The Labour Party has published its ‘Fair Tax Programme’, promising to raise more than £6 billion a year with measures including an Offshore Property Company Levy, scrapping non-dom status and trebling the number of audits carried out by HMRC.
A Labour government would launch a public inquiry into tax avoidance and evasion, publish the tax returns of large companies and wealthy individuals, and introduce an ‘Excessive Pay Levy’ on companies that pay people more than £300,000 a year. It would also consult on the introduction of a withholding tax levied against dividend, interest and royalty payments to people and companies in ‘abusive tax havens’.
Shadow Chancellor John McDonnell said it would be “the most ambitious and detailed plan for tackling tax avoidance and evasion ever enacted in government” and that it would “end the scourge of tax avoidance and evasion”.
Only two of the measures in the programme come with revenue estimates. The Offshore Property Company Levy is expected to raise £3.3 billion by the fifth year of a Labour government. An increase of 200,000 in the number of audits HMRC carry out annually is predicted to raise an average of £2.9 billion over the Parliament (rising from £1.8 billion in year one to £4.0 billion in year five).
The party explains that they have not included revenue estimates for other measures in the 35 point plan out of ‘abundance of caution’ but they observe that scrapping of non-dom status was previously estimated to raise £1 billion, and restoring preferred creditor status to HMRC and establishing an Excessive Pay Levy were each estimated to raise over £1 billion in their 2017 policy proposals.
Labour’s Fair Tax Programme
NB. This section contains, in Labour’s own words unless indicated with square brackets, content from the programme. All 35 points are included but some have been edited/summarised from the original document for brevity, and footnotes indicating sources have not been included.
1. ENHANCED TRANSPARENCY
Public register of trusts
Trusts are a key vehicle for tax avoidance and illicit financial flows. They are often used to avoid inheritance tax, with assets placed in a trust so they aren’t counted as what’s inherited. Labour will create a public register of trusts, going beyond the existing (non-public) Trust Registration Service. Access will not be limited to those with a ‘legitimate interest’, which is the position under the current Trust Registration Service. The public trust register will include all trusts that operate through the UK. We’ll also review penalties for non-compliance to ensure compliance.
Public filing of large company tax returns
Labour will require all large companies (using the definition in the Companies Act 2006) to file their tax returns publicly, along with related documents, at Companies House. This will help the public know where companies are avoiding tax and will give parliamentary committees the power to ask searching questions of the companies and HMRC.
Public filing of tax returns of wealthy individuals
This would be required for all individuals earning over £1 million. This system of public filing, following the lead of Scandinavian countries, should inform public debate on income and wealth inequality.
Excessive pay levy
As announced in 2017, we will establish a small graduated levy on companies paying out high incomes: 2.5 per cent for income paid above £300,000; five per cent for income paid above £500,000; and 7.5 per cent for income paid above £1 million. Legislation introducing the levy will take a broad view of what counts as ‘pay’ so that companies cannot dodge the levy.
Advance Thin Capitalisation Agreements
Labour in government will conduct a comprehensive review of existing Advance Thin Capitalisation Agreements (ATCAs), agreements that aim to give multinational companies certainty about elements of their tax liability but are often used by companies to avoid taxation. Labour will adopt a general presumption against making these deals, with the aim of drastically reducing the number of ATCAs.
Other measures in this section
- Inquiry into the finance sector [a general inquiry into regulation and rules for the sector – not tax-specific]
- Strengthened public register of company beneficial ownership, including reducing the threshold for disclosure of shareholders to include all shareholders, not just those with over 25 per cent of shares
- Action on tax avoidance and evasion in Crown Dependencies and Overseas Territories, including public registers of beneficial ownership
- Greater scrutiny of MPs, consulting on whether there is enough disclosure of links with trusts and offshore holdings
- Public contract transparency - all companies tendering for public contracts will have to disclose publicly their beneficial owners
- Work with the banking sector to improve transparency
2. STRONGER LAW, ENFORCEMENT, AND SUPPORT FOR HMRC ON TAX AVOIDANCE AND EVASION
A General Anti-Avoidance Rule
The current General Anti-Abuse Rule is weak, complicated, and shielded from being properly applied by a General Anti-Abuse Advisory Panel. It contains a ‘double reasonableness’ test – arrangements fall afoul of the rule if they “cannot reasonably be regarded as a reasonable course of action” – which is vague and difficult to prove. We will remove the unnecessary layer created by an Advisory Panel needing to approve prosecution, and replace the General Anti-Abuse Rule with a more robust and wide-reaching General Anti-Avoidance Rule, based on the New Zealand model. This will crack down on tax avoidance measures that escape specific anti-avoidance rules, and will help to catch exploitative use of trust and company structures in order to minimise tax. Overseas jurisprudence can be relied upon, and the courts’ interpretation of a British General Anti-Avoidance Rule can provide clear yardsticks for what is deemed to be unacceptable tax avoidance in other areas of policy.
Clamping down on enablers of tax avoidance and evasion
A package of measures so that enablers can no longer profit so freely from facilitating tax avoidance and evasion. Enablers include accountants, auditors, lawyers, and other professionals. Strengthen the law on failing to prevent the facilitation of tax evasion (in particular, tightening the defence of reasonable prevention procedures); introduce harsher penalties for promoters of tax avoidance and evasion; consult on extending the Suspicious Activity Regime to tax avoidance; and refer to the Law Commission whether lawyers’ use of legal professional privilege is facilitating tax avoidance and evasion, and whether the law should be changed to restrict this.
