taxpayers, business and the tax profession, that HMRC is seriously under-resourced. That is highly inconvenient for taxpayers (and sometimes much more serious than that). But it also means that some tax is not being paid: taxpayers are making mistakes, and HMRC is not helping them.
    • It’s not merely that HMRC funding has failed to keep pace with inflation; its most experienced personnel have been moved onto other projects, particularly Brexit and the pandemic. This was probably sensible, but is having long term consequences.
    • It is therefore in our view, and that of most other professionals we’ve spoken to (inside and outside HMRC) that providing more resources to HMRC is very likely to yield more than it costs, provided the funds are employed with care. So, for example, expanding helpline teams, compliance teams and creating special investigation units would seem likely to result in a positive return. Expanding internal and bureaucratic functions, less so. And, as in all organisations, it is likely that there would be pressure from internal stakeholders to expand internal and bureaucratic functions. Considerable care and skill may be necessary to avoid this trap.
    • There will also be important benefits to individuals and businesses. This is not a zero sum game.

    Treating “tax avoidance” as criminality

    • There is an increasing amount of “tax avoidance” that is marketed to small businesses and individuals of relatively modest means, but that isn’t really avoidance at all. It’s a sorry mixture of incompetence and criminality.
    • Attacking tax avoidance, broadly defined, could bring down those “failure to take reasonable care” and “evasion” figures.
    • The vast majority of this “avoidance” isn’t promoted by the Big Four – it’s sold by dodgy outfits, some onshore, some offshore (particularly the Isle of Man). Their response to an HMRC challenge is often to walk away, leaving HMRC with nothing.
    • The answer in our view is new powers enabling HMRC to pursue directors and shareholders of tax avoidance scheme promoters.
    • We’ll be writing more about this soon.

    Investigating tax avoidance and evasion more proactively

    • Giving HMRC additional powers isn’t enough – HMRC need to be smarter and more proactive investigating tax avoidance and evasion.
    • HMRC appears to be constantly playing catch-up with tax avoidance, only belatedly attacking structures that have been well publicised for years. HMRC once had special investigation teams that proactively uncovered and investigated avoidance; it no longer does. We receive many reports of avoidance schemes and tax scams from tax professionals across the country; we can investigate some, but sadly only a small proportion. This is something HMRC could do much more systematically and effectively.
    • And, when HMRC does begin an enquiry/investigation, it does so in what often looks like slow motion, taking months to send out correspondence. This is, once more, highly inconvenient for taxpayers, but also risks losses for HMRC (both because limitation periods can run out, and because changes of personnel over time mean HMRC can, and does, drop the ball).
    • In our view the loan scheme/loan charge affair was greatly exacerbated, and perhaps even caused, by HMRC not realising how prevalent loan avoidance schemes had become. By the time they realised, the situation was out of control. The same may be happening now with other forms of remuneration avoidance.

    Closing “loopholes”

    • The tax avoidance tax gap figure excludes arrangements that many people would call “tax avoidance” but isn’t strictly that at all, because it reflects intentional Government policy rather than a “loophole”.
    • One example is the ease of avoiding stamp duty when you buy commercial real estate, another the simplicity of avoiding inheritance tax if you have a portfolio of AIM shares.
    • It remains unclear why these “loopholes” continue.

    Simplification

    • Many of the “errors” and “failures to take reasonable care” reflect the complexity of the tax system, and the difficulties that ordinary taxpayers and small businesses can encounter from reasonably straightforward arrangements. Some of this complexity is inevitable, but some is not. We have entire taxes that have no reason to exist.
    • £4bn lost to “legal interpretation” is an admission of policy failure. If there are areas where the law is unclear, those areas should be clarified (one way or another). £4bn of technically disputed tax each year represents a grotesque waste of HMRC and taxpayer resources.
    • These measures would, we believe, reduce the tax gap, but probably not result in increased revenue (or decreased revenue). They would, however, benefit both the tax system and the country as a whole. Again, tax change is not a zero-sum game.

    So are the claims that large sums could be raised plausible?

