Osborne provides evidence of aggressive tax avoidance to justify tax relief cap

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Osborne provides evidence of aggressive tax avoidance to justify tax relief cap12

Finance | Tania Mason | 10 Apr 2012

Chancellor George Osborne has hit back at the avalanche of opposition to the tax relief cap by revealing that he has evidence that a number of the country’s highest earners are using legal tax loopholes – including charitable giving - to slash their tax bills.

Since Osborne announced the cap in his Budget speech, the voluntary sector has unified to condemn the proposal, arguing that it will strangle charitable donations from major donors, and is effectively a tax on giving. The Prime Minister was tackled about it at the launch of Big Society Capital last week and the national media has since run with the angle.

In an interview with the Daily Telegraph yesterday, Osborne sought to defend the initiative and produced evidence of widespread tax avoidance by the country’s richest people.

He revealed that he had personally studied various “anonymised” tax returns submitted by some of the UK’s top earners that had been supplied to him by HMRC.

He told the Telegraph he was “shocked” to find that these people paid, on average, about 10 per cent of their substantial incomes in tax – and in some cases they paid nothing at all.

They were able to reduce their tax bills by using three main loopholes – writing off business losses, offsetting the cost of business mortgages or borrowing on buy-to-let properties against their income tax bill, and making donations to charity.

Osborne said it was this kind of aggressive avoidance that the new tax relief cap is designed to address. He said he thought that the wealthiest people should pay at least 30 per cent of their earnings in tax.

On the subject of philanthropy, he told the Telegraph: "I was very clear in the Budget that we are specifically looking at making sure we are still encouraging philanthropy and charitable giving. But that is a specific issue we can deal with."

Telegraph stories supports Persche claim

The Telegraph story also quoted “Treasury sources” as saying the tax relief system is open to abuse “as people are giving money to foreign charities which they have often established themselves”.

This lends weight to claims made by tax lawyers earlier this month, that the cap is motivated by HMRC’s determination to get around the 2008 European Court of Justice decision on Persche, which allows UK taxpayers to claim tax relief on donations to charities in other ECJ jurisdictions.

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Carl Allen
11 Apr 2012

Conservatives are not inherently philanthropic thus the expected shift from charity support to social investment.

And of course social investment, like any business, will pay tax. Whereas charity asks for tax funding.

[Reply]

Kevin Russell
Technical Director
Stewardship
11 Apr 2012

Gordon, the Tainted Charity Donations legislation does the job already, but in a more carefully targeted way.

This current proposal is a complete nonsense, summarised so well by Ian Theodoresen. It seems to me that the Government are only now scratching around for 'evidence' to justify this measure. Would an FOI request reveal just when George saw these tax returns?

[Reply]

Grant
Trustee
12 Apr 2012
Response to [Kevin Russell]

I have already submitted the following Freedom of Information request relating to the proposed cap on unlimited income tax relief.

1 Using whatever definition of "very high incomes" and "little or no tax" you wish, how many individuals on very high incomes have used gift aid relief to pay little or no tax in each of the last five tax years for which information is available?
2 Using the same definition of "very high incomes" and "little or no tax", how many of those individuals have used gift aid relief to pay little or no tax in four of the last five years for which information is available (ie they have how paid little or no tax year after year)?
3 Using the same definition of "very high incomes" and "little or no tax", for each of the above individuals and each tax year what proportion of the tax relief they claimed was gift aid relief (as opposed to other relief) - this information can be banded into ten or 20 per cent bandings if that is simpler.

I am happy to share the results when they I receive them!

[Reply]

Kevin Russell
Technical Director
Stewardship
12 Apr 2012
Response to [Grant]

Excellent, Grant.

Your question 3 is particularly apposite.

Looking forward to the response!

[Reply]

Kevin Russell
Technical Director
Stewardship
27 Apr 2012
Response to [Kevin Russell]

Grant,

Just wondering if you have had a response yet on your FOI request?

[Reply]

Grant
Trustee
8 May 2012
Response to [Kevin Russell]

The Treasury's response is that it "does not hold any information in the scope of my request."

This seems to completely undermine the Government's claim "that [the Chancellor] has evidence that a number of the country’s highest earners are using legal tax loopholes – including charitable giving - to slash their tax bills."

[Reply]

Grant
Trustee
10 May 2012
Response to [Grant]

I've now been directed to HMRC so have submitted same FOI request.

[Reply]

Anon
Trustee
11 Apr 2012

I agree with the points made in previous comments.

If the problem is caused by what are effectively fraudulent charitable donations to overseas charities or charities where the donor has a personal link or to family trusts then deal with that rather than philanthropists giving a large proportion of their income in a single year.

The Chancellor has cited the US as a model but the rules are much less restrictive there with the ability to roll over unused relief and a higher threshold.

The most objectionable aspect of this remains the implication that charitable donation is a form of tax avoidance.

[Reply]

Carl Allen
11 Apr 2012

It is a lose-lose situtaion for the charity sector as a new normal is being set in the relationship between government and charity (charity not being the social investment sector).

If the charity sector wins this battle, then expect vastly reduced support from government, beyond that already planned, as government applies a general policy that charity needs no government intervention however helpful or unhelpful that intervention may be.

[Reply]

Ian Theodoreson
Chief Finance Officer
Church Commissioners
10 Apr 2012

I really don't understand George Osborne's logic. How can paying a charity £100,000 to save paying tax of £25,000 be considered as a sensible tax avoidance stratetgy? As long as the donation is to a genuine operational charity and not some family trust then the donor is paying their way four times over!

If the Chancellor is concerned that the charitable donations are not genuine then there has to be ways of stopping these rogue payments and not take the attitude, which is so often adopted by Government, that everyone is on the make so let's hit the innocent as well as the guilty. This fiscal equivalent of carpet bombing simply is not acceptable

[Reply]

Gordon Hunter
Director
Lincolnshire Community Foundation
10 Apr 2012

Simple really: to ensure that the donor doesn't benefit personally, then don't allow tax relief (or cap tax relief) on donations to charities, here or abroad, that the donor has a personal link to.

[Reply]

Adrian Beney
Partner
More Partnership
10 Apr 2012

You refer to this as a " legal loophole". It would be if donors got the benefit of the tax relief. But all higher rate relief does is allow the donor to give to the charity the gross amount they earned. That's not a loophole; it's allowing someone who pays higher rate tax and wants to give away, say, £100,000 and has therefore paid £50,000 in tax, to give the charity £100k at a net cost to the of £50,000. I.e. the donor does not benefit from the tax relief. Donors are always worse off (financially) when they give to charity, whether or not they claim tax relief.

[Reply]

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