Moral outrage forces richest taxpayers to avoid tax schemes

The UK’s wealthiest taxpayers are becoming more wary about using complex tax planning and contrived tax avoidance schemes, after public concerns about moral behaviour, but still view inheritance tax (IHT) as a punitive ‘double tax’, reports Pat Sweet

The independent IFF research classed wealthy individuals as those with an income of over £200,000 or assets/wealth of over £2m, subdivided into ‘affluent’, with net wealth under £10m, and high net worth individuals (HNWI) with over £10m, and was commissioned by HMRC to understand more about the factors that shape their behaviour and how they go about planning and structuring their tax affairs.

On the broadest tax parameter, the headline income tax rate at 45% for the highest earners was viewed as low enough to deter the richest taxpayers to get involved in risky tax arrangements, while the ‘moral’ tone of media coverage and the prevailing public and political narrative around wealthy individuals’ tax affairs makes it less acceptable to engage in risky avoidance schemes.

Vociferous public and political criticism of perceived abuse of tax rules by the wealthiest in society has succeeded in shifting ‘norms’, the research found, while HNWI are increasingly concerned that investigations are expensive and time-consuming, which is acting as another deterrent.

However, there were concerns expressed by agents and wealthy individuals about the HMRC’s current approach. For instance, some agents felt that it is businesses that have the resources and risk appetite to engage in tax avoidance – and thus the focus on wealthy individuals is misplaced.

The research found both wealthy individuals and their agents felt the tax system was overly complex and that the rules changed too frequently.

Agents said this opened up ‘grey areas’ which created opportunities for tax avoidance. These included the way that venture capital is taxed, due to its complexity; routing benefits from offshore trusts; film schemes; loss relief; changing rules around trusts; HMRC ‘moving the goalposts’ around deductibility of interest; and the line between expenses and capital cost.

Non doms

The UK tax system is also increasingly harsh for non doms. Agents said the rules were more opaque, complex and punitive for this group, while successive governments have tinkered with the non-dom rules so that this was getting even worse. This risked putting off wealthy individuals from coming to the UK in future, or even encouraging those already here to consider leaving the UK.

Inheritance tax

For wealthy respondents, inheritance tax was a major issue of concern, and was described by some wealthy individuals as an unfair and punitive tax because it taxed them on money they had already paid tax on at the point at which they earnt it – described as ‘being taxed twice’. Some individuals were therefore planning ahead to avoid paying inheritance tax and felt justified in doing so.

There was irritation at this becoming a morally loaded issue in media coverage and political/public discourse

Overall HNWI tax behaviour seems to be shaped by a delicate balance between wanting to contribute to society, while not being prepared to be hit with an over-onerous or too punitive a tax regime. The core goal is paying the ‘legally correct’ amount of tax, with the research detecting irritation at this becoming a morally loaded issue in media coverage and political/public discourse.

Complex, contrived arrangements

A few wealthy individuals talked about investigating or being involved in perceived ‘higher risk’ tax arrangements, defined as being anything that feels overly-complex or contrived, where it is unclear how it works, or involves misrepresentation.

Tax havens occupied a middle ground – some wealthy individuals were wary of them (partly because of the personal stress and upheaval that can be involved in using them, as a wealthy individual), while others saw them as perfectly valid.

Overall, however, both wealthy individuals and their agents said they would avoid overly-complex or contrived arrangements. Legal challenges, changes to regulation and the ‘moral’ tone of media/public discourse are felt to have made risky arrangements less acceptable.

Compliance

The research also looked at options to encourage compliance among wealthy individuals. It concluded some messaging approaches might have an impact, such as more effectively ‘selling’ the benefits to society to those with a stronger social conscience; warning those with a higher risk appetite to avoid being the ‘guinea pig’ who proves a scheme doesn’t work; and – cutting across wealthy individuals more generally – the idea that, by using only safer tax arrangements,  it is possible to protect the peace of mind and quality of life that are among the key advantages of being wealthy.

Agents and – where they have had direct dealings – individuals tended to have broadly positive views of HMRC in terms of levels of knowledge and timeliness of response, researchers found.

HMRC staff

Generally, respondents said the HMRC staff and tax inspectors in the high net worth and affluent units had a good understanding of the UK tax system and the circumstances of their client group.

On the downside, there were negatives with respondents citing a lack of consistency at HMRC, both in the tone of their dealings and in their position on an individual’s tax affairs; and HMRC staff were also criticised as being adversarial sometimes. There was an appetite for a more consistently constructive approach from HMRC but, paradoxically, concern about the stressful, time-consuming and costly consequences of being challenged by HMRC appeared to be deterring more risky tax arrangements.

Non doms and some wealthy British nationals with experience of other tax systems tended to view HMRC relatively favourably compared to other countries. HMRC was seen as more accessible, straightforward to deal with and answered queries relatively quickly.

HMRC commissioned independent consultancy IFF to conduct 42 qualitative interviews, 32 with wealthy people and 10 with tax agents for wealthy people to understand more about the factors that shape their behaviour and how they go about planning and structuring their tax affairs.

Report by Pat Sweet, edited by Sara White

HMRC Researching the drivers of tax compliance behaviour among the wealthy and ways to improve it 

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