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  • GC Wealth – the £bn tax avoidance scheme that could be fraud

    GC Wealth – the £bn tax avoidance scheme that could be fraud

    We’ve been investigating a Belize company called GCWealth. It says its offshore trusts can eliminate tax on your assets, and prevent your spouse or creditors ever accessing the assets. And GCWealth claims that billions of pounds have been put into their schemes in the last fifteen years.

    Our experts believe GCWealth’s claimed tax, divorce and insolvency benefits don’t actually exist. The schemes only work if the authorities don’t find out about them. That suggests this may be fraud, not avoidance.

    The GCWealth schemes, like others before them, shows that the current approach to dealing with tax avoidance isn’t working.

    Promoters remain free to push highly aggressive schemes that border on fraud. They do so from offshore companies that – they think – make them untouchable. And we believe that this kind of avoidance/evasion is part of the reason why the small business “tax gap” is so large. It’s time to make promoters of such schemes pay, with harsh penalties and criminal sanctions.

    This report outlines the GCWealth schemes, explains why they don’t work under current law, and proposes specific changes to criminalise promoters like GCWealth.

    The two schemes

    This is GCWealth’s document promoting its “business asset trust” (PDF version here):

    The scheme works like this:

    • GCWealth’s client declares a trust over property (or indeed any asset), so that it remains in the taxpayer’s name, but beneficial ownership passes to a Belize trust.
    • The taxpayer sets up a new UK company which becomes the beneficiary of the trust (i.e. it’s a trust inside a trust).
    • Then, through steps that are not set out in these documents, the asset supposedly becomes free from income tax, capital gains tax and inheritance tax.
    • GCWealth also claim that the trust means that your “assets protected from 50/50 split upon divorce”. In other words, if you divorce, and a court split the marital assets, you’d keep all the assets in the trust.
    • And GCWealth say the “assets [are] immediately sheltered from bankruptcy, insolvency proceedings”. So if you owe your creditors money, but have put assets in trust, your creditors wouldn’t have access to them. 

    These are bold claims.

    Here is the document promoting a second scheme, the “creditor protection trust” (PDF version here):

    This second scheme works like this:

    • The client has a pre-existing small business run through a company.
    • Normally the company would pay corporation tax on its profits, and pay dividends to the client – with the client paying income tax on the dividends.
    • Under this scheme, all the profit made by the client’s company is contributed to the trust.
    • GCWealth say the company’s payments to the trust are deductible for corporation tax purposes. So the company pays zero corporation tax.
    • The money, now in the trust, is then lent by the trust to the client under successive ten year interest-free loans.
    • And GCWealth say that the client receives the loans tax-free.
    • GCWealth say the structure “spans over a hundred years in its use”. We don’t know what that means.

    Again these are ambitious claims.

    The PDF metadata of both documents show that they were created by “Bobby” in 2021; we have received reports of the scheme being promoted in 2022, 2023 and 2024.

    Both schemes have a fee of 15% of the amounts put into trust. That will be a very large amount. If the claim that billions of pounds have gone into these schemes is correct, then over £100m of fees will have been received.

    Why the schemes fail

    We’ve spoken to leading private client tax advisers, and they believe the claims made in the two documents are fictitious.

    The documents say that the taxpayer retains control of his assets at all times, despite the trust arrangement. That suggests that the arrangements may in fact be a “sham“, and there is no trust at all.

    But a sham may be the best-case outcome for GCWealth’s clients. If it’s not a sham, the first scheme (the “business asset trust”) won’t be effective, and may trigger large up-front taxes:

    • The transfer of assets to the trust will likely result in an immediate 20% inheritance tax charge (once beyond the £325k nil rate band). The trust would be subject to a 6% charge every ten years and on any exit of any assets from the trust.
    • We’d expect capital gains tax to be triggered on the transfer of assets to the trust unless “hold-over relief” applies. Whether hold-over relief would in principle be available isn’t clear from the description in these documents, but it requires a taxpayer to make a claim to HMRC, and we suspect users of this scheme wouldn’t be minded to tell HMRC about it.
    • The client (as settlor) or company (as beneficiary) would ordinarily be subject to capital gains tax on the trust’s capital gains, and the trustee subject to income tax on the trust’s income. We’ve no idea why the document says “any rental stream for the asset is now tax free” and “any sale of the asset is free from CGT”. Possibly there are mechanics behind the scenes that supposedly prevent the usual trust tax rules applying. We are doubtful this is possible in principle, but even if it was, we would expect the general anti-abuse rule (GAAR) would apply.
    • Where the assets consist of land in England or Northern Ireland then the trust’s acquisition of the interest in the assets may trigger a stamp duty land tax charge on the market value of the land. If the property is residential then the rate could be up to 17%.
    • Where the assets consist of UK shares and (as the document suggests) the beneficiary is a connected company, there will be a stamp duty reserve tax charge equal to 0.5% of the market value of the shares.
    • The document says “It does not matter if the asset has borrowing/mortgage. The lender does not need to be notified as the beneficial title of the net equity is transferred to the client’s own UK new company”. We’ve seen these claims before and they are usually false. That’s our view, and also that of the mortgage lenders’ industry body. So, if a mortgaged property is put into trust, the mortgage will probably be defaulted.

    We expect the second scheme (the “creditor protection trust”) also fails to provide a tax benefit, and may trigger large up-front taxes:

    • The contribution to the trust by the client’s company will be non-deductible for corporation tax purposes, because it isn’t made for wholly and exclusively for the purposes of the company’s trade. Indeed it’s nothing to do with the trade.
    • After the most recent wave of attempts to avoid employment tax, the “disguised remuneration” rules were introduced. If you are a director, and receive what is in substance a reward, via a third party, then you get taxed. These rules will apply here. Possibly there are mechanics intended to defeat the disguised remuneration rules – it is not obvious how even in principle this could be achieved but, even if it was, we expect the GAAR would apply, as it already has to another variant on a remuneration trust structure.
    • Realistically, the contributions to the trust by the company are gifts. We expect they will be subject to a 25% inheritance tax entry charge in the hands of the company’s shareholders (beyond the £325k nil rate band).

    Both schemes end up being a tax disaster for GCWealth’s clients.

    Failure to disclose the scheme

    DOTAS

    Tax avoidance schemes are required to be disclosed to HMRC under the DOTAS rules. Given that the two GCWealth schemes have a main benefit of creating a tax advantage, and there is a 15% fee, it is in our view reasonably clear that the schemes should have been disclosed. We asked GCWealth on three occasions if they disclosed and they failed to answer. We therefore believe that GCWealth unlawfully failed to disclose.

    Where an offshore promoter fails to disclose a scheme, the clients themselves are required to disclose. The promoter can also be subject to penalties of up to £1m.

    IHTA return

    There is a special reporting rule that applies to anyone who, in the course of their trade/profession, is involved in the creation of an offshore trust for a UK settlor, but inheritance tax isn’t paid when the trust is established.

    We expect no inheritance tax was paid on the establishment of these trust structures, which means that this rule will have applied, and a return should have been made to HMRC. We doubt that it was.

    Other registration rules

    Any offshore trust/settlement owning UK real estate is required to register with the Trust Registration Service. Does GCWealth register its trusts?

    Offshore entities with beneficial ownership of land in England & Wales are required to register with the Register of Overseas Entities. Does GCWealth do this?

    Tax avoidance or fraud?

