It has never been more important that we tax the rich fairly than now. The report of The Equality Trust – Cost of Inequality 2023 – makes it clear that our tax system favours the rich and costs everyone else their wealth, the tax they pay, and their mental and physical health. And this has been getting steadily worse for most of the last half-century.
This applies to both businesses and individuals. For individuals it is not just income but every time they spend that income. The poor pay VAT on most of what they buy but the rich reclaim the VAT through their businesses, so do not pay it. Lewis Hamilton has a private jet but avoided paying VAT and other taxes by registering it in the Isle of Man.
The poor are on PAYE so cannot avoid income tax but the rich can pay themselves in share options and dividends incurring less tax. Small businesses, so beloved of Thatcher and Blair, and the supposed recipients of deregulation, pay their taxes in the UK. Richer businesses take their profits offshore to avoid UK tax.
Why pay tax if you can avoid it
No one likes paying taxes. I live and am a tax resident in France and pay tax in both France and the UK. Thankfully, the two countries have a double taxation treaty so the taxes I pay in the UK are credited against my French taxes. I like to think of taxes as the subscription we pay for living in a civilised society.
We need taxes to pay for roads, healthcare, and all the services we want as a community. And it is perfectly legal to arrange your affairs so that you pay less tax – for example, the income you pay into a personal pension scheme is untaxed. The problems arise when the number of ways available to arrange your affairs gets so convoluted that if you have enough money you can avoid paying almost any tax.
The UK tax code is ten million words long – 12 times the complete works of Shakespeare and 12 times the length of the Bible. Shakespeare’s works and the Bible recount an awful lot of cheating and duplicity. The UK tax code permits even more. The Hong Kong tax code is just 150,000 words.
If we tax the rich fairly they will all leave
That is one claim of those who would let the rich carry on collecting wealth whilst the poor pay for everything we use between us. Some may up-sticks and leave, but many will stay and there are ways of ensuring that we tax UK activity. At present UK property and property income is taxable in the UK, wherever the owner may live. That principle can be extended.
How to make individuals pay tax
I am required by law to complete a UK tax return each year, but HMRC only ever gets a partial picture of my finances. France, on the other hand, gets much more information as I must declare my worldwide income.
The UK should require anyone paying tax in the UK to do the same. Then income received in countries without double taxation treaties could be taxed by HMRC. People may choose to lie about such income but most prefer to stay legal.
Avoiding income tax
Income tax is supposed to be progressive – the more you earn the higher the rate – so we have the personal allowance then 20%, 40% and 45%. Why stop there? The greatest period of overall social improvement in the histories of both the UK and the US was after the Second World War when tax on the top slice of income of the richest was between 90% and 97%.
But whatever the tax rates, you must make sure people are encouraged to remain legal. Between 2010 and 2015, Chancellor George Osborne demonstrated how to cut civil service costs by reducing the number of tax inspectors. In 2017 there were barely 1,000 tax inspectors for the top 550,000 rich people and at the same time, the number of benefit inspectors had increased to over 4,000 to keep an eye on all the poor people.
All income should count for income tax
If you are on PAYE then all your income is charged the relevant rate of income tax. If you are rich and can have some of your remuneration paid as shares, then you do not pay income tax on their value. If you sell the shares you will be liable for capital gains tax, but capital gains are charged at a lower rate.
Staff remunerated partly in shares will not only see the benefit of capital gains rates but the dividends they receive on those shares are charged at a lower rate than income. And very few workers receive shares. If all of this was treated as income then the tax take would be higher and fairer.
If you buy or your company remunerates you with a work of art you never sell, you will never pay capital gains on the increase in value. At your death, it will be valued and there may be an inheritance tax liability. Your beneficiary will only ever be liable for the capital gains from the day they acquire the item, so your capital gains are forever lost to HMRC.
Capital gains should at least be taxed at the same rates as income. If they had to be declared on annual tax returns then the tax could be collected each year
Reputedly the UK’s most hated tax, this is paid by only a small number of estates. Most of the estates that have moved into paying tax in recent decades have only done so because of the rise in the value of property – and the owners did not pay tax on that rise in any form. We could scrap inheritance tax and just treat it as income – so poor people pay less and rich people pay more. It may be fairest to spread the inheritance over ten years of income as not many people get an inheritance every year.
If an estate is sufficiently valuable you can avoid inheritance tax. In 2016 the Duke of Westminster died leaving everything to his son, including a Mayfair property estate worth £9.9 billion, which should have been liable for £4 billion in inheritance tax – but he paid nothing.
The estate was in a Trust so it was not directly owned by either father or son. However, the Duke of Westminster was the Chair of the Trustees with an absolute right to make decisions about the property – just as if it was his personal property.
Another way to avoid tax is to put income into a trust, as David Cameron’s father did. This included sufficient to pay young David’s school fees through Eton – about £210,000.
If Eton had had to charge VAT – and as a business selling access to an exclusive network for the elite, this seems very reasonable – the charge would have been £252,000. If Cameron Senior had paid tax at 40% he would have needed £420,000.
So Cameron’s education was subsidised by the taxpayer to the tune of about £30,000 a year. The state spent just over £2,000 per secondary pupil per year in 1990, shortly after Cameron had left Eton. Even today the funding for each pupil in state education is under £7,500 a year.
The clue is in the name and who better to illustrate their use than a Chancellor of the Exchequer – Sajid Javid. Working for Deutsche Bank in the early 2000s he was paid a bonus of £3 million – which would have earned HMRC £1.2 million in tax. But the money was paid in the British Cayman Islands. And then when working as a ministerial aide in the Treasury he operated as a non-dom and also avoided tax through an offshore trust.
The UK operates 13 tax havens, including Jersey, Guernsey, the Isle of Man and the British Virgin Islands as British Overseas Territories – enabling the rich and powerful, people and corporations, to avoid their fair share of tax.
In France, this starts when an individual has net worldwide wealth in excess of €1.3 million. And like all good taxes it is progressive, rising from 0.5% to 1.5% on wealth above €10 million.
The UK should require taxpayers to declare their worldwide wealth if that exceeds, say, more than £10 million. If they have that much they will have accountants with records so this will not be onerous. An annual tax of 1% on wealth over this is not unreasonable. And a tax of just 2% on the 350 families of the Sunday Times Rich List would raise £20 billion a year.
Small companies do pay a lower rate of corporation tax on profits than large companies but at least they pay their share to HMRC. Large companies can avoid taxation by exporting their profits, often to the tax havens described above, where a small subsidiary is paid for intangibles such as intellectual property on the logo. This subsidiary then pays little or no tax on these profits.
HMRC could calculate the worldwide income against the UK income, assuming the UK operation made a proportional amount of profit and tax accordingly. If the company wishes to declare more in the UK, that would be fine.