    Yes – the claim is credible… but with the big caveat that simply increasing HMRC’s budget is unlikely to be effective to raise these sums. Careful targeting and management is required.

    How do the Parties claims compare?

    The three main parties have provided three very different sets of claims for how much revenue they could raise:

    The Labour Party plan is in their “Plan to Close the Tax Gap” document. The Conservatives included a plan as part of their National Service press release. This doesn’t appear to be publicly available; we’re publishing it here. The Conservative figures weren’t in that press release, but are in their manifesto costings document.

    The origin of the £6bn figure common to Labour and the Conservatives appears to be the head of the National Audit Office, who said earlier this year that £6bn could be raised by cracking down on avoidance and evasion. But he didn’t say how, or how much it would cost.

    The Lib Dems just present the £7.2bn figure as 2028/29 funding in their manifesto costings document. They don’t give figures for earlier years. There is no published plan. I asked them about this, and their press office told me:

    “We will invest an additional £1 billion a year in HMRC to tackle tax avoidance and evasion – more than Labour or the Conservatives. We are confident that this would enable us to raise an extra £8.23 billion a year by 2028-29 – an achievable and realistic figure. Jim Harra, Managing Director of HMRC, told the Public Accounts Committee that every £1 invested in cracking down on tax avoidance and evasion raises between £9 and £18. That would mean net revenue of £7.23 billion a year in 2028-29.”

    Both Labour and the Conservatives also cite figures for historic ninefold returns from compliance expenditure (and, as above, the Lib Dems cite even higher numbers). However these figures are derived from historic targeted compliance measures which were relatively small. We are a little sceptical that they can be extrapolated to very significant billion pound measures, as is now proposed.

    Comparing the Labour and Conservative plans: the Conservatives’ in large part reflects current Government initiatives (unsurprisingly). Labour’s plans are more detailed (as you’d expect, from an opposition with something to prove).

    It is the Lib Dems who stand out: for having no plan, for claiming the largest revenues, and for assuming the revenues ramp up faster than others.

    Many thanks to R, P and K for their input on this, and to C for help with the statistical elements.

    Images from the BBC interview © British Broadcasting Corporation, and from Good Morning Britain © ITV, both reproduced here for the purposes of criticism/review.

    Footnotes

    1. Estimating the tax gap is a very difficult exercise, with numerous sources of error and uncertainty. HMRC does an impressive job to rigorous standards, generally believed to be the best in the world (most tax authorities only produce tax gap figures for VAT, which is a far simpler job given that it can be estimated with reasonable accuracy “top-down” from national accounts data). About ten years ago, HMRC’s homework was favourably reviewed by the IMF, who made various recommendations, most of which have been followed. More recently it was also reviewed by the Office for National Statistics. ↩︎

    2. Other figures are sometimes quoted, but they are statistically naive. Richard Murphy produced a figure of £90bn back in 2019, but he did this by adopting a “top-down” methodology which, as HMRC and the IMF (page 46 here) have explained, requires a series of significant adjustments which Murphy does not make. Murphy’s estimate also fails the “smell test”. It requires us to believe HMRC are missing more than 95% of all tax evasion – that does not seem plausible given that HMRC conduct random audits of businesses (absent HMRC being corrupt, which is Murphy’s view). We’re unaware of any tax expert who believes Murphy’s approach is credible, and no country has adopted it. ↩︎

    3. These figures are all from HMRC’s 2024 tax gap report, covering tax years up to 2022/23. ↩︎

    4. It’s sometimes said that the estimates ignore offshore avoidance. This is not quite right, and there are two separate points here.

      First, our work identified that HMRC does not systematically match up offshore account reporting with self assessment data. But that is different from saying that offshore is not included in HMRC’s tax evasion estimates. At most, HMRC’s estimate may be missing some evasion that would be identified by cross-checking HMRC’s sources of data. If so, the amounts are likely modest.

