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TAX AVOIDANCE, PRIVATE COMPANIES AND THE FAMILY

Published online by Cambridge University Press:  08 March 2013

Glen Loutzenhiser
Glen Loutzenhiser*
Affiliation:
Pinsent Masons University Lecturer in Tax Law and Fellow of St Hugh's College, University of Oxford.
*
Address for correspondence: Dr Glen Loutzenhiser, St Hugh's College, St Margaret's Rd, Oxford OX2 6LE. Email: glen.loutzenhiser@law.ox.ac.uk.
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Abstract

Recent media reports have revealed a substantial number of highly-paid senior civil servants and BBC presenters have been using “off payroll” arrangements and personal services companies to reduce the tax paid on their earnings. This article examines the tax and National Insurance contribution (NIC) savings that can be had by carrying on economic activity through a company rather than as an unincorporated business or an employee. These savings derive from a combination of favourable tax and NIC rates on companies, and can be further increased through family income-splitting arrangements, as witnessed in the case of Jones v Garnett. Several possible reforms to address the distortions and inequity in the present tax and NIC regimes in favour of companies are considered, including amendments to the IR35 “disguised employment” regime and the anti-income-splitting rules known as the settlement provisions. Applying the new statutory general anti-abuse rule, which the Government plans to introduce in Finance Act 2013, is another possible approach. The preferred option, however, is to deal with the root problem and pursue closer alignment of the tax and NIC treatment of activity carried on in different legal forms.

Keywords

Tax avoidanceincome taxcompaniesIR35independent taxation
Type
Shorter Articles
Information
The Cambridge Law Journal , Volume 72 , Issue 1 , March 2013 , pp. 35 - 49
Copyright
Copyright © Cambridge Law Journal and Contributors 2013

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References

1 R. Syal, “Around 2,400 senior civil servants being paid ‘off-payroll’” Guardian (28 May 2012).

2 J. Groves, “BBC tells stars to dodge tax—ultimatum for workers: go off the books or face the sack” Daily Mail (23 July 2012) and C. Hope, “How Jeremy Paxman blew lid on BBC's complicity in tax avoidance pay deals for stars” Daily Telegraph (5 Oct 2012).

3 BBC Newsnight, “Top civil servant in tax deal row” (2 February 2012), available at http://news.bbc.co.uk/1/hi/programmes/newsnight/9692281.stm.

4 HM Treasury, Review of the tax arrangements of public sector appointees, Cm 8350 (May 2012).

5 Office of Tax Simplification, Small Business Tax Review (London March 2011).

6 J. Mirrlees and others (eds.), Tax by Design: the Mirrlees Review (Oxford 2011).

7 Tiley, J., “Tax, Marriage and the Family” [2006] C.L.J. 289Google Scholar.

8 [2007] UKHL 35, [2007] 4 All E.R. 857.

9 [2005] EWCA Civ 1553, [2006] 2 All E.R. 381 and discussed in Tiley, op. cit., pp. 297–300.

10 C. Crawford and J. Freedman, “Small Business Taxation” in J. Mirrlees and others (eds), Dimensions in Tax Design: The Mirrlees Review (Oxford 2010), 1046–59.

11 See, for example, Market Investigations Ltd v Minister of Social Security [1969] 2 Q.B. 173, Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 Q.B. 497, and Autoclenz Limited v Belcher and Others [2011] UKSC 41, [2011] I.R.L.R. 820.

12 Bolton, J. E. (chair), Small Firms: Report of the Committee of Inquiry on Small Firms (London 1972), 219Google Scholar.

13 Ibid.

14 B. Dowell, “BBC pays 3,000 freelancers through personal service companies” Guardian (23 March 2012).

15 J. Mirrlees and others (eds), Tax by Design: The Mirrlees Review, op. cit., 451. This premise is not accepted by all; Anne Redston has argued that small businesses are fundamentally different from employment and that comparisons between the two are irrelevant: see Redston, A., “Income Splitting: The Nelsonian Option” (2007) British Tax Review 680Google Scholar.

16 J. Mirrlees and others (eds), Tax by Design: The Mirrlees Review, op. cit., ch.5.

17 S. Adam, “Budget 2011: an initial response”, Institute for Fiscal Studies Press Release (London 23 March 2011), available at: http://www.ifs.org.uk/pr/budget2011_pr.pdf.

18 On earnings in excess of £7,488 p.a. NIC rates are slightly lower if the employee has contracted out of the state earnings related pension scheme.

19 See HM Treasury, Tax Ready Reckoner and Tax Reliefs, Table 1.5, available at http://www.hmrc.gov.uk/stats/tax_expenditures/menu.htm.

20 These figures reflect non-contracted out NIC rates for 2012–13, and are based on Table 11C.1 in Crawford and Freedman, op. cit., 1091 and a modified version of the table to include family income-splitting arrangements in G. Loutzenhiser, “Operational integration of income tax and National Insurance Contributions” (2012) British Tax Review 229. The one-person company example assumes a salary of £7,592 paid to the owner-manager with the after-tax profits paid out as dividends. The husband and wife company example assumes a salary of £7,592 paid to each spouse, with the after-tax profits paid out as dividends to each spouse/shareholder in equal shares.

