The Government faces very tough choices over tax – but what would the experts do? The Spear’s Research Unit surveyed leading top tax advisers and their answers were illuminating. For wider coverage of tax issues see the Spear’s Tax and Trusts index
As the economy continues to adjust to life after the disruption caused by the pandemic, the Government and the monarchy are in flux, a recession looms and inflation is in double digits for the first time since the early Eighties, questions of wealth are as pressing as ever.
In times of financial difficulty – not to say crisis – the Government must maximise its tax take without encouraging HNWs to avoid paying altogether by relocating themselves or their interests. We asked our contacts in the tax advisory industry a series of questions, some of which are new and some of which were also asked last year to provide a point of comparison, to gauge their and their clients’ feelings on how well tax is being managed.
The first question we asked regards the desirability of a wealth tax, given the state of the UK’s public finances. In December 2020 a prominent tax policy commission convened by the University of Warwick had floated the idea of a one per cent levy on a person’s net worth. The idea was seriously being considered in government as a measure to restore public finances after the high spending period of lockdown. In 2021 a high proportion of advisers – 48 per cent – indicated that they thought it would be desirable, all things considered, for the state to take a percentage of a person’s accumulated wealth each year.
This year, the picture is starkly different, as 83 per cent reject the idea and only 13 per cent are in favour. The feeling among many of the advisers Spear’s spoke to was that the moment for a wealth tax had passed, as the difficulties of the lockdowns faded from memory and people were more focused on future problems such as falling growth rates. Andrew Goldstone, partner and head of the tax group at Mishcon de Reya, put it most stridently when he said: ‘The Government had the chance to bring in a one-off Covid-related wealth tax which the electorate broadly would have accepted. They bottled it and the moment has now gone.’
The practicality of the Exchequer doing the exacting work of collecting it is also in doubt among our sample of experts. Seventy per cent thought it would not be practical – up from 40 per cent last year – citing such difficulties as accurately assessing the total wealth of HNWs with complex international affairs, the legal challenges that would surely arise, distractions from the Making Tax Digital project, and the long timeframes needed to properly assess the value of properties.
More than one adviser raised what was to become a recurring theme: that any overly burdensome tax placed on the shoulders of those with the resources to structure their affairs differently would end up being collected from those who would not be able to afford it as easily and would not be able to take action to avoid it. A wealth tax ‘requires that an entirely separate, new legal machinery be introduced’, said Antoaneta Proctor, who advises on international tax affairs at Wedlake Bell. ‘The cost and effort of valuing and calculating the liability is likely to be vastly disproportionate to the benefit for the majority of individuals and families. Mobile HNWs will simply relocate, leaving the mass affluent, rather than the wealthy, to foot the tax bill and removing inflows of capital and investment in the economy at a time when it most needs it.’
Having established that a wealth tax was not a popular option, we asked our experts if they would change rules for another group: non-domiciled individuals. During the research period for this survey the press was filled with the story of the wife of the then-Chancellor, Rishi Sunak, claiming non-dom status and avoiding having to pay tax in the UK on her foreign earnings.
Although Sunak did not in the end have to resign over the matter, it was an extremely narrow decision. His prickly, defensive responses to the barrage of questions he faced over it are widely thought among political commentators to have been the turning point between his previous public image as a moderate and popular figure and his later characterisation as a member of the wealthy international elite, out of touch with the concerns of working people. ‘Non-dom’, no matter the actual workings of it as a set of rules, has become media shorthand for people who are wealthy enough to be able to avoid tax if they choose to do so.
Despite 53 per cent of our advisers being against changing the rules, there was no shortage of ideas for alterations to the legislation. Many respondents suggested reducing the residence window from its current generous 15 years to a stricter 12, seven or even five-year limit. Assets from outside the UK could be brought in and sheltered from tax – inheritance tax or capital gains – on a preferential basis in order to encourage investment from abroad. Flat taxes were suggested, as were other methods of simplifying the tax code such as cutting the number or rules around remittances.