    There are a number of signs that the promoter either has no understanding of tax, or is engaged in a deliberate deceit:

    • The claim that this is “not a tax avoidance scheme” is laughable. The only purpose of this arrangement is to avoid tax and other legal obligations.
    • The first document (“business asset trust”) says that “HMRC are bound by the validity of the structure”. They are clearly not, and we don’t believe any competent lawyer or tax adviser would think otherwise.
    • The second document (“creditor protection trust”) says that “HMRC accept the validity of the structure”. Either HMRC have been shockingly negligent, or this is a lie.
    • The description in the second document says “the client will also be a beneficiary to the trust ie a creditor”. A beneficiary is not a creditor. Perhaps this is a deliberate attempt to muddy the waters, or perhaps the author does not understand trusts.
    • The documents claim that “The very nature of the structure means that it is not subject to the general anti-avoidance rule (GAAR)”. The GAAR guidance contains numerous examples of the GAAR applying to trusts and the GAAR advisory panel has issued a decision on an offshore remuneration trust structure. Why wouldn’t the GAAR apply to these variants? And any tax adviser knows it is the general anti-“abuse” rule.
    • We see no proper basis for a DOTAS disclosure not being made.
    • We are confident HMRC would challenge these schemes if it became aware of them (and we are aware of one case where HMRC did become aware and did challenge). But the way the first scheme works, with a “silent” trust that operates behind the scenes, means that it will be very hard for HMRC to discover the existence of the schemes unless they are properly disclosed in tax returns. We expect that scheme users do not properly disclose the scheme, with either no disclosure or misleading disclosure. Deliberate concealment is potentially tax fraud.

    How much have these schemes cost taxpayers?

    GCWealth says that the structure has “Protected several £Billion wealth since 2009” and that their clients includes “business owners in every major industry sector; some of the UK’s wealthiest families; some of the UK’s leading sportspeople; property developers and investors”.

    We don’t know if these claims are true. But if they are, we expect that the schemes have resulted in a cost to the taxpayer of around £1bn, thanks to GCWealth’s clients having failed to pay tax that in our opinion was legally due.

    Divorce protection

    GCWealth claims the first scheme, the “business asset trust” means your “assets protected from 50/50 split upon divorce”. It’s a variant of the “deed in the drawer” structure that’s been used for centuries. As one judge recently summarised it:

    “The phenomenon of the “deed in the drawer” is one that is now frequently encountered. X appears to be the owner of a property, and people lend to him or otherwise deal with him on the footing that he owns it. But if X becomes bankrupt or the subject of enforcement proceedings a deed is produced which shows that in truth he holds the property upon trust for somebody else. In some cases these deeds are simply not authentic. In other cases they are authentic, but simply not noted in any public register.”

    We spoke to barristers and solicitors specialising in chancery law, family law, and nuptial agreements, and they all expected the trust would fail to achieve this:

    • As noted above, it could be attacked as a sham on conventional Chancery principles (because in a real trust the settlor does not have full control of the assets).
    • If not a sham, the fact the client has control of the assets suggests that it is simply the “property and other financial resources“ of the client, and part of the “matrimonial pot” in the same way as any other asset. The arrangement achieves nothing.
    • If not a sham and the client somehow doesn’t have influence/control, the question is whether the trust was created “with an intention to defeat” the spouse’s financial claims. If it was, then the court could make an order to set it aside under section 37 of the Matrimonial Causes Act. There is a rebuttable presumption that the trust was created with such an intention if it was created less than three years before the date of the court application. Even after three years the experts we spoke to thought that the structure was plainly motivated by a desire to defeat a claim for financial relief, and therefore it would be hard to resist a section 37 order..

    The specialists we spoke to concluded from this, and the incorrect reference to the “50/50 split”, that the promoters of the scheme have no expertise in this area and did not take appropriate advice.

    Insolvency protection

    The documents also promise that the trusts mean your assets are “immediately sheltered from bankruptcy, insolvency proceedings”. This claim is false.

    Gifts into a trust will be set aside if made within two years of your bankruptcy, or five years if you were insolvent at the time. And a gift made at any time can be set aside if a court is satisfied that the gift was made for the purpose of putting assets beyond the reach of a person who is making, or may at some time make, a claim against him.

    The confidence with which a clearly incorrect claim is made again suggests that the promoters have no expertise and did not take appropriate advice.

    Bobby Gill

    The man behind these companies is a British solicitor called Bobby Gill.

    Gill says he’s “been a leading international corporate lawyer for over 2 decades”. He is indeed a solicitor (non-practising) but, whilst we have extensive contacts in international and offshore law firms, we couldn’t find anybody who’s heard of him. He has no web presence except amateur looking Wix and WordPress sites, and what look like paid-for profile pieces on obscure websites.  

    Gill’s sole public visibility arises from his ownership of a business called Swisspro Asset Management AG which attracted investors on the basis it would undertake currency trading and pay them a 2% per month fixed return (which equates to a 27% annualised return). We’ve spoken to FX traders and fund managers – none regard this as plausible.

    Swisspro became insolvent in 2019, as did a related UK funding entity called GCW Funding Limited. The Swiss financial regulator issued a “cease and desist” order to Gill, requiring him to cease accepting investments (machine translated version here). According to Bloomberg, the Swiss regulator said in a letter to creditors that the business “appears a Ponzi scheme”. Ordinary investors lost large sums.

    Gill gave a personal guarantee for £1.5m borrowed by Swisspro. Swisspro started to get into financial difficulties in 2017 and the lender called on the loan in 2018. Gill tried to argue that, because the guarantee had been signed electronically, he wasn’t bound by it. The dispute ended up at the High Court, which wasn’t impressed with Gill’s attempt to escape the guarantee he’d signed.

    It’s hard to understand why Gill ever thought his business could produce such high returns for investors. He told us that the failure was the fault of an FX trader engaged by Swisspro, who has since been convicted for fraud and money laundering and is currently an international fugitive. That doesn’t explain why Gill made the claim of a 2% return per month, or why he continued to take customer money well after the point that Swisspro was unable to repay the £1.5m loan.

    As a non-practising solicitor, Gill remains bound by SRA rules which prohibit solicitors from promoting aggressive tax avoidance schemes. We have reported Gill to the SRA.

    GCWealth

    GCWealth has no online presence (the similarly named company that does is completely unrelated). It reaches clients and wealth advisors through direct sales.

    Gill established GC Wealth Limited as a UK company, and in 2016-2018 it had significant fee income. But its accounts for 2019 appear to be badly wrong, with the 2019 balance sheet identical, to the pound, to the 2018 balance sheet:

    It also looks as those there may have been aggressive tax avoidance to prevent the company’s profits being taxed. At some point around 2019 that company became dormant and the business moved to “GCWealth Administrators Limited” and two associated companies in Belize:

    Has the scheme been challenged?

    One client sued Gill and his associated companies for negligence back in 2018. We don’t know the outcome, but infer from the lack of action that it was settled. There was another case against Gill around the same time; we don’t know what it involved.

    There are signs that HMRC is aware of GCWealth’s activities. We believe there is one live case where HMRC is challenging a UK taxpayer who used a GCWealth scheme. And HMRC applied at the end of last year to wind up GCWealth RT Limited (but we don’t know why, or what that company did).

    However, Gill and GCWealth are not on HMRC’s list of named promoters and avoidance schemes, and aren’t subject to a “stop notice” making promotion a criminal offence. They should be.

    Links to other schemes

    Bobby Gill appears to be connected to notorious tax avoidance scheme promoter Paul Baxendale-Walker. We understand that Gill used to sell PBW remuneration trust schemes, and the trust schemes described in this article are very similar to PBW structures. We do not know if this is coincidence, if PBW helped create the schemes or if Gill just copied/modified existing PBW structures.

    There also a surprising connection to the OneCoin Ponzi fraud we covered earlier this year, through the “C” in “GC Wealth” – a lawyer called Robert Courtneidge. Gill’s original UK company was once called Gill & Courtneidge Wealth Limited (although Courtneidge no longer appears directly involved), and Courtneidge was described by the High Court as a friend of Gill. Courtneidge was a lawyer to the OneCoin Ponzi fraud and has been associated with other failed businesses (although he has not been accused of any wrongdoing).