Properly resourcing HMRC
Set up an intelligence-led taskforce (including past and present HMRC staff, relevant trade unions, tax practitioners, academics, accountants and business representatives, and informed observers like the Tax Justice Network) to make recommendations about consolidating HMRC as a significant and essential part of the core machinery of government. Moves towards restoring resourcing will mean HMRC can enforce court decisions consistently (for example, to ensure money earned by sports players from offshore image rights is counted as income), and continue to develop targeted inquiries (for example, into landlord tax avoidance).
Increase targeted audits done by HMRC
The majority of the missing £8 billion owed in tax by those on self-assessment is owed by two per cent of self-assessment taxpayers: around 220,000 individuals. The number of audits by HMRC to try to capture that money has fallen sharply over time: between 1999 and 2009, the number of audits fell from 350,000 to 150,000. An increase of 200,000 audits is likely to raise £2.9 billion annually through direct and indirect effects. [NB. This is based on the work of Arun Advani of University of Warwick / CAGE / IFS which found that non-compliance is higher among men, those of working age, the self-employed and those with property income, and is highest in the hospitality, transport and construction sectors.] (Fair Tax Programme, pp16-18, contains more info on yield calculations.)
Launch a public inquiry into avoidance and evasion
Public inquiry to investigate common tools of avoidance and evasion, and recommend policy measures to eliminate these tools. In particular, the inquiry will consider the use of offshore trusts, and whether there is the case for taxing further distributions from trusts or imposing a withholding tax on certain distributions from trusts, payable by trustees. As well, the inquiry will investigate the tax treatment of equity and debt, to inquire into whether steps should be taken to ensure debt and equity are treated equally for taxation purposes.
Other measures in this section
- Introduce more robust third-party information reporting within HMRC
- Extending the time limit for HMRC corporation tax investigations of offshore transactions, giving HMRC 12 years to investigate, in line with cases involving income, inheritance and capital gains tax
- Fully restore HMRC’s preferred creditor status
- No public contracts for tax dodgers [this appears to be using existing law to its full potential rather than creating new law]
- Tackle dormant companies - implement proper verification procedures and require the annual confirmation of dormancy
3. ELIMINATING LEGAL LOOPHOLES THAT ENCOURAGE AVOIDANCE
Scrapping non-dom status
The non-dom rule is a colonial hangover. Non-doms can pay a remittance basis charge if they have spent significant periods of time overseas, or pay tax on income remitted; but these rules are shot through with loopholes. A Labour Government will scrap the status altogether in our first Budget, consulting on whether there is a need for an exception for foreign residents in the United Kingdom for a short period of time.
Removing the ‘trading exemption’ capital gains tax loophole for foreign investors
Almost all major UK commercial property is held by large corporates or collective investment schemes or trusts. The Government has created a loophole meaning that foreign investors involved with commercial property transactions do not have to pay capital gains tax due to a ‘trading exemption’. Labour would close this loophole by removing this exemption and replacing it with an exemption targeted at small investors with a £1 million limit.
Tightening anti-enveloping rules
Anti-enveloping rules prevent developers from avoiding taxation by selling assets that derive their value from land rather than the land itself which often involves selling shares of property holding companies. Current laws give foreign investors an advantage in this through an exemption that means capital gains tax is only paid if an investor owns more than 25 per cent of the company. Labour would establish a £1 million limit on this exemption to prevent it being used as a mechanism for tax avoidance.
Other measures in this section
- Incorporation avoidance – review 2006 changes that allowed single director incorporations; also higher corporation tax would make it less lucrative to incorporate
- Closing the Eurobond loophole – consider de-recognising the Channel Islands Stock Exchange [this relates to a withholding tax exemption available to UK companies holding securities listed on this exchange; estimates put the tax lost at £0.5 billion per year]
- Clamping down on umbrella agencies - ensure HMRC has resources to tackle abuse of the Employment Allowance by temp recruitment agencies
- Upfront payments for fragmented profits cases [schemes used by hedge funds and private equity to divert profits offshore]
4. CROSS-BORDER ACTION ON TAX AVOIDANCE AND EVASION
A withholding tax for tax havens
Draw up a list of tax havens, considering the approaches adopted by the OECD, European Union, France, Portugal, and elsewhere. Introduce sanctions against tax havens to make clear that low-tax or no-tax jurisdictions cause social and economic harm, and should be discouraged. Consult on the introduction of a withholding tax levied against any dividend, interest and royalties to individuals or companies in abusive tax havens. This will be deducted at source before any payment is made and remitted to HMRC. The consultation will consider the relationship between a withholding tax and double taxation treaties.
Introduce an Offshore Company Property Levy
An additional charge on purchases by offshore companies and trusts of UK residential property, supplementary to existing stamp duties. A company purchasing residential property benefits from the UK’s infrastructure and legal framework, and ought to pay a small levy to acknowledge that. This can also play a role in cooling the housing market, preventing illicit flows, and raising revenue for decaying public services. UK-based tax advantages of holding UK property through offshore companies have been restricted, but perceived benefits remain significant, including in terms of privacy and secrecy, as well as advantages of being located offshore. The additional levy will be set at 20 per cent, at a similar rate to analogous offshore buyers’ taxes that exist in Canada, Singapore, Australia, and elsewhere. It will apply to foreign companies as well as trusts. Estimated to raise £3.3 billion a year, taking into account behavioural change and uprating for a figure for year 5 of a Labour government. (Fair Tax Programme, pp18-19, contains more info on yield calculations.)
Other measures in this section
- Full country-by-country reporting
- Introduce an Overseas Loan Transparency Act to ensure loans made to foreign governments are disclosed
- Greater support for bodies working on international tax justice
- A review of double taxation agreements - expert working group to conduct a review of the UK’s network of double tax treaties, paying particular attention to the role of these treaties in facilitating tax avoidance in the UK and by UK companies in the Global South
- Global recognition of tax avoidance as an ‘Illicit Financial Flow’