The Good Law Project issued a press release this morning saying:
Good Law Project and Dale Vince, founder of Ecotricity, have launched a legal challenge against HM Revenue and Customs demanding the closure of a loophole which allows private equity fund managers to pay almost half the tax they should.
Back in 1987 the private equity industry successfully lobbied the Inland Revenue, now HMRC, to pay less tax. Their success meant that the money made by executive managers is classed as ‘capital gains' and not ‘trading income' - instead of paying a tax bill of around 40% that figure dropped considerably to 28%.*
Good Law Project, working with leading tax lawyer Dan Neidle, believe the agreement was unlawful. For years, people have been arguing the so-called ‘carried interest' loophole should be abolished. New research suggests it never existed at all as HMRC isn't allowed to give sweetheart deals.
I wish them well, Dan Neidle knows his tax law. So does Jo Maugham. They clearly think that they have a chance. And this is an egregious loophole.
But, before we get too excited by this, or Rachel Reeves' obsession with the same issue (and the non-dom law, on which both Jo Maugham and I have advised Labour in our time) let's remember that egregious as these issues are, they are also small fry in terms of revenue impact and so inequality.
The big issue with regard to capital gains tax is not that it is what is used to tax carried interests in hedge funds but that it is taxed at half the rate of income, when I think all incoming pounds to a person should be taxed at the same rate.
And the other deeply annoying aspect of capital gains is that they suffer no national insurance, saving at least 15% and more in some cases when employer's contributions are also taken into account.
Those are the big tax issues to get worked up about in the tax system and its bias to wealth. But Labour is not talking about doing anything about these issues. In fact, it has confirmed its commitment to low CGT rates and so a bias towards wealth.
I want all loopholes to be closed. But we really should concentrate on the big issues and not the token gestures and Labour is far too good at tokenism.
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Just as money is a balance sheet phenomenon so is morality and the two obviously intertwine often in complicated ways. We don’t appear to have many politicians capable of understanding this and striking the right balance. Very shortly after the Labour Party was founded it failed on this front. Philip Snowden (shadow chancellor) for the Labour Party in the 1920’s argued for a return to the Gold Standard. When it proved to be a disaster he was expelled from the party. So the party has long historical form in this area of money and morality balance.
https://spartacus-educational.com/Gold_Standard.htm” rel=”nofollow”>https://spartacus-educational.com/Gold_Standard.htm
In order to flush out what is going on, could I ask a question rather than make a case. What are the suasive arguments that have been (at least traditionally) made for treating personal capital gains differently? How do they fit with current circumstances? The reason I say this is that over my life I have seen a change in culture: in the past people sought to build capital through success in business. Now, for most people work simply pays the bills; capital (for pensions) is made on your property. The effects of this I suspect are profound, and they are driven by the prevailing orthodox tax regime.
One simple answer is that in a world of uncertainty that runs on money it makes sense to become obsessive about making sure incomings exceed outgoings. This is particularly true of non-financial businesses but especially so of financial businesses that lend the money stuff and don’t want the “lender of last resort”, the government, telling them how to place their speculative bets. After all a “big motive” in the financial sector is to get rich quick, less so in the non-financial sector.
Well, I suppose the question is, are capital gains and income essentially the same thing, so should be taxed the same way? Or are they different?
Historically, the UK had no taxation of income or capital gains. Income tax was introduced temporarily from 1799 to 1802 and from 1803 to 1816, and we’ve had it permanently since 1842. But for many decades most people would not pay any income tax. It was really PAYE that allowed income tax to be collected efficiently from almost all earners.
Income tax was always limited to income sources – rents, interest, earnings, profits from professions or trades, pensions, etc. Income tends to be regular – daily, weekly, monthly, yearly – whereas for most people capital comes in lumps – when you sell an asset that you keep for a number of years – a house or a car, say. Money is money, but to that extent capital gains are not like income.
And for assets held for many years, we also need to decide how to deal with inflation. Should an inflationary gain be taxed like income? Or is an inflationary gain not really a gain at all?
Many wealthy people have substantial portfolios of invested capital – shares, debts, land, etc – and the size of the investment portfolio means some assets may be bought and may be sold each year, so there may be capital gains or losses each year.
After a flirtation with short term capital gains which were taxed like income (land sold within 3 years of acquisition, other assets sold within 6 months), and alongside the introduction of a corporation tax, we ended up with a separate capital gains tax in the 1960s. Initially charged at a flat rate of 30 per cent – in the middle of the bands of surtax rates we had then up to 50%. And then we had egregious avoidance in the 1970s into the 1980s as some people tried to find ways to turn income into capital.
And we also have people who own companies that can decide whether to pay themselves a salary, or pay a dividend, or keep the cash in the company and eventually hope to realise a capital gain.
So, we need taxes at the same right to end the silly games and to create horizontal and vertical equity
That also means we need close company rules
Andrew, I like the historical framing of your answer. Land, the key source of tax was always keen to pass the responsibility to ‘commercial society’. The final decisive transfer was probably surrounding the 1911 Finance Bill, when the House of Lords (the core of the landed interest) gave up the power to amend or delay Finance bills. The Commons then fudged the proposed land tax reforms, and opened the way for business (the dominant interest in the Commons) to transfer the weight off tax to the wage earning people; and there it has accumulated and remained into the 21st century. It isn’t even a philosophical issue. It is just there, unconsidered, unjustified.
The contributions from Andrew and Mr Warren are salient and show to me the paucity of knowledge and debate about these issues and how we end up with the systems that we end up with. This stuff should be public knowledge and be questioned all of the time.
I mean, when you have politicians telling us about ‘broken Britain’ and their little confectionary projects to put it right and you have the inequity of income tax and capital gains tax – I mean who the hell do they think they are kidding eh? It’s just a load of bollocks isn’t it?
An informative post to say the least. And will the public get instead? Phillip Schofield, nude rambling and Naked Attraction.
We’re toast.
Now this really is up my political street and, like you, I wish them well. Having Dale Vince onside is a good ploy as the government are a little wary of him, especially his views on green energy.
Two things spring to mind: egregious is a VERY polite word and I’m not sure that we should “suffer” national insurance, indeed it’s one “tax” that should be increased in my view along with other means of paying for all other public services, including back-filling and your own ideas..
Tax issues are often a source of conflict between governments and citizens. In recent years, token gestures have become increasingly common, making it difficult for people to pay their taxes. Token gesture taxes are different from traditional taxes as they are often levied on small amounts of money or goods. This makes them difficult to track and manage, leading to frustration among taxpayers. Governments must take a proactive approach when it comes to tackling token gesture tax issues in order to ensure that all citizens are paying their fair share and that there is no disruption in the process.