    The other individual known to have been involved in GCWealth is a woman called Marianna Timmini. We don’t know anything about her.

    We are working on an application that will visualise connections between individuals linked to UK companies – it’s not quite ready for public consumption, but the GCWealth connections look like this:

    Bobby Gill’s response

    Gill sent us a response in which he said “The company has never engaged in any form of ‘tax avoidance’, aggressive or not. Indeed it has never engaged in any form of tax planning.”

    We view that as completely untrue. The trusts have no purpose other than to avoid tax and hide assets from creditors or a spouse. We believe any reasonable tax adviser would see this as highly aggressive tax avoidance.

    We put to Gill that the structure was technically hopeless. His response was that we’d only seen two page summaries. In many cases that would be a fair criticism: it would be unwise to judge the efficacy of (for example) Google’s tax structure, or the Duke of Westminster’s inheritance tax planning, on the basis of a two page summary. However just as a physicist would feel confident dismissing a miraculous perpetual motion machine on the basis of a two page summary, we feel reasonably confident dismissing a scheme that achieves the fiscal miracle of nullifying all tax from an asset. We have also seen correspondence between Gill and advisers acting on behalf of people interested in the GCWealth schemes. The pattern is always the same: when advisers ask technical questions, Gill stops responding to emails.

    We asked Gill three times if the trusts had been disclosed under DOTAS. He avoided answering directly, but instead said HMRC were aware of the trusts,. That is not the same thing. The requirement to notify HMRC of a tax avoidance scheme applies regardless of whether HMRC are “aware” of the scheme. We infer from Gill’s response that no DOTAS notification has been made. And that’s what we’d expect for this kind of scheme – marketing it is much more difficult if it’s been disclosed to HMRC as a tax avoidance scheme.

    We set out our correspondence with Gill in full here.

    How can these schemes be stopped?

    We have three recommendations:

    First, use and expand existing powers

    HMRC needs to be more proactive identifying and naming schemes. We believe HMRC is aware of the GCWealth scheme. Why isn’t it on HMRC’s published list of avoidance schemes?

    When schemes are put on the list, it’s only for twelve months. That’s a silly limitation of current law – the law should be changed.

    Second, make it a criminal offence to fail to disclose avoidance schemes

    One constant in all the tax avoidance schemes we see is that none are disclosed to HMRC under DOTAS, the rules requiring notification of tax avoidance schemes. The technical basis for this is either non-existent or nonsensical. The real rationale is that nobody can sell an avoidance scheme that’s been disclosed under DOTAS

    This needs to change.

    It should be a criminal offence to fail to disclose a scheme under DOTAS where no reasonable adviser would have thought there was a reasonable basis for failing to disclose. It would be important for HMRC to make clear that the offence would never be applied to a genuine mistake; the measure would be a failure if it concerned normal tax advisers. The offence should be carefully calibrated to only impact the cowboys, and there should be a defence where the breach occurred despite a person taking reasonable steps to comply with DOTAS.

    Third, end the offshore promoter loophole

    Many of HMRC’s powers are hard to enforce against offshore promoters of tax avoidance schemes. Obtaining an offshore promoter’s client lists and documentation is, for example, very difficult.

    Tax avoidance scheme promoters have taken ruthless advantage of this by moving their businesses offshore. We would speculate that this is why Gill moved his GC Wealth business from the UK to Belize in 2018.

    The obvious solution is to simply prohibit offshore entities from promoting tax avoidance schemes (broadly defined), with criminal penalties for breach, and enhance penalties for taxpayers using such schemes.

    Many thanks to all the experts who contributed to this report, including: O, M and James Quarmby (personal tax), Elis Gomer (chancery law), S (SDLT and general technical review), N (divorce law), K (insolvency law), C and P (accounting), E (additional research) and O, F and B for their FX and fund management insights. As is always the case, Tax Policy Associates Ltd takes sole responsibility for the content of the report.

    Documents © GCWealth Administrators Limited, and reproduced here in the public interest and for purposes of criticism and review.

    Footnotes

    1. The document actually says that “the beneficial title sits” with the company. That can’t be right, because it implies the arrangement is a bare trust, which would have no tax effect. Probably the author doesn’t understand the difference between a beneficiary and beneficial title. ↩︎

    2. The document expressly says the company is the beneficiary of the trust. But it also says, in the previous sentence: “The trust structure is set up so that the power in the trust to hold the assets are held by the client in a UK new company specifically set up as part of the structure, of which the client is the sole shareholder and director” which is incoherent, but perhaps suggests the company manages the trust? ↩︎

    3. These steps sometimes include an intermediate non-UK company which acquires the asset and makes the contribution to the trust. This appears to be an attempt to fool UK settlement rules – it won’t work. ↩︎

    4. Metadata is the data created when by software that creates or edits documents, but which is not visible onscreen when you view the document. The metadata in a PDF file can, for example, be seen in Acrobat by selecting File/Document Properties. It is important not to read too much into metadata – if I set up a computer as belonging to Napoleon then PDFs created on that computer by Acrobat would (by default) show Napoleon as the author. And the author, data and other metadata in a document can easily be manipulated. So metadata should be regarded as no more than indicative. ↩︎

    5. It looks like GCWealth accept that VAT should be paid on 5%, but then try to argue the remaining 10% is exempt. That is in our view incorrect – it’s all realistically a fee for advice, and VAT therefore applies. ↩︎

    6. The incoherent sentence noticed above (“The trust structure is set up so that the power in the trust to hold the assets are held by the client in a UK new company specifically set up as part of the structure”) also adds to the feeling that this is not a real trust. ↩︎

    7. This is just a short summary; there are a large number of anti-avoidance rules which may apply here, not least the transfer of assets abroad rules ↩︎

    8. The settlor interested trust rules would seem to apply to tax the income in the hands of the client, as if there had been no trust ↩︎

    9. The GAAR doesn’t care about how clever your technical argument is, which is one of the reasons why we are reasonably confident this scheme doesn’t work despite not having access to those technical arguments. ↩︎

    10. The rules in Scotland and Wales are different; we expect there would be adverse effects, but we have not discussed with Scottish and Welsh tax experts. ↩︎

    11. The deemed market value rule in s53 will apply if the purchaser for SDLT purposes is a connected company. The rules as to who is the “purchaser” in para 3 Sch 16 Finance Act 2003 have the effect that, if the beneficial owner under the trust is the company, then the company is treated as the purchaser.  GCWealth’s promotion document suggests that “the beneficial title sits with the client’s own UK new company.”  If that is the effect of the documents, then large SDLT liabilities are likely to arise. ↩︎

    12. i.e. 3% above the normal rate if a company holds the property, and 2% extra if the company/ trust/new owner is treated as non-UK resident for SDLT purposes. The flat 15% rate could apply if an individual dwelling were worth over £500K, although though with reliefs, eg for a property rental business. The non-resident 2% rate applies on-top of the 15% rate. ↩︎

    13. Broadly speaking – it’s a little more complicated than this ↩︎

    14. Payments to a trust for the benefit of employees are only deductible when and if the employees are taxed on the payments. However that’s only if the payments are deductible on general principles. Here the document goes out of its way to say that the loans “aren’t in any way connected in (sic) the client’s capacity as employee/director of the business”. That is supposed to help the analysis. It doesn’t – but query if it would prevent the company obtaining a deduction, even when (inevitably) the client is taxed on the loan. ↩︎