One adviser, a senior partner at a large City law firm, suggested we should ‘replace the current system, which lacks credibility because it’s so arbitrary, with a more consistent and fair system that incentivises people to move to the UK and allows them to be taxed on a favourable basis in the short and medium term. It is right that there is a regime that attracts wealthy people to the country like other countries do, but it is antiquated and arbitrary.’
Giving our advisers the chance to play chancellor for a moment longer – a role that many said they were relieved not to hold for real – we also asked how they would alter a range of other taxes, given the chance.
Kwasi Kwarteng came into the job and immediately made an impact, disposing of the 45 per cent top rate of income tax as well as cancelling plans to raise corporation tax and national insurance in 2023. The top rate tax decision was soon reversed, indicating back-bench reluctance to present themselves as a party of tax cuts for the better off, but many other decisions such as lowering the base rate to 19% remain. Our experts are hawkish on keeping tax rates low if at all possible, so will have welcomed these moves. The only area even approaching support for an increase was on capital gains tax, with 30 per cent of all respondents (well down from last year’s figure of 58 per cent) believing it is currently set lower than it could be.
Across the board, there was more enthusiasm for cuts than increases. The only other category that even crept over 10 per cent in favour of a rise was an energy tax, at 17 per cent, with the need for environmental change seen by those in favour as an appropriate use of the tax system. Even so, that small level of support was balanced by 33 per cent who thought energy taxes should fall. Very few of our survey respondents advocated for increases in inheritance tax, VAT, corporation tax or the top rate of income tax.
Even last year’s consensus that half or more than half the countries in the world would adopt Joe Biden’s plan to introduce a global corporation tax minimum of 15 per cent has been withdrawn, with 47 per cent of advisers no longer willing to commit to a prediction at all of how many countries will sign up.
Globally, corporation tax is taken at an average of more than 20 per cent, so few countries would be affected by adopting the plan, including Britain whose 19 per cent rate is low but still comfortably above the minimum. Low-tax ‘offshore’ jurisdictions, however, would see significant consequences of such a move.
There was 30 per cent support to reduce VAT in the face of a coming recession and cost-of-living crisis. Almost half of all advisers wanted to lower corporation tax, so they will welcome Truss and Kwarteng’s plan to cancel Sunak’s planned slow increase to 25 per cent, which was due to begin in 2023.
Our advisers are clearly of the mind that to increase tax at the beginning of a period of recession, inflation, lower investment and geopolitical instability in Ukraine would be the wrong decision. This is supported by the replies to our question on whether the Government has any room to manoeuvre when it comes to the overall burden of taxation. Some 77 per cent replied that increasing tax overall would simply result in people finding ways to avoid paying. This would particularly be the case among higher earners with a greater flexibility in the ways they can describe their wealth and income.
‘It’s tricky,’ said Andrew Goldstone. ‘You raise the most tax by increasing tax rates for the vast majority even by just a small amount, but that increases inequality. Increasing taxes for the rich raises very little unless the rises are very significant, and then you risk behavioural change, including emigration. That’s a particular risk now, when people can often work from anywhere in the world.’
One adviser who concentrates on succession planning and philanthropy is of the opinion that inheritance tax planning is a positive thing for families who give away their wealth. It forces people to examine the values of different generations in order to make decisions about how the giving will continue, resulting in a philanthropic structure that is more satisfying to all involved and a greater likelihood that the giving will continue, she told Spear’s.
Finally, we asked our contacts to consider the performance of HMRC itself. The response was not good. While 67 per cent were willing to go as far as a ‘fair’ rating, only seven per cent would commit to ‘good’, more than a quarter said ‘poor’ or ‘very poor’, and our ‘very good’ option remained completely untouched. Why? The advisers mentioned long waits for responses to queries, high turnover of staff, increasingly inexperienced auditors and especially very long delays in probate.
The service, our respondents agree, was badly affected by staff shortages during Covid and has not had the money to repair itself in a time of fundamental changes in government due to leaving the European Union. It is underfunded, understaffed, and under pressure. As one adviser said: ‘HMRC is slow, and there is no way to actively engage with them in a productive fashion. It’s an adversarial process, not a collaborative one. They are very overstretched, leading to a very slow game of correspondence chess.’