Setting up a company specifically to avoid tax is ‘aggressive tax avoidance’ and should be distinguished from investment in pensions or genuine start-up businesses, the Prime Minister suggested today.
Anti-avoidance rules to counter the use of personal service companies to disguise employment income have been in place since 2000. For those in genuine self-employment, a significant financial incentive to incorporate a business has existed for many years. In its interim review of small business taxation, published last year, the Office for Tax Simplification noted that the continued operation of separate systems for income tax and NICs ‘leads to a number of anomalies that provide incentives to distort behaviour [and] decisions being taken that are wholly tax driven’.
Reporting to the Chancellor in March 2011, the OTS said there was ‘still a considerable incentive to operate through a limited company and receive dividends [instead of salary]’. Experts also point out that in some cases there are valid non-tax reasons for incorporation, such as the need for limited liability.
John Humphrys noted on this morning’s Today programme that the Chancellor said in the Budget that he regarded tax evasion and ‘aggressive tax avoidance’ as ‘morally repugnant’.
Humphrys was trying to clarify what the government meant by ‘aggressive tax avoidance’ and offered David Cameron a case study: ‘A very successful businessman (you’ll know who I’m talking about) creates a structure that transfers most of the ownership of [his] company to his wife through offshore companies based in the Channel Islands. She lives in Monaco, he takes a huge dividend – it’s paid to her, it’s estimated that this reduces his tax bill by hundreds of millions of pounds.’
Humphrys asked: ‘Is that “aggressive tax avoidance” and therefore morally repugnant?’
Cameron declined several times to answer the question, saying he was not going to discuss an individual’s tax affairs. Humphrys said Cameron knew that the individual was Sir Philip Green, whom Cameron recruited to advise the government.
Cameron said he did not know Green’s tax affairs and offered his own definition.
‘There are things that people do that reduce their tax liability, for instance they put money into a pension scheme.’
‘Rather than Monaco,’ Humphrys said.
‘Absolutely,’ Cameron said. ‘I think putting money into a pension scheme is a sensible thing to encourage people to do and that doesn’t count as aggressive tax avoidance … I’m very clear about the difference between putting money into pension schemes or Enterprise Investment Schemes to help start-up businesses, and there is that form of tax avoidance where people are almost specifically setting up a company in order to avoid tax rather than actually wanting to invest in start-ups and the rest of it.’
The government had taken a lot of steps to try to reduce ‘this sort of activity’, Cameron added. ‘For instance we have put £900m extra into HMRC to enable them to go after aggressive tax avoidance.’
Aggressive tax avoidance was wrong, he said. ‘It’s right that the government is going after this activity. Everyone should pay their taxes properly.’
Generally speaking, he told Humphrys, it was ‘sensible’ for a Prime Minister not to have dealings with people engaged in aggressive tax avoidance.
Setting up a company specifically to avoid tax is ‘aggressive tax avoidance’ and should be distinguished from investment in pensions or genuine start-up businesses, the Prime Minister suggested today.
Anti-avoidance rules to counter the use of personal service companies to disguise employment income have been in place since 2000. For those in genuine self-employment, a significant financial incentive to incorporate a business has existed for many years. In its interim review of small business taxation, published last year, the Office for Tax Simplification noted that the continued operation of separate systems for income tax and NICs ‘leads to a number of anomalies that provide incentives to distort behaviour [and] decisions being taken that are wholly tax driven’.
Reporting to the Chancellor in March 2011, the OTS said there was ‘still a considerable incentive to operate through a limited company and receive dividends [instead of salary]’. Experts also point out that in some cases there are valid non-tax reasons for incorporation, such as the need for limited liability.
John Humphrys noted on this morning’s Today programme that the Chancellor said in the Budget that he regarded tax evasion and ‘aggressive tax avoidance’ as ‘morally repugnant’.
Humphrys was trying to clarify what the government meant by ‘aggressive tax avoidance’ and offered David Cameron a case study: ‘A very successful businessman (you’ll know who I’m talking about) creates a structure that transfers most of the ownership of [his] company to his wife through offshore companies based in the Channel Islands. She lives in Monaco, he takes a huge dividend – it’s paid to her, it’s estimated that this reduces his tax bill by hundreds of millions of pounds.’
Humphrys asked: ‘Is that “aggressive tax avoidance” and therefore morally repugnant?’
Cameron declined several times to answer the question, saying he was not going to discuss an individual’s tax affairs. Humphrys said Cameron knew that the individual was Sir Philip Green, whom Cameron recruited to advise the government.
Cameron said he did not know Green’s tax affairs and offered his own definition.
‘There are things that people do that reduce their tax liability, for instance they put money into a pension scheme.’
‘Rather than Monaco,’ Humphrys said.
‘Absolutely,’ Cameron said. ‘I think putting money into a pension scheme is a sensible thing to encourage people to do and that doesn’t count as aggressive tax avoidance … I’m very clear about the difference between putting money into pension schemes or Enterprise Investment Schemes to help start-up businesses, and there is that form of tax avoidance where people are almost specifically setting up a company in order to avoid tax rather than actually wanting to invest in start-ups and the rest of it.’
The government had taken a lot of steps to try to reduce ‘this sort of activity’, Cameron added. ‘For instance we have put £900m extra into HMRC to enable them to go after aggressive tax avoidance.’
Aggressive tax avoidance was wrong, he said. ‘It’s right that the government is going after this activity. Everyone should pay their taxes properly.’
Generally speaking, he told Humphrys, it was ‘sensible’ for a Prime Minister not to have dealings with people engaged in aggressive tax avoidance.