    15. The claim that “The loan is taken by the client in his capacity as a creditor to the trust (ie not in any way connected in the client’s capacity as employee/director of the business)” is presumably an attempt to avoid these rules, but it is obviously untrue. Of course the loan is connected to the client’s capacity as a director – the company only made the contribution to the trust because the client/director knew he would receive it back as a loan. ↩︎

    16. Which may mean it falls within the DOTAS employment income hallmark – see 5.8 ↩︎

    17. In such a case, the usual 20% rate is grossed-up to 25%. ↩︎

    18. Assuming the company is close, which seems likely. More details here, with an example here. ↩︎

    19. The penalties for a breach of section 218 are ludicrous – £300 plus £60/day. It is, however, unacceptable for a solicitor to ignore a legal requirement. ↩︎

    20. The courts have found trusts to be “other financial resources” in numerous cases of “real” trusts where the settlor influences the trustees, but does not have complete control. The test in Charman v. Charman [2006] 1 WLR 1053 is “whether, if the husband were to request [the trustee] to advance the whole (or part) of the capital of the trust to him, the trustee would be likely to do so”. ↩︎

    21. Note that if there is sufficient evidence then there is no limitation period for s37. ↩︎

    22. i.e. because the divorce “advantage” is specified in the promotional material for the trust, and further evidence would likely emerge from disclosure (including the client’s correspondence with GCWealth. Indeed it is unclear what purpose the client could say the trust had, other than tax avoidance and “asset protection”. ↩︎

    23. There is one an additional point that probably isn’t relevant, but some arrangements of this kind get caught by. If the wife were a beneficiary of the trust, even to a small amount, that the trust could qualify as a “nuptial settlement”, which the court has almost unlimited powers to vary. ↩︎

    24. Such an improper purpose will exist even if there are other purposes, such as tax avoidance. ↩︎

    25. The Lemos judgment provides a useful example of how the courts apply section 423 in practice. ↩︎

    26. Gill tells us he doesn’t own GCWealth Administrators Limited but is merely a consultant. The reports we’ve received of GCWealth’s sales efforts only mention Gill. Gill clearly was the owner of GCWealth’s predecessor UK company (of which more below), which appears to have transferred its business to the Belize operations. Obfuscation of ownership is a common tactic of tax avoidance scheme promoters. ↩︎

    27. Aside from the Swisspro High Court case we mention below. ↩︎

    28. Gill says that, until 2009, he was an associate at Allen & Overy and Mallesons in Sydney, and then a partner at an unspecified top 20 international law firm. The internet has no evidence of any of this, although companies House suggests that from 2006 to 2010 Gill worked for a boutique law firm called iLaw. ↩︎

    29. An obvious caveat is that we cannot know whether Gill actually created these pages or someone else did; it is, however, difficult to see what motive anyone other than Gill would have to write them. Gill may have been conned by one of the firms like Mogul Press that promise to raise their clients’ profiles, but actually just publish poorly written articles on low impact websites. ↩︎

    30. There was also a UK company, Swisspro Asset Management AG Limited, owned by Gill, which appears to have been dormant – if we can trust the accounts. And a Canadian company, Swisspro Asset Management Inc, which was dissolved in 2022 for non-compliance after failing to file any accounts since its incorporation in 2017. ↩︎

    31. Which suggests Swisspro wasn’t originally established as a fraudulent enterprise. ↩︎

    32. Gill continued “There is an ongoing police investigation, and me, my family and many others are victims of this fraud. I have assisted the police to the best of my abilities and been praised for my support and assistance. I am unable to comment much further on this given the ongoing investigations”. ↩︎

    33. This is on the basis of the 30 January 2019 balance sheet, which show £1,252,124 cash at bank, £351,007 debtors, and almost all of that (£1,602,985) owed to creditors (of which HMRC account for only £11). The figures in the 30 January 2018 balance sheet are exactly the same, to the pound, which the accountants we spoke to thought was likely a bad mistake (it is just about possible in principle for a company with so much cash to have no balance sheet movements at all from one year to the next, but none of the experienced accountants we spoke to had ever seen such a thing). The 30 January 2020 accounts then show the 2019 balance sheet as all zeroes, but there was no filing of amended accounts, and no explanation for the change, so this appears to be another error or a rewriting of history rather than a proper correction in accordance with usual accounting practice. ↩︎

    34. The 30 January 2017 balance sheet shows £2,250,066 cash in bank, £119,563 debtors, and almost all of that (£2,369,529) owed to creditors (none owed to HMRC). On the basis of these accounts, and what we know of the GCWealth scheme, we would speculate that the company made offshore payments it claimed to be tax-deductible. The accounts of other Gill companies, GCW Funding Limited, GCW Funding (2) Limited and GC Wealth RT Limited have similar features, with GC Wealth RT Limited also having a 2019 balance sheet identical to the 2018 balance sheet. ↩︎

    35. Although “RT” often stands for “remuneration trust” ↩︎

    36. One of the defendants in the negligence case brought against Gill was Bay Trust International Limited, which linked to Baxendale-Walker. There is another case involving Gill and two of Baxendale-Walker’s Minerva and Buckingham companies. And another case in which Gill applied to set aside a statutory demand; his lawyers were Morr & Co, who often act for Baxendale-Walker and his companies. ↩︎

    37. We put to Gill that he was connected to PBW. His response was that he “repeated his comments above”. It’s not clear which comments he refers to, so this may or may not be a denial. ↩︎

    38. There is no single legal definition of “tax avoidance”, but tax advisers and judges know it when they see it. ↩︎

    39. If you are sceptical of this claim, have a look through decided cases where the first paragraph of the judgment describes the arrangement in question as a “tax avoidance scheme”. In the last 25 years, the result has almost always been that the taxpayer loses. ↩︎

    40. That not’s quite true for SDLT, where a scheme that’s been around for ages, and HMRC are therefore aware of, can in some cases be “grandfathered” and not subject to DOTAS notification. ↩︎

    41. In other words, borrow the successful “double reasonableness test” from the GAAR ↩︎

    42. So, for example, if a person relies on an opinion from an adviser that DOTAS doesn’t apply then the defence should be available. If, however, the opinion was obtained on the basis of incorrect assumptions of fact, the adviser was improperly briefed, or a reasonable layperson would suspect the opinion was incorrect (e.g. because the barrister had previously issued opinions on DOTAS which courts had found to be incorrect), then the defence would not be available. ↩︎

  • What to do if you received an HMRC stop notice from Property118?

    What to do if you received an HMRC stop notice from Property118?

    Tens of thousands of people (including me!) just received this email from Property118, attaching a rather scary HMRC “stop notice” (PDF version here, or click on thumbnails below):

    We all received the email because we once downloaded an ebook from the Property118 website.

    What should you do if you’re in this position?

    Nothing.

    If all you did was download the ebook, or book a consultation you never took forward, then the stop notice is irrelevant to you. Property118 may consider you a “client” for the purposes of the rules that force them to write to people, but if you didn’t use any of their tax schemes then you’re not a “client” in any way that matters.

    You can happily delete the email, and stop reading this article.

    It’s unfortunate Property118 didn’t make clear that the email is irrelevant to 99% of its recipients.

    What if you were a Property118 client, or used their tax planning ideas yourself?

    If you did use Property118’s tax planning then you should be alarmed by the stop notice. It’s a very rare use of an HMRC power to require a business to stop promoting a “tax avoidance scheme” that (in HMRC’s view) doesn’t work. If the business continues to promote the scheme then those involved commit a criminal offence.

    A stop notice is a serious thing. It has no direct effect on Property118’s clients, but it is a warning that HMRC is likely about to challenge their historic tax returns.

    I’d strongly suggest someone in this position obtains independent tax advice from a regulated law or accounting firm.

    Are your details going to be passed to HMRC?

