Political Promise

Captial Gains Tax: The problem of tax avoidance crackdowns

In Newswire on June 25, 2010 at 3:53 pm

By Aaron Newell

After the Liberal Democrats promised a tax avoidance crackdown in their manifesto, the coalition agreement included an agreement to increase Capital Gains Tax (CGT). As potential tax avoidance schemes are difficult to decipher at first, crackdowns can be equally opaque.

Share-schemes are good at explaining this. Share-scheme plans can allow businesses to pay employees–very often executives–in shares, and shares are classified as Capital Gains when sold. That is, taxed less than income. Such scheme are very popular in the City and the world of big business. And a CGT increase makes such schemes far less profitable.

Yet Tuesday’s budget announced a less-than-expected CGT increase to 28%. Members of the Conservative CGT-rise rebellion will be appeased by this, yet this weaker increase may actually be beneficial to the avoidance crackdown.

As the business world moves faster than Parliament–Terry Smith’s pre-budget sale of over £40 million shares to a CGT-increase-proof trust makes this point well–Parliament has to be careful businesses and banks will not hide all their money under a labyrinth of lawyers and accountant, or even abroad, on hearing about a new crackdown.

Yet, with this less than expected increase, banks and businesses may
be persuaded to accept the modest increase rather than moving en mass
into new esoteric CGT-proof schemes, or even abroad.

Hardly Sweden’s tripartite agreement between government, labour and business, but perhaps a tacit settlement.

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