      Second, HMRC’s tax gap does not include areas where something we might describe of as “avoidance” is actually permitted under the rules – for example the “double Irish” structure Google used prior to 2015. So in 2015 it was a very valid criticism to say that the tax gap estimates ignore multinational tax avoidance. However, things have changed since 2015. The many anti–avoidance rules implemented post-2015 make it much harder to see what “avoidance” remains permissible. Even the Tax Justice Network estimates (of which we’ve been very critical) show multinational avoidance costing the UK less than £2bn. This second criticism therefore feels of limited relevance today. ↩︎

    5. Also note that the definition of “avoidance” doesn’t encompass planning that’s clearly permitted by the rules (even if many people wish it wasn’t). So, for example, the big tax advantages for non-doms aren’t a result of tax avoidance – they’re how the rules work. Ditto carried interest, avoiding SDLT on commercial property using enveloping, etc. ↩︎

    6. See page 31 of the CBI report ↩︎

    7. See paragraph 1.8 onwards in this National Audit Office report. ↩︎

    8. We are sceptical of the Association of Revenue and Customs’ claim that £910m of additional expenditure would result in £11.3bn of additional revenues. They reach this figure by looking at historic targeted budget increases, all at least an order of magnitude smaller than what the ARC is proposing (see page 49). The obvious response is – why stop there? Why not £2bn? The obvious answer is: diminishing returns. ↩︎

    9. The Association of Revenue and Customs (the trade union for HMRC personnel) estimated a £1bn per annum saving for business if HMRC response times could be improved; although the ARC has an obvious vested interest. ↩︎

    10. Given they’re envisaged and permitted by Parliament, “loophole” is not really the right word, but we have been unable to think of a better one. Any suggestions gratefully received. ↩︎

  • The KC who sold a hopeless tax avoidance scheme without declaring a conflict of interest

    The KC who sold a hopeless tax avoidance scheme without declaring a conflict of interest

    Robert Venables KC has a reputation for providing tax avoidance scheme promoters with convenient opinions that their schemes work. The courts usually disagree. But on one occasion he went further – in 2018 he promoted a loan charge avoidance scheme where his client was a company called “Citadel Limited”. The scheme was promoted to desperate and vulnerable taxpayers by an adviser who later disappeared with his clients’ money. And what Venables didn’t add: he controlled Citadel.

    We’ve previously reported on the “loan schemes” sold to taxpayers in the 2010s. The schemes replaced normal taxable income with “loans” from offshore trusts, supposedly avoiding all tax on wage income. The Government eventually killed these schemes with the “loan charge” – a harsh one-off tax on the value of all these outstanding loans.

    The loan charge was announced in 2016 and would apply on 5 April 2019, in many cases creating six figure tax bills. So, by 2018, those affected were desperate to find a solution.

    For some avoidance scheme promoters, this created an irresistible opportunity to sell schemes to make the loan charge disappear. None of these schemes had any prospect of working. In February 2017 and August 2017, HMRC had published “Spotlights” making clear their position that the only way to avoid the loan charge was to (genuinely) repay the loan. But that didn’t stop the promoters.

    We’ve previously written about the loan charge avoidance scheme promoted by Douglas Barrowman’s company, Vanquish. Many others were playing the same game.

    One was Robert Venables KC.

    The fraudster

    Venables’ scheme was promoted via an individual called Phil Manley.

    Manley had previously worked for HMRC in a largely administrative role, which he exaggerated, claiming to have technical expertise and inside knowledge of the loan charge. Manley claimed to have been the “tech lead responsible for finding the way to defeat” avoidance schemes (a role which doesn’t exist).

    Manley used the Loan Charge Action Group to boost his profile and gain clients. Manley told clients he could save them from the loan charge, so they could ignore the upcoming 30 September 2020 HMRC settlement deadline. Just before that deadline, Manley abandoned his clients and fled the UK, leaving his clients in a very difficult position. Many have told me he took their money.

    It appears from this and other reports that Venables was working with Manley. Venables neither confirms nor denies this (see below). We believe Venables should have been suspicious that Manley was exaggerating his experience and expertise; other tax experts and laypeople drew unfavourable conclusions at the time from Manley’s behaviour and communications.