    Unfortunately they may be, if they signed up to the Property118 website on or after 17 July 2024.

    Property118 protected its own position by taking a very cautious view of the legislation (and the definition of “client”). That’s why people are receiving an email when all they did was download an ebook or register with the Property118 website.

    But it also means that people who only downloaded an ebook, or registered with the website, on or after 17 July 2024, may have their details passed to HMRC. That seems wrong, and potentially a breach of GDPR (i.e. if tax legislation does not in fact require an ebook downloader’s name to be given to HMRC). We will raise the matter with HMRC.

    Background

    We wrote about HMRC’s scrutiny of Property118 here, there’s more background here, and both articles contain links to our previous investigations into the company.

    Footnotes

    1. The first draft of this article said the opposite; it took me a while to realise that Property118 must have taken the position that ebook downloaders were their “clients” under the POTAS rules. My apologies. ↩︎

    2. It’s revealing that Property118 took a very over-confident view of the law when other peoples’ tax and property was at stake, but are taking a very cautious view of the law now their own livelihood is on the line. ↩︎

    3. Or such later date as Property118 were given the notice – I don’t know when that was ↩︎

  • Property118 – more hopelessly wrong tax advice for landlords

    Property118 – more hopelessly wrong tax advice for landlords

    We have previously reported on a high profile unregulated firm called “Property118”, which promoted a series of landlord tax avoidance schemes. HMRC took action, and Property118 has resorted to asking their clients to make donations to fund their appeals. Despite this, Property118 continues to promote tax avoidance that doesn’t work and will land its clients in a financial mess.

    UPDATE 20 July 2024: HMRC issued a stop notice to Property118 on 18 July 2024, and most of the Property118 website has now been taken down

    Property118 is continuing to publish tax advice for landlords, in the form of a 36 page ebook (now taken down; but you can read an archived version here). One of our team, a stamp duty land tax specialist, reviewed the ebook and was alarmed by its contents. We have discussed his concerns with other SDLT experts, and the consensus is that much of the advice is objectively wrong. By this we don’t mean that we disagree with it; we mean that it misses obvious points which a newly qualified tax adviser would immediately identify.

    This article is solely focused on two significant SDLT errors. There are other serious problems with the SDLT advice in the ebook, as well as numerous non-SDLT problems (particularly around interest deductibility, capital gains tax and the potential to default a landlord’s existing mortgages). If this was a regulated firm then we expect disciplinary action would be taken. But Property118 is completely unregulated.

    Failed SDLT avoidance on incorporation

    It is sometimes sensible for landlords to incorporate – i.e. to transfer their properties, and their property rental business, to a company. This should be done with care, and will sometimes cost more in increased tax and financing costs than it saves.

    One particular challenge is that, if properties are held by a landlord personally, then when the landlord transfers the properties to a company there will be an immediate SDLT charge.

    Property118 think you can get round this by moving property into a partnership, and only subsequently into a company:

    This completely ignores the specific SDLT anti-avoidance rule in section 75A Finance Act 2003. Section 75A is an extraordinarily wide rule which the Supreme Court has confirmed applies regardless of the parties’ motives. Having a “legitimate reason” is of no help. The only relevant questions are whether there’s a disposal and acquisition of property, a number of transactions are involved in connection with that disposal/acquisition, and this all results in less SDLT than would have been due on a simple sale.

    So if you plan to save SDLT by moving property into a partnership and later from the partnership into a company, then s75A will apply. It doesn’t matter if you wait a week or four years, and it doesn’t matter whether you say this is tax avoidance, or claim you have a commercial rationale. Section 75A doesn’t care about any of that. And taxpayers are expected to apply section 75A themselves under self assessment – it’s not a matter of waiting to see if HMRC applies it (but if a taxpayer doesn’t apply s75A when they should have done, HMRC would likely have 20 years to open an enquiry and would likely impose a tax-geared penalty for failure to make a return).

    There are a surprisingly large number of online articles suggesting that you are safe after three years. That is not correct – there is no three year rule here, and possibly people are confusing s75A with an unrelated rule. There is an excellent article by Simon Howley covering these issues.

    Section 75A isn’t an obscure provision – all SDLT advisers are very aware of it… and if you google “SDLT anti avoidance rule” you’ll find thousands of helpful articles.

    The obvious conclusion: Property118 don’t know what they’re doing. Anyone following their advice risks triggering an SDLT bill far in excess of the expected savings from incorporation.

    Increasing your children’s future stamp duty bills

    One of the Property118 schemes involves a landlord moving their property into a limited liability partnership, and then adding their spouse and children as members of the LLP. The idea is that rental income is then taxed in the hands of the spouse/children, who are in lower tax bands:

    But there’s a big problem with this – it means that the children are deemed to own property (“through” the LLP), and that can have expensive future consequences for them.

    First, when/if the children come to buy property, they probably expect to benefit from the special threshold for first time buyers (presently £425K, due to fall to £300K with effect from 1 April 2025).

    But will they?

    The Property118 ebook says this will be just fine:

    But here’s the definition of “first time buyer” in the SDLT legislation. Note how the words “own property” are not used, and instead specific technical terms are used:

    The way these terms are defined kills the structure.

    When the children are given an interest in the LLP after it has acquired a property, they will likely in practice be a “purchaser in relation to a land transaction” (see paragraph 17 Schedule 15 Finance Act 2003). If they’re a member of an LLP at the time it acquires a property, they’re deemed to enter into a land transaction themselves (see para 2(1)(b) of Schedule 15).

    So the children likely won’t qualify as first time buyers when they come to buy a property later in life.

    It gets worse. There’s a 3% SDLT surcharge on people buying second/subsequent properties. When the children come to buy their own property, I doubt they expect the surcharge to apply. But it probably will.

    The rules are complicated, but broadly speaking, if the child’s interest in a property held by the LLP is worth more than £40,000 then he or she will be treated as already owning an interest in a property.

    So if/when the child buys property for themselves, not only will they be disqualified from the special first time buyer’s regime, they’ll potentially be hit with the 3% surcharge. This is a very poor result.

    How can Property118 get the law so wrong?

    Property118 is run by salespeople, not tax experts. As far as we are aware, they employ nobody with any tax or legal qualifications. They used to work in a joint venture with a barrister’s chambers called “Cotswold Barristers”, which again had no personnel with any tax experience (and, as a consequence, made a series of serious errors of law). It’s unclear if that relationship continues, as the Cotswold Barristers branding is no longer present on the Property 118 website.

    We recommend that any landlords looking for tax advice approach regulated firms of tax advisers, not unregulated outfits run by salespeople. We set out more thoughts on choosing a tax adviser here.

    Does this demonstrate why tax advice should be regulated?

    We’re not sure.

    The previous Government recently closed a consultation on requiring tax advisers to be regulated. We are, however, doubtful that this would stop Property118 and others like them.

    It would be straightforward for Property118 to hire a junior accountant, give them straightforward compliance work, and then claim to be a regulated firm. And Property118’s approach to tax seems to originate with Cotswold Barristers, who were regulated by the Bar Standards Board.

    We believe creating the right incentives will likely be more effective than creating layers of new regulation. Stiff penalties for people who promote tax avoidance schemes without disclosing them to HMRC under DOTAS, and perhaps even criminal sanctions.

    Thanks to J for spotting these points and writing the initial analysis; thanks to P, T and Sean Randall for their subsequent review.

    Excerpts from the Property118 ebook are © Property118 and reproduced here as fair dealing for the purposes of criticism and review.