21 [2007] UKHL 35, [2007] 4 All E.R. 857.

22 Formerly in the Income and Corporation Taxes Act 1988, Pt. XV now rewritten in the Income Tax (Trading and Other Income) Act 2005, Pt. 5, Ch. 5.

23 [2005] S.T.C. (S.C.D.) 9.

24 [2005] EWHC 849 (Ch), [2005] All E.R. (D) 396 (Apr).

25 [2005] EWCA Civ 1553, [2006] 2 All E.R. 381.

26 This summary paraphrases Park J.'s description in Jones v Garnett [2005] EWHC 849 (Ch), [2005] All E.R. (D) 396 (Apr) at [1].

27 [2007] UKHL 35, [2007] 4 All E.R. 857 at [13].

28 [2007] UKHL 35, [2007] 4 All E.R. 857 at [49].

29 Crossland v Hawkins (1961) 39 T.C. 493 (CA), 549–50

30 IRC v Plummer [1980] A.C. 896, 912 (per Lord Wilberforce).

31 [2007] UKHL 35, [2007] 4 All E.R. 857 at [7]. Baroness Hale expressed considerable displeasure with the “patronising and inaccurate term ‘bounteous’” in her reasons, preferring instead to use the term “gratuitous” (at [22]).

32 [2005] EWCA Civ 1553, [2006] 2 All E.R. 381.

33 [2007] UKHL 35, [2007] 4 All E.R. 857 at [27–28] and see Lord Walker at [55] and Lord Neuberger at [94].

34 [2007] UKHL 35, [2007] 4 All E.R. 857 at [30] and see Lord Hope at [38].

35 Written statement to Parliament from the Exchequer Secretary to the Treasury, Angela Eagle, HC Deb. vol. 463, cols. WS 89–90 (26 July 2007).

36 HM Treasury, Budget 2008, HC 388, para. [4.69].

37 Buck v Revenue & Customs Commissioners [2009] S.T.C. (S.C.D.) 6.

38 Young v Pearce (1996) 70 T.C. 331 (Ch).

39 The debate became known as the “IR35” issue because this was the number of the original press release issued in the run-up to Budget 1999.

40 ITEPA 2003, s 49 et seq.

41 See HM Treasury, Budget 2007 Press Release BN46.

42 Office of Tax Simplification, “Small business tax review”, op. cit., 39.

43 Ibid.

44 See http://www.hmrc.gov.uk/freedom/ir35-status-enqs.htm.

45 HM Treasury, Budget 2012, HC 1853, para. [2.207].

46 HM Treasury, Autumn Statement 2012, Cm 8480 (December 2012), [2.103].

47 D. Oliver and P. Harris, “Family Connections and the Corporate Entity: Income Splitting through the Family Company” in D. Oliver and P. Harris (eds.) Comparative Perspectives on Revenue Law: Essays in Honour of John Tiley (Cambridge 2008), 244.

48 Redston, op. cit., 686.

49 Tiley, op. cit., 299–300.

50 Penny and Hooper v Commissioner of Inland Revenue [2011] NZSC 95.

51 Australian Taxation Office, “Taxfacts – General Anti-avoidance Rules and How They May Apply to a Personal Services Business” (March 2003).

52 G. Aaronson, GAAR Study: A study to consider whether a general anti-avoidance rule should be introduced into the UK tax system (11 November 2011), available at http://www.hm-treasury.gov.uk/tax_avoidance_gaar.htm.

53 The other study group members were Professor Judith Freedman, John Bartlett, and judges Sir Launcelot Henderson and Howard Nowlan.

54 HM Treasury, Autumn Statement 2012, Cm 8480 (December 2012), [1.178]. The draft legislation is available at http://www.hm-treasury.gov.uk/tax_avoidance_gaar.htm.

55 J. Mirrlees and others (eds), Tax by Design: The Mirrlees Review, op. cit., ch.5.

56 Office of Tax Simplification, Small Business Tax Review, op. cit., at [6.3].

57 Office of Tax Simplification, Small Business Tax Review, op. cit., at [3.2]; J. Mirrlees and others (eds), Tax by Design: The Mirrlees Review, op. cit., 451.

58 J. Mirrlees and others (eds), Tax by Design: The Mirrlees Review, op. cit., 452.

59 Ibid., 463–64.

60 Ibid., 463–68.

61 Crawford and Freedman, op. cit., 1044–46.

62 The calculations that follow are explained in more detail in Loutzenhiser, op.cit., 370–71.

63 J. Mirrlees and others (eds.), Tax by Design: The Mirrlees Review, op. cit., 468.

64 Tiley, op. cit., 298.

65 HM Treasury, Budget 2011, HC 836, para. [1.77].