    The scheme

    Six months before the report in The Times, Manley had sent this email to his clients:

    Manley was, in fact, absolutely endorsing a tax avoidance scheme. Or, rather, two schemes – one for people who were employees, another for the self-employed:

    We’ve uploaded a copy of the “Justice” (employed) document here, and the “Liberation” (self-employed) document here.

    The email and the specification documents don’t set out the details of the scheme, but the concept was clear: pay 8% of the outstanding loans, and your loans – and the loan charge – would disappear:

    And there’s then a clear sign in Manley’s email that this is very dangerous territory:

    In the commercial world one sometimes sees lengthy tax opinions running to dozens of pages. These are for the largest and most complex transactions involving sophisticated multinational companies. Even so, a hundred page tax opinion would be highly unusual (none of our team can recall seeing one).

    It is in our view extremely unwise for a normal individual to enter into an arrangement where the analysis is so complex that a 100+ page opinion is required.

    The conflict of interest

    The “Justice” and “Liberation” specification documents are peculiar.

    This isn’t a case where a taxpayer client was approaching Venables with a structure, and asking Venables to independently advise on it. Venables (perhaps via Manley) was promoting a structure to taxpayers – vulnerable individuals who were desperate to escape the loan charge.

    But those taxpayers weren’t Venables’ client. His client was “Citadel Limited”:

    Citadel Limited is a UK company (with nothing to do with the well-known fund manager of similar name).

    Who controlled Citadel Limited?

    Robert Venables and Michael Venables, plus a company called Breamgale Limited:

    Michael Venables is Robert Venables’ brother – he runs a specialist tax publishing company.

    Who controlled Breamgale Limited? Again, Michael and Robert Venables:

    Nowhere in the “specification” documents promoting the scheme does Venables disclose his interest in Citadel.

    So it appears that Venables was selling an opinion to taxpayers, knowing they wouldn’t be able to rely on it, and without disclosing that he was closely connected to his actual client (to whom the taxpayers would be paying a fee).

    We don’t know how many schemes were sold by Venables/Citadel, but Citadel’s accounts for the year to 31 March 2019 show £1.5m of profit.

    The prospects of success

    The consensus amongst tax professionals has always been that attempts to avoid the loan charge are doomed.

    So, whilst we don’t know the details of how Venables’ 2018 scheme was structured, we can be reasonably confident that it had no realistic prospect of success:

    HMRC “Spotlights” of February 2017 and August 2017 made clear that HMRC would challenge loan charge avoidance schemes. There were at least five ways HMRC could do this:.

    • The loan charge applied to all loans outstanding on 5 April 2019. There were specific provisions in the loan charge legislation to prevent a loan being somehow eliminated without the loan being actually repaid in cash.
    • These provisions were backed-up by a a targeted anti-avoidance rule (“TAAR”) that countered schemes that artificially “repaid” loans.
    • Any attempt to release or write-off a loan would also potentially face a separate tax charge under the normal disguised remuneration rules (and perhaps under the normal rules for beneficial loans and general earnings charge as well). 
    • Since at least the early 2000s, the courts have lost patience with tax avoidance schemes; we believe there is only one, the SHIPS case, where the taxpayer has prevailed.
    • After SHIPS, Parliament enacted a General Anti-Abuse Rule (GAAR) to counter schemes that no reasonable person could regard as a reasonable course of action. In our view it’s clear that entering into an artificial arrangement to defeat the loan charge (an anti-avoidance rule) was not a reasonable course of action, regardless of the detail of how the scheme works.

    None of this requires the benefit of hindsight – the fact that loan charge avoidance schemes were doomed was obvious to professionals at the time Venables promoted his scheme in 2018.

    Six years further on, as far as we are aware, every single loan charge avoidance scheme has either been abandoned or is the subject of an ongoing HMRC enquiry. Some of those promoting the schemes have been arrested for tax fraud – HMRC has said it is investigating 200 people for criminal offences relating to loan charge avoidance.

    The Justice and Liberation schemes should have been disclosed under DOTAS, given that they were being mass-marketed and clearly had a main benefit of obtaining a tax advantage. We rather expect that they were not.