    Footnotes

    1. The General Anti-Abuse Rule (not “Rules”) certainly exists, but isn’t terribly relevant to this structure. The fact Property118 mention it (and not s75A) shows their lack of expertise. Indeed a small but telling detail is that nobody in the tax world calls the GAAR the “G.A.A.R” – it’s a bit like calling an ISDA an “I.S.D.A”. ↩︎

    2. Because a person holding an interest in an LLP which holds land is treated as if they held the land themselves. The child’s LLP interest will therefore be a major interest in property, which triggers the surcharge rules. ↩︎

  • Half the British public doesn’t understand income tax – new data

    Half the British public doesn’t understand income tax – new data

    Updated polling evidence from Tax Policy Associates and WeThink shows that half the public doesn’t understand a basic principle of income tax: the way that tax rates apply to income above a threshold. Half of voters believe that, once you hit the higher rate threshold, the 40% higher rate applies to all your earnings.

    The full data polling data and our analysis spreadsheet is available here.

    In the 1990s, the Liberal Democrats had a policy to “put a penny” on the basic rate of income tax to increase funding for schools. Daniel Finkelstein was then the Conservative Party’s head of research. He and their head of polling, Andrew Cooper, commissioned ICM to look into how popular this policy was. They found the policy was very popular, but that many of those supporting it thought it would cost them one penny. Not 1%, but one shiny copper penny.

    There’s been research in the US about another tax misunderstanding – that if you go into a higher tax bracket, it means all your income is taxed at a higher rate. You earn one cent more, but pay thousands in tax. Some polls have shown a majority of Americans believe this; others that a third do; YouGov found 52% getting it right. The misunderstanding is sufficiently common amongst ordinary members of the public that the Tax Foundation has a page dedicated to correcting it.

    Which made us wonder whether there is a similar confusion in the UK. When we poll people about different tax rates, do people understand that (for example) the higher rate of tax only applies to the part of your income that falls in the higher rate band?

    All things being equal, Americans should understand more about their tax system than we do, given that they are required to file tax in a much more detailed and laborious manner than us.

    How tax bands work

    For example: if you live in England, earn £50,269, and receive a £1 pay rise, you’ll pay an additional 28p in tax – 20% income tax and 8% national insurance.

    The £50,270 you’re now earning puts you at the top of the basic rate tax band. Get another £1 pay rise and you’re now in the higher rate tax band – and you’ll pay an additional 42p in tax – 40% income tax and 2% national insurance.

    The important thing is that the higher 40% rate applies only to your income above the £50,270 40% threshold. Hitting that threshold doesn’t mean all of your income becomes subject to tax at 40%, so that the £1 pay raise results in thousands of pounds of additional tax.

    The polling evidence

    WeThink kindly included this issue as part of their regular opinion polling back in April. They polled 1,164 people, before weighting (a pretty typical number for this kind of poll). I wrote about it at the time, but the answers were so surprising that WeThink, even more generously, carried out some more polling to obtain an unusually large sample (3,312). That lets us at the subgroups and try to figure out what is going on.

    Our question was:

    “Suppose that you earn £50,270, the highest amount in the basic rate 20% income tax band. You get a £1 a year pay rise, and are now in the 40% higher rate tax band. How much additional tax do you think you will pay?”

    The options we gave were modelled on US polling from YouGov:

    • “a small amount of extra tax”, or
    • “a substantial amount of extra tax”

    I think it’s clear that the correct answer is “a small amount”. But 49% of the public, and 54% of women, don’t agree:

    This is consistent with YouGov’s polling of an essentially identical question in the US.

    We have large enough subgroups that we can test if there is a statistically significant difference between supporters of different parties – there isn’t:

    This suggests that whatever is driving the difference we’re seeing, it isn’t ideological.

    That is very different from YouGov’s US polling, where there was a very large difference between the parties, perhaps reflecting the very partisan nature of US politics and peoples’ views of the US tax system (i.e. the “substantial” answer from Republications signally a hostility to tax and the US Government rather than an assessment of the arithmetic):

    An obvious question is whether understanding of the tax system changes with age.

    It does not – again, no statistically significant difference here:

    We do, however, see a highly statistically significant difference if we look at income levels:

    Scotland

    The Scottish rates are different. There is a 21% “intermediate rate” income tax band for earnings up to £43,662, and then a 42% “higher rate” tax band.

    It looks on the surface as if there’s better understanding in Scotland; but the Scottish and Welsh samples are both too small to be able to rule out a fluke – this difference is not statistically significant.

    There’s a similar story if we look at the other subgroups; small differences, but mostly not statistically significant (and the large number of subgroups mean we should be careful not to cherry-pick or “p-hack“).

    Did we ask the wrong question?

    When we published our initial results, there were two ways in which some people said our question could be misinterpreted.

    • The first is that people could think that paying 40% tax on your next £1 of income is a significant amount. So when we thought we were getting an arithmetic answer, we were getting a political one. I’m unconvinced this is a natural reading of the question. But, more importantly, if the answers were driven by politics more than misunderstanding, then we’d see differences between e.g. Labour and Conservative supporters. We don’t.
    • The second is that people are accurately understanding the effect of the loss of the savings allowance. This is the £1,000 of interest you can earn tax-free until you become a higher rate payer – it’s then reduced to £500. For someone with around £12,000 of savings outside an ISA that could mean the £1 tax increase costs them £200 (£500 x 40%). For such a person “a substantial amount of tax” might be a correct answer. Intuitively it seems unlikely many people are aware about this effect. But if it was driving the answers, then we’d expect higher awareness of it, and more “a substantial amount” answers, as we go up the income levels. We see the opposite – which is consistent with people understanding the question as expected.

    I’m grateful to the people who made these observations; it’s largely thanks to them that we went back to obtain more polling data.

    Another possible criticism is that many people didn’t understand the question, and that plus the “forced choice” means that we’re seeing a lot of random noise. We can’t exclude that possibility.

    So, if WeThink is kind enough to give us the opportunity, it would be interesting to re-run this polling with a slightly different question. We’d welcome suggestions.

    But the consistency with the US polling results suggests that the effect we are seeing is a real one.

    Why is this important?

    It used to be that only a small number of people paid higher rate tax – that is no longer the case. By 2027/28, the IFS has estimated 14% of adults will be in this tax band, which equates to about a quarter of all individual income taxpayers. It’s reasonable to expect that about half of all households will include someone paying higher rate tax at some point in their lifetime. So the higher rate is more important than it ever was.

    Our poll findings shouldn’t cause concern that people are paying the wrong amount of tax. Employees are paid by PAYE, which deducts the correct tax automatically. The self employed either use HMRC’s self assessment system (which calculates the tax due) or use an accountant.

    There are, however, other potential consequences of a widespread misunderstanding as to how income tax works.

    First, and perhaps most importantly, there are anecdotal reports of people turning away work because they believe entering the higher rate tax band will cost them large amounts of money. If that’s true for even a small percentage of the population, then it’s a problem for the individuals in question and the country as a whole. We’d suggest it’s something that HMRC and policymakers should investigate. (We are unlikely to be able to look into this ourselves with further polling, due to the statistical limits of polling samples.)

    Second, it would be sensible to assume that other basic tax concepts are equally misunderstood. Policymakers, media and others communicating about tax (including Tax Policy Associates) should try to bear this in mind.

    Finally, it means that we should be careful when looking at opinion polling on tax questions: the responses may be based upon fundamental misunderstandings of the question.

    Many thanks to Brian Cooper and Mike Gray at WeThink/Omnisis for their generosity in running polls for us pro bono. They ask for nothing in return, and don’t even ask to be credited.

    Many thanks to Daniel Finkelstein for the top quality anecdote.

