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.