    The problem with the Tax Bar

    In 2014, Jolyon Maugham (not then a KC) wrote an article about the “Boys Who Won’t Say No” – the handful of tax KCs who had a reputation for issuing opinions that avoidance schemes would work.

    Those opinions were vital for the promoters selling the scheme, as they could reassure clients that they had a KC opinion. However in practice these schemes were doomed, and had no real prospect of success – the clients would almost certainly lose their money. But the KCs knew that the clients couldn’t sue them, because the KC’s client was the promoter, who did just fine out of the scheme. And only the client can sue.

    Ten years later, nothing has changed. Some tax KCs (it must be stressed, a small minority) still write highly dubious opinions for scheme promoters, knowing that the actual scheme users will have no recourse when (inevitably) the scheme fails.

    The Justice and Liberation schemes appear to be an unusual and even worse case. Venables wasn’t just an adviser acting on someone else’s scheme – he was closely involved in the creation of the scheme and had an undisclosed interest in it. He surely knew that the scheme would be promoted to unrepresented and vulnerable individuals.

    We don’t believe a solicitor would be permitted by the SRA to act in this way. The question is whether the Bar Standards Board will act.

    A failure of regulation

    The Bar remains the last outpost of cowboy tax advisers.

    CIOT/ATT-qualified tax advisers and solicitors are required to adhere to the the “Professional Conduct in Relation to Taxation” (PCRT) guidelines.

    The PCRT includes this key paragraph:

    Members must not create, encourage or promote tax planning arrangements or structures that i) set out to achieve results that are contrary to the clear intention of Parliament in enacting relevant legislation and/or ii) are highly artificial or highly contrived and seek to exploit shortcomings within the relevant legislation.

    This is an important consumer protection for clients – any structure that sets out to achieve results contrary to the clear intention of Parliament will, given the modern caselaw, almost inevitably fail.

    However, barristers are not required to follow the PCRT. They remain free to promote highly artificial and contrived schemes with no realistic prospect of success, secure in the knowledge that in practice they face no adverse consequences when the scheme fails.

    There is a live Government consultation on regulating the tax profession and “improving standards”. The proposals will have no effect on the Bar, as it is already regulated.

    Given the significance of KC opinions for tax avoidance schemes, this looks like a major omission. We will be writing shortly on our wider concerns with the consultation. In our view they will fail to curtail modern forms of tax avoidance, whilst imposing an unnecessary regulatory burden on people who have no involvement in tax avoidance.

    Venables’ response

    We wrote to Robert Venables KC asking for comment.

    Venables’ response started with a rather childish insult…

    … and then provided a series of highly specific statements which neither confirmed nor denied the points we had put to him:

    Denial of promoting the scheme with Phil Manley

    Venables categorically denied that he promoted the scheme:

    It is, however, not obvious how this is consistent with the “specification” documents, which appear to be aimed at promoting the scheme to individual taxpayers. It is possible that Venables is using a particular meaning of “promoting”.

    We asked Venables specifically if he caused the specification documents to be circulated to taxpayers; he declined to comment.

    In his answer above, Venables seems to be trying to distance himself from Manley. We note the reports from 2019 that Manley and Venables were involved in a scheme to avoid the loan charge called “Insella” (confirmed by our discussions with contractors and by contemporaneous forum posts). It is surprising that Venables was unaware of these reports, and that someone following the loan charge as closely as Venables was unaware of the controversy around Mr Manley.

    We gave Venables the opportunity to specifically confirm or deny that he worked with Manley, and that he caused the Justice and Liberation specifications to be circulated to taxpayers via Manley. Venables declined to comment.

    Denial of ownership of Citadel

    We asked Venables about the details of his scheme saying that – as Citadel was his company – usual considerations of client confidentiality shouldn’t prevent him responding.

    Venables’ response was to distance himself from Citadel:

    The implication is that Breamgale is a trustee for some unknown third party, who holds the beneficial interest in the Citadel shares. That is consistent with Breamgale’s PSC disclosure. But it doesn’t explain why Venables has been listed, at all times, as a PSC of Citadel Limited, and that unknown third party has not been.