    Photo by William Warby on Unsplash

    Footnotes

    1. This story has been going round for years, and is often regarded as an urban myth, but Baron Finkelstein kindly confirmed it to me earlier in the week; prompting me to finally update this article. ↩︎

    2. The difference presumably down to the wording of the poll. The first poll had “You pay your marginal tax rate on all of your income” vs “You pay the same rate as others on income up to a certain amount, then a higher rate on every dollar up to the next threshold”. This seems a little technical and long-winded, particularly given there is no “don’t know” option. The second is much simpler, but refers to “tax brackets”, which rather presupposes their existence is understood. I favour the YouGov approach ↩︎

    3. The amazing reason why the US doesn’t have a UK-style self-assessment system is that Intuit and the tax preparation industry lobbied to prevent the IRS creating a free automated filing system. This sounds like a conspiracy theory but is well established. ↩︎

    4. or Wales or Northern Ireland ↩︎

    5. It used to be slightly more because of the High Income Child Benefit charge, but that’s now moved from £50k to £60k. However that doesn’t change the point of this article – the additional tax is still less than the £1 of additional earnings ↩︎

    6. In other words, a marginal tax rate of over 100%. There are some points in our income tax system where that actually happens, but not here (with the exception of the savings allowance, of which more later). And stamp duty land tax used to work in this way. ↩︎

    7. Note that we forced people to make a choice, and didn’t provide a “not sure” option. The question of whether “forced choice” is the best approach has a long history… I have no expertise in this, and was happy to be guided by the experts at WeThink. ↩︎

    8. Depending on how you read the question, the additional tax might be 14p, 20p, 40p, or 42p – but I don’t think that matters.. the amount is “small” in each case. The only exception is if you have significant savings, due to the loss of £500 personal savings allowance you’re a higher rate payer – more on that later. ↩︎

    9. chi-squared test for independence, p-value=0.34, all calculations in spreadsheet linked at the top of this article. ↩︎

    10. Our initial polling had a very high understanding of the “correct” position amongst Green Party supporters – at 66% it was the highest of all subgroups. However the small numbers in that subgroup suggested it wasn’t statistically significant, and the updated polling with larger subgroups has confirmed that, with the high Green figure disappearing. ↩︎

    11. p=0.45 ↩︎

    12. p=0.0020 ↩︎

    13. p=0.24 ↩︎

  • A tax reform agenda for tomorrow’s Chancellor

    A tax reform agenda for tomorrow’s Chancellor

    At a time when the UK’s finances look fragile, the new Chancellor would be forgiven for thinking the only purpose of changing the tax system is to raise Government funding.

    There is, however, another purpose: to fix those elements of the UK tax system which stand in the way of growth and those elements that are desperately unfair. It’s often the same elements.

    Everyone involved in the tax system knows that radical tax reform is overdue. As Isaac Delestre puts it, “there are few corners of the British tax system that are not in urgent need of repair.”

    Some tax reform is easy and obvious. A lot of it isn’t. And some of the most important tax reforms will take political bravery. But this is a splendid opportunity for a new Chancellor to deliver both equity and economics.

    Here are a baker’s dozen suggestions:

    1. HMRC reform

    There are too many obvious signs of HMRC failure at the moment. Terrible customer service. A series of unforced procedural errors. Notorious tax avoiders being permitted to make fortunes from ripping off the tax payer for decades.

    And there are equal signs of failure in the cases that HMRC do pursue. Bad technical positions with no policy rationale. Penalty appeals involving vulnerable people. HMRC’s Litigation and Settlement Strategy has become an albatross that creates too many impediments in the way of dropping bad cases.

    Increased funding is part of the answer, but the problems go much deeper. The Chancellor should bring in people with deep experience of how HMRC used to work, and keen insight into how it could work.

    2. No more crazy marginal tax rates

    I had a message yesterday from a consultant anaesthesiologist.

    He earns just under £100k – that’s typical for a junior consultant. He currently receives fifteen hours a week of free childcare.

    His hospital trust has asked him to work extra hours, for which they pay £125/hour. But there are two problems. First, the personal allowance taper means that he has a marginal rate of 62% on earnings above £100k. Second, If his earnings hit £100k then his eligibility for free childcare disappears.

    These factors together mean he’d have to work 61 hours to make even £1 of additional net income. So he doesn’t. And many people have a much worse result – the total benefit of the free childcare can be as much as £20,000, and it all disappears at £100k.

    There are hundreds of thousands of people in the UK in this position, and we’ve created an incentive for them to avoid work. It’s hard to think of a more anti-growth feature of the tax system.

    The problem is that income tax has been damaged by a series of gimmicks, bodges and compromises employed to avoid increasing the rate. And they’re now very hard to remove.

    So what should the next Chancellor do?

    First of all: own it. Acknowledge that this is how things are, and it’s a problem.

    Second: don’t make it worse. Commit to taking no steps that will create further anomalously high marginal rates

    Third: plan to end it. Smooth out the rates and, when circumstances permit, abolish them.

    3. Stop playing the tax avoidance game

    Tax avoidance used to be much like cricket. Teams of brilliant (albeit amoral) lawyers creating fantastically complicated structures which may have been morally questionable, but were legally defensible.

    That’s not how it is today. Dodgy boutiques sell doomed schemes, ignore rules requiring disclosure to HMRC, and declare insolvency and walk away when they’re caught. The actual taxpayers are often low paid workers, who don’t realise the schemes they’re signing up to, and end up holding the baby.

    That amazing figure that 1/3 of all small business corporation tax isn’t being paid, almost £10bn/year? I think a lot of it isn’t real small businesses – it’s “umbrella company” tax avoidance and tax evasion, and schemes involving people like Barrowman and Baxendale-Walker. We’re talking huge sums of money being essentially stolen from taxpayers.

    It’s time to stop treating this as a game.

    The Government should scrap the current consultation on regulating the tax profession. Some of the worst offenders are barristers, who are already regulated. And the bad actors who are currently unregulated will either ignore, or game their way round, any new regulations.

    The answer isn’t to suffocate the bona fide tax profession in red tape. It’s to come down extremely hard on the cowboys, so their business ceases to be economic.

    Some mixture of:

    • Criminalising the failure to disclose a tax avoidance scheme to HMRC under DOTAS. That means a criminal offence for the individuals directly involved, as well as the companies, their directors, and advisers and other facilitators. This should be accompanied by financial penalties geared to the tax at stake. With a statutory defence to the offence and the penalties where a person took reasonable steps to ensure compliance, but the rules were breached due to circumstances outside their control.
    • Ending legal professional privilege for advice provided as part of a tax avoidance scheme which should have been disclosed under DOTAS, but wasn’t, and for schemes where the general anti-abuse rule applies. Too many barristers are hiding behind the pretence they are neutral advisers when what they’re really doing is enabling quasi-criminal behaviour.
    • A renewal of the Government threat in 2004 to counter disclosed tax avoidance schemes with retrospective legislation. That shouldn’t be like the loan charge – introduced 10 years too late, after the problem had ballooned out of control. Instead, each disclosed tax scheme should trigger a fast determination: can this be easily countered with existing laws and powers? Or is a new retrospective rule required? The timescale should be weeks, not months or years.
    • A properly staffed HMRC investigation unit to ensure new and old rules targeting avoidance and enablers are actually used.

    All of this needs to be calibrated carefully, so it has no effect on bona fide tax advisers, but it drives the cowboys out of business.

    4. End penalties for the poor

    Over the last four years, HMRC charged 420,000 penalties on people with incomes too low to owe any tax. They shouldn’t have been required to file a tax return, but for some reason they were – and because they didn’t file on time, they received a penalty of at least £100. In most cases, that’s more than half their weekly income.

    Astonishingly, 40% of all late filing penalties charged by HMRC over these four years fall into this category.

    And penalties can go much higher than £100. TaxAid reports on Emma, who earned less than £6,000 per year, but paid HMRC penalties of £4,700.

