How Britain is squeezing the rich

The taxman has a specialist department for going after the rich and shaking them down for more cash. How has it been doing? Simon Wilson reports.


The taxman should do more, says Meg Hillier
(Image credit: Copyright (c) 2012 Rex Features. No use without permission.)

The taxman has a specialist department for going after the rich and shaking them down for more cash. How has it been doing? Simon Wilson reports.

What has happened?

A report by the National Audit Office (NAO) into HMRC's dealings with the UK's very richest people was published earlier this month and makes for fascinating reading. The taxman's specialist High Net Worth (HNW) Unit was set up in 2009 to keep a close eye on the necessarily complex tax affairs of 6,500 UK taxpayers (0.02% of all taxpayers) with assets of more than £20m. The NAO report reveals that the unit winkled an extra £416m of tax out of its well-off "customers" in 2015-2016 as a result of compliance investigations.

That is a big jump on the extra £200m it collected in 2011-2012, and is on top of the £3.5bn that this rich group had already paid in income tax and national insurance (equivalent to 1.3% of the total revenue for these taxes) and £880m in capital-gains tax (15% of the total take).

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Did it find evidence of illegality?

Hardly any. Over the past five years, the report says, HMRC has investigated and closed 72 cases of alleged tax fraud relating to these 6,500 people, raising £80m in compliance yield, including penalties. However, all but two of these were investigated as civil matters of disputed compliance. Only two cases were investigated as crimes, and only one resulted in a conviction. Overall, the report reveals that one in three of the super-rich are currently being investigated over an estimated £1.9bn in unpaid tax, with an average of four formal inquiries per taxpayer.

Are these people being treated fairly?

That depends on how you see it. Meg Hillier (pictured above), the Labour chair of parliament's public accounts committee, argues that the extremely low rate of prosecutions is evidence that HNW individuals and their tax advisers are always one step ahead of HMRC when it comes to using complex structures to avoid paying tax.

In other words, critics think that the wealthy are still being treated with kid gloves and that the authorities could do more. However, the impressive results of the specialist unit suggest that, far from getting away scot-free, the super-rich are in fact being scrutinised as never before perhaps to an unreasonable extent.

In what way?

The NAO report found that 9% of the overall tax take from HNWs came from the HMRC's compliance work. That compares with only 3% for big businesses and 5% for HMRC as a whole. In addition, HMRC wants to increase the "wealthy individuals and corporates" it prosecutes for tax fraud to 100 by the year 2020. Prosecuting tax fraud is a good thing, but assuming that a set number of people each year are guilty of it seems rather questionable.

Do the rich pay a fair share of tax?

When it comes to income tax, payments are highly concentrated, with about half of income-tax revenues coming from just 3% of adults. However, the other main taxes value-added tax and national insurance are much less skewed to high earners. And equality campaigners (such as the Equality Trust) have frequently argued that when you take into account all taxes on consumption, plus council tax, the poorest in society actually pay a higher proportion of their household income in tax than the richest. Nevertheless, in terms of how much income tax the very richest are paying the proportion is bigger than ever.

What are the figures?

According to data from government sources and the Institute for Fiscal Studies (IFS), lower tax thresholds, rapid income growth, and cuts to pension tax relief mean that the amount of income tax paid by the richest 1% (about 300,000 people) now stands at more than a quarter of the total. In the eight years to 2015-2016, that proportion has edged up steadily from 24.4% to 27.5%. At the same time the proportion of people not paying any income tax at all (due to a significant rise in the nil-rate allowance) rose from 34.3% to 43.8%, equivalent to 23 million people.

Who are these 300,000 people?

Perhaps unsurprisingly, research published last year by the London School of Economics (into the possible effects of restoring the 50p tax rate. Conclusion: the effects are "very unclear") found that the typical individual in the top 1% of taxpayers is likely to be male, aged between 34 and 54, living in London or the southeast and either working in financial services, self-employed, or the director of a company. It might be hard for the lesser mortals among us to summon up too much sympathy for this gilded elite.

But even the wealthiest taxpayers deserve to be treated fairly. And quite apart from issues around fairness, the IFS points out that a narrowing of the tax base ie, an increasing reliance on the tax payments of a smaller number of higher earners means that "the growth of receipts may be more unpredictable and risky", which poses fundamental risks to the public finances.

The 20 taxes we could scrap now

Rich people are more likely to be motivated to avoidtaxes and to find ways of doing so when those taxesare both high and complicated, say proponents of reform.Earlier this month free-market think tank the Instituteof Economic Affairs published a "Tax Death Row" of 20taxes it argues should be abolished, including corporationtax, national insurance, capital-gains tax, inheritance tax,council tax, business rates, the television licence fee, the apprenticeship levy, stamp duties, alcohol duties, tobaccoduties, vehicle excise duty and air passenger duty.

In place of all this, a new, slim-line tax system shouldinclude a flat-rate tax on income of 15%, VAT at 12.5%, andan annual land value tax based on "imputed rent". Overall,these changes would slash the tax take as percentage of national output from 37% to less than 25%. The resulting boost to growth, and the effects of the tax changes, wouldbenefit everyone but the poorest would benefit far more,proportionately, than the richest, they claim.

Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.   

Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.