    We asked Venables to explain this; he declined to comment.

    However, in our view whether or not Venables holds a beneficial interest in Citadel is not the key question. Even on Venables’ account, he still controls the company (unless his Companies House filings were incorrect). And that was not disclosed to the taxpayers receiving the scheme proposal.

    Denial of a duty to disclose

    Mr Venables doesn’t think there’s anything improper about marketing a scheme to unrepresented individual taxpayers without disclosing his links to Citadel:

    You state “However the documents fail to disclose that you were a shareholder in Citadel Limited (both directly and via Breamgale Limited), with the other shareholder being Michael Venables (who we assume is a relative).” Please specify to whom it alleged Mr Venables owed a duty of disclosure concerning his alleged shareholding? You will see that the work proposals you attached make You will see that the work proposals you attached make it clear that Mr Venables only proposed client was Citadel Ltd and that he disclaimed any duty of care of care any third party.

    And:

    This is a very narrow view of a barrister’s duties, which go beyond the narrow duty to the barrister’s own client. In our view, the BSB’s requirements of honesty, integrity and independence preclude a barrister from promoting a tax scheme to unrepresented individuals without disclosing that he personally, or persons related to him, will benefit from the fees that they pay.

    Claim of confidentiality

    Venables’ email to us was headed “strictly confidential”. We asked what the basis was for claiming confidentiality, and received this response:

    That is not how the law of confidence works.

    We are publishing the correspondence in full here.

    Many thanks to M, J and C for technical remuneration tax input, and to B for advice on barristers’ professional standards. Thanks to Simon Lock for the genealogical research, and thanks to all the contractors who provided us with background on Messrs. Venables and Manley.

    Footnotes

    1. Unrelated to the well-known Citadel, the fund manager. ↩︎

    2. Venables’ reputation as a provider of avoidance opinions is hard to prove from publicly available sources, as the opinions he issues are rarely public. One exception is the Hyrax case – see in particular paragraph 80 of the judgment. Venables provided an opinion the structure wasn’t disclosable to HMRC under the DOTAS rules. The tribunal had no difficulty coming to the opposite conclusion. ↩︎

    3. After Manley’s activities were reported in The Times in April and then June 2019, Ed Davey wrote on behalf of the All-Party Parliamentary Loan Charge Group saying Manley “hadn’t promoted tax avoidance schemes” and never had a formal role with the APPG or the Loan Charge Action Group. Manley clearly had promoted tax avoidance schemes. He may never have had a formal role, but Manley accompanied Davey on meetings with HMRC, and worked with the LCAG on their input to the Independent Loan Charge Review. Both bodies were at best naive in giving prominence to someone who was fairly clearly not an expert in the matters he purported to advise on. It’s hard to understand why Davey then defended Manley. ↩︎

    4. The only explanation provided by Manley was that HMRC had “thrown [him] under the bus”. It is unclear what was meant. Some of Manley’s former clients believe he was delusional enough to think he could persuade HMRC/HMT to drop the loan charge, and he fled upon realising that this would not happen. Others believe he was a fraudster from the start; that seems plausible to us, given the gulf between Manley’s claims and his actual expertise. ↩︎

    5. It is possible that the schemes discussed in this report were in fact “Insella”, or changed into “Insella”. It is also possible they were different schemes. How many schemes Venables and Manley promoted is an interesting question, but only of limited relevance to the matters discussed in this report. ↩︎

    6. We weren’t sure about this when we first published this report, but are now reasonably confident they are brothers thanks to birth registration index data. Michael and Robert share a place of birth and mother’s maiden name, and the father owned a company now owned by Robert and Michael Venables. Many thanks to Simon Lock for the research on this. ↩︎

    7. See for example Pett on Disguised Remuneration at 15.6 ↩︎

    8. Just as if someone claimed to have a scheme which eliminated an employee’s tax on £100k of PAYE income then we would be reasonably confident that the scheme would fail, without knowing the details of the scheme. ↩︎

    9. Unless they are also CIOT or ATT regulated, which most are not. ↩︎