    The cause of this travesty is a change of law in 2011. Until then, a late filing penalty would be cancelled if, once a tax return was filed, there was no tax to pay. However the law was changed, and now the penalty will remain even if it turns out the “taxpayer” has no taxable income, and no tax liability. At the time, the Low Incomes Tax Reform Group warned of the hardship this could create, but they were ignored.

    The law should go back to how it was. Nobody filing late should be required to pay a penalty that exceeds the tax they owe. And HMRC needs to think carefully about how to improve tax compliance from the poorest in society without creating an unfair burden on them.

    5. Abolish stamp duty on shares

    A great deal of ink has been spilled on the underperformance of the FTSE. Not enough has been written about the role of stamp duty. At 0.5% it’s the highest such tax in any large developed country. It increases the cost of capital for business, particularly on projects that are already marginal. It’s easily avoided by professional investors using CFDs. There’s a good case that abolition would boost GDP and perhaps even pay for itself.

    Instead of creating complex new subsidies for the UK market, like the “British ISA“, it would be better to remove the complex existing barrier created by stamp duty.

    If only Nixon can go to China, perhaps only a Labour Chancellor can abolish stamp duty.

    6. Tax simplification

    Tax is too complicated, particularly corporate tax. It deters investment, and misallocates resources (too many tax lawyers!).

    Nigel Lawson famously abolished one tax in every budget. The next Chancellor should take that as a starting point, and abolish one tax, or major tax rule, every Budget. Here’s a starting point:

    • Abolish old fashioned stamp duty – the one with actual stamps. It serves no purpose now we have proper taxes on securities and real estate. It’s a deterrence to using English law.
    • Abolish bearer instrument duty – very few people even know it exists, and when I asked HMRC, they were unable to identify any time in recent history it had actually applied.
    • Abolish the bank levy and roll into the bank surcharge.
    • Abolish historic complexity. Methodically go through tax legislation and abolish the legions of anti-avoidance rules that were once necessary but now aren’t. In the modern world, the courts are deeply hostile to tax avoidance, every tax rule has a specific targeted anti-avoidance rule, and there’s a general anti-abuse rule on top. I’m confident hundreds of pages of historic legislation could be abolished overnight. And, just to be safe, this should be accompanied by blood-curdling threats of retrospective legislation if anyone were foolish enough to take simplification as a licence to resuscitate tax avoidance schemes.

    7. Property tax reform

    The UK’s main three land taxes are no longer fit for purpose:

    We can scrap all three taxes, and replace them with a modern, fair, tax on the value of land. A tax that creates a positive incentive to develop land. That’s land value tax – and 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?

    A new government with a hefty majority has the chance to do something truly radical, both pro-fairness and pro-growth.

    8. End the tax system’s bias against employment

    One of Jeremy Hunt’s best and most principled moves was to start to phase out employee national insurance.

    There was once a real link between national insurance and pension benefits – but national insurance is now just a tax on income with added accounting.

    It is, however, a very regressive tax on income, because it applies to employment and self-employment income, but not to rental income, dividends on shares and other forms of passive income.

    The answer is to abolish employee national insurance. That’s expensive, so (absent magical tax windfalls) it should be paid for by increasing income tax. And the broader base of income tax means that national insurance can go down by more than income tax goes up. Everyone making their money from their job will be a winner.

    That still leaves employer national insurance.

    This is a hard problem, but an important one.

    Employer NI, at 13.8%, 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 fictional – 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.

    In the long term, the burden of employer national insurance falls on employees in the form of lower wages. But that’s in the long term. If employer national insurance was abolished overnight it would cost £100bn – and in the short-to-medium term that’s just a windfall for employers.

    The question is whether there’s a way to abolish employer national insurance, force the benefit to be passed to employees and then tax the employees. It’s not at all obvious how this could be done, but there would be a substantial prize for achieving it.

    9. Inheritance tax reform

    Inheritance tax is deservedly unpopular. The rate, at 40%, is one of the highest in the developed world. The burden falls on the upper middle class. The very wealthy easily escape it:

    And the loopholes used by the wealthy are economically distortive, encouraging unproductive investment in assets like woodlands.

    The answer: end the loopholes and cut the rate. We should be more like Germany, which raises a comparable amount despite having a rate of 30%.

    10. Cut the VAT threshold

    VAT is inefficient. 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. And, worst of all, the VAT threshold is too high, and that stops small businesses from growing:

    Reducing the VAT threshold will be politically difficult. But there is support across the political spectrum – the Adam Smith Institute says “the case for reducing the VAT registration threshold is overwhelming”. It would have to be combined with a push to enable better app-based VAT compliance for micro businesses.

    And revenues should be ploughed into reducing the rate for everybody, to clearly demonstrate this is about doing what’s right for growth, not a Government tax grab.

    11. Make full expensing real

    Anther Jeremy Hunt success was “full expensing” – letting businesses deduct the cost of investment expenditure up-front, rather than over years or decades.

    UK business investment is the lowest in the G7 and the third-lowest in the OECD. Full-expensing can help change that. The Tax Foundation has found that full expensing raises long-run GDP by 0.9 percent, investment by 1.5 percent, and wages by 0.8 percent. These are not numbers to be sniffed at.

    But the UK’s “full expensing” isn’t quite full expensing. It doesn’t apply to all forms of business investment – that means we get uncertainty and tax avoidance at the margins, and the full benefit of full expensing is not being unlocked.

    The answer is to abandon the complex rules on what kind of investment gets tax relief, and give tax relief for everything. That can boost investment and eliminate a huge source of tax system complexity. But that has to come with a quid pro quo. As the IFS has said, to afford this, and have a system that doesn’t encourage unprofitable investment, we also have to revisit the deductibility of interest.

    That’s a radical step, but one that may receive support from a significant proportion of the business community.

    12. Make environmental tax make sense

    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.

    Why isn’t it?

    13. Capital gains tax reform

    Capital gains tax is broken. If you magically convert income into capital gains then you’re taxed on what is realistically income at the low rate of 20%. If, on the other hand, you invest patiently for years, you’re taxed on your notional return at 20%. Most of that may be inflation – it’s not gain at all. So the effective rate on your actual gain may be much higher than 20%.

    We used to have an allowance for inflation. Gordon Brown abolished that, supposedly because inflation allowance was too complex to calculate. But in the internet age where almost nobody enters a tax return by hand, this is no longer an issue.

    So we can fix the incentives, which are currently completely the wrong way round. As the IFS puts it: “the biggest giveaways go to those who make big profits without investing much money”.

    The answer? Raise the rate of capital gains tax whilst also creating an allowance for inflation. And given that the new rate will apply to historic gains, the new inflation allowance should too. Long term investors will benefit.

    Photo by Nick Kane on Unsplash

    Footnotes

    1. Originally there were two number 10s. As they say, there are three types of lawyers: those that can count, and those that can’t. ↩︎

    2. To be clear: I do not mean me. I have no knowledge or experience of HMRC and Government, and I would be the wrong person. ↩︎

    3. In that tax year; more if it’s split across two years! ↩︎

    4. See paragraph 4.4.1 of their response to the 2008 HMRC consultation paper on penalties ↩︎

    5. Thanks to the commentator below who pointed out that the Irish rate is 1% – but given the relatively small Irish public market, the two effect of the two taxes isn’t in practice comparable. ↩︎

  • 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).

    UPDATE FEBRUARY 2026: Stamp is now threatening to sue Dan Neidle in Wyoming for “suppressing his ministry“. Here’s our response.

    UPDATE MARCH 2026: Stamp is involved in litigation in New York which appears to relate to funds which he had an associate place in a New York bullion account on his behalf; the associate now claims sole ownership of the funds.

    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”

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