Don't chase the super-rich for tax, just simplify the system

It might seem fair for HMRC to chase the super-rich. But if the tax system were simpler, they might be less inclined to go looking for loopholes.


Would the super-rich pay more tax if the system were simpler?
(Image credit: 2012 Getty Images)

What do you do if you are a broke government worried that not everyone is paying all the tax they should? You can divide up the answers to that question into carrots and sticks.

Italy (very broke) is going carrot. Next year, following in the footsteps of Malta, parts of China and Portugal, it is introducing a tax lottery. Get a receipt every time you shop (rather than pay cash, get no receipt and let the seller bypass the till) and you (and your shopkeeper) will be entered into a lottery. Cash prizes galore.

In the UK (also very broke) we're going with a bit more stick. We've piled a load of new taxes onto our well-off. We've taken away their personal income tax allowances and we've ramped up their income taxes by removing their pension allowances, for example. Now we're going all guns blazing for our very, very well-off a group no one ever dares defend any more.

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This week, the National Audit Office released a report on HMRC and its special high net worth (HNW) tax unit, set up in 2009 to deal with the affairs of anyone in the UK with wealth of more than £20m. The existence of the unit, which gives every one of about 6,500 HNW people a relationship manager to deal with directly, makes some sense.

As the NAO says, they can have complicated tax affairs. They have property and investment income, "complicated business arrangements" and overseas assets, all of which gives them "more choice over how they manage their assets than the average taxpayer". That all means that it "can be challenging for HMRC to understand their tax affairs and assess if there are any risks to address". (Risk in this context means risk that tax is going unpaid).

The whole thing needs one-on-one attention, something that HMRC can now show works very well indeed. In 2014-15 HMRC took in £4.3bn from the group. They paid 1.3% of all the UK's income tax and National Insurance and 15% of the capital gains tax take. But in 2015-16 they paid £416m more all because of the HNW compliance unit.

I suspect this all sounds fine to you. They owe. They don't pay. HMRC sends a relationship manager heavy round. They pay. Job done. NHS saved, and so on.

But look at the wording in the NAO report and you might begin to think it is a little heavy handed. In the main, this isn't about evasion: it's about "avoidance", which is legal, and about "the legal interpretation of complex tax issues", which is to a degree subjective.

HMRC seems to see a remarkable amount of confusion on these issues wherever it looks. When it doesn't "understand or agree with the position taken by a taxpayer it will open a formal inquiry". It has one-third of the UK's HNW individualsunder inquiry, something that really doesn't sound like much fun: "6,000 issues under inquiry have been open for more than 18 months, 4,000 of which have been open for more than three years", the report said.

Worse than the purgatory of being under inquiry, however, might be being prosecuted by HMRC. It now has a target "to increase to 100 the number of prosecutions of wealthy individual and corporates made each year by 2020". I suspect that, like me, you are all for prosecuting tax fraud, but assuming in advance that a set number of people are guilty of it each year seems to me to be shifting the emphasis rather in the wrong direction.

George Bull of RSM finds some uncomfortable language in the report too. He's worried in particular about the bit where the NAO calls on HMRC to "do more to identify the most effective approaches to maximising the tax revenue paid by the wealthiest people in the UK". It is the duty of taxpayers to pay the correct amount of tax, says Mr Bull, not the maximum amount of tax.

And so far the job of HMRC has reflected that. This change of emphasis is "tax farming by any other name", says Mr Bull. It all suggests that there is an even more combative time ahead for the rich and HMRC one reason, perhaps, why the Royal Bank of Canada has just decided to stop providing tax advice in the UK. And don't think, by the way, that just because you haven't got £20m that doesn't mean you. The unit has extended its reach this year to those with £10m or up. So, if you have a nice house in Kensington, no mortgage and a City pension saved up, expect a call.

If I were in charge, I'd take a rather different approach. Instead of hiring 400 more relationship managers and have them assume the worst of every resident of Notting Hill, tempting as that might be, I'd start paying attention to why HNWs spend so much time avoiding paying tax in the first place.

Might it be because our taxes are both very complicated and very high something that makes both avoiding them and arbitraging between their rates look like a good idea? A report from the Institute of Economic Affairs makes the point: it comes up with a list of 20 taxes it reckons could be abolished in a new streamlined system. They suggest a simple replacement that might perhaps be too simple for most people (a flat income tax, VAT and a property tax) but the number to focus on here is 20.

A system that can abolish 20 taxes and still have any left over is a system out of control. I wrote last week that if you want people to save into pensions you need to make it simple and cheap for them to do so. The same goes for taxes. Make them simple, make them low and you might be able to release some of today's beleaguered tax relationship managers into more productive and less combative work. Which would, I think, be nice for all of us.

This article was first published in the Financial Times

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.