Politics & public spending Tax-avoidance package to hit City bonuses
By Christopher Adams, Political Correspondent
Financial Times Published: December 2 2004 18:46
taxThis year's City bonus season is set to be a fraught affair after the chancellor effectively closed down the most attractive ways for employers to reward workers with tax-free sums.
Gordon Brown's decision to intensify his crackdown on tax avoidance by targeting the pay schemes used by a number of financial institutions and mainstream employers drew a collective squeal from accountants, lawyers and other advisers.
The anti-avoidance package, which contained a fresh set of steps to shore up the tax take and covered everything from films to controlled foreign companies, was the single biggest revenue-raising element in the pre-Budget report.
The Red Book that accompanied Mr Brown's speech calculated that some £3.5bn would be raised by April 2008 from the crackdown, more than offsetting the cost of extending a freeze in fuel duty.
Announced after six months of a new disclosure regime requiring the tax advice industry to reveal details of avoidance schemes to the Inland Revenue, the biggest part of the package was action against remuneration schemes.
This has long been an area where the Revenue has struggled to keep pace with the inventiveness of accountancy firms.
Not long ago, City employers looking to retain the best talent would offer to pay bonuses and salaries in the form of gold bullion, diamonds, fine wines and even paintings. In this way, employees could avoid paying 40 per cent tax and national insurance, while their employer also avoided NI payments.
When that loophole was closed, new ways were found to continue the practice. Recently, some firms have begun avoiding tax by paying bonuses via dividends in specially constructed companies.
Mr Brown has now taken unprecedented action, not just closing a loophole, but making it retrospective so that anyone who uses a scheme in future that the Revenue is unhappy with will be penalised by having to repay all the tax that is foregone.
At stake are hundreds of millions of pounds in revenue. Dawn Primarolo, paymaster general, said: "Taxpayers who contribute their fair share have a right to expect that others will also do so."
Up to £2bn would be paid this year in bonuses on which the tax and NI due to the exchequer was at risk, she said. A Whitehall official described this as a "conservative" estimate.
"For years, in almost every finance bill the chancellor has brought forward, there has been some measure or other to deal with tax avoidance in the area of remuneration," said the official.
"What's happening is that the avoidance industry sees the latest measure as an impetus to find another way around. Mr Brown is saying he doesn't want to play that game any more."
Several experts warned that the retrospective nature of the move could be challenged in the courts under European law. Stephen Quest, a tax partner at Grant Thornton, said: "This is unique, it's not happened before. It changes the relationship between the government and taxpayer, it's questionable whether it's legal and whether they will be able to enforce it."
But Treasury officials were confident the change would stick. It was in part a response to more aggressive marketing, they said. Some tax experts agreed that the practice had become more widespread. Advisers, said to include at least one of the Big Four accountancy firms, had been lining up clients in advance to take advantage of the short period between a scheme's launch and when the Revenue had to be told.
Anneli Collins of KPMG said employers would find it difficult to plan bonus remuneration. "It won't kill City bonuses. It will just mean people have to pay tax on them. But it is a miserable time to announce it, just before Christmas."
Mr Brown also clamped down on other areas of avoidance, including the use of controlled foreign companies to shelter profits from tax. Here, a number of practices identified since the disclosure rules came into force are to be outlawed. There was also action to end schemes that exploited double taxation relief and the relief available for investment in British film-making.