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Weekend reading: Welcome to Moneyland, a dystopian home from home

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What caught my eye this week.

I went to a chilling talk this week by Oliver Burroughs, the author of Moneyland. The book is a tourist’s guide to that murky realm where offshore finance and spurious shell companies meet kleptocracy and tax-dodging Belgium dentists.

When did you last change your mind about something big? We all know it’s rare.

Well, I went into that talk thinking that super-rich tax avoidance was in large part a handy bogeyman for politicians to trot out, and that onerous anti-money laundering procedures were quite possibly an overreaction to several miserable developments of recent years, such as terrorism and the ill-judged War against it.

And I came out temporarily terrified.

Of course I want rich people to pay their taxes like anyone else.

I’m also against the looting of poor nations – who wouldn’t be, bar the looters?

But the big picture Burroughs paints is of a world where wealth everywhere is inexorably moving out of reach of the State and the tax man. This has already crippled the budgets of developing nations and it could eventually threaten our own.

From his award-winning book, which is just out in paperback:

“…this means Moneyland has neutered the core functions of democracy – taxing citizens, and using the proceeds for the common good – which in turn has disillusioned many people with the democratic experiment altogether.

In despair they have turned to strong men … who have further undermined democracy in a vicious cycle that benefits no one but the rich and powerful.”

Burroughs is right that this has crept up on us. For example, we’ve all read stories about the dubious money behind London’s luxury high-rise boom – and then turned the page to the sports section.

Perhaps some of you will call me naive in the comments and point out other such stories. But what impressed me from the talk wasn’t the existence of these dubious channels but the sheer scale – 10% of global GDP and rising.

Who watches the Watchmen?

By coincidence, the day after the talk I heard Paul Lewis bemoaning the high cost of financial regulation in an FT podcast. Lewis estimates it costs £1.7bn in the UK, and rightly points out that it’s ultimately paid for by us honest consumers.

In the FT‘s printed version, he notes [Search result]:

“…the good guys will continue to pay compensation for the bad guys. And everyone who uses financial services — just about all of us — will continue to stump up for the nearly £2bn a year we spend enforcing the rules, fining those who break them, and compensating those who have been cheated.

The most expensive lawful industry in the world. Probably.”

Lewis is no cheerleader for a trodden-down financial services industry. His inference is that the sector should be doing more to police itself.

Just be honest, guys!

Well maybe. But if we can’t get a grip on the off-shoring of not just money but accountability – and even in one case Burroughs highlighted, legal vulnerability, shielded against by paid-for diplomatic status – then those billions spent each year will seem trivial.

Especially compared to the price we may ultimately pay.

From Monevator

Trust life assurance to do the right thing – Monevator

From the archive-ator: I, Robot – The benefits of automatic investing – Monevator

News

Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1

Bank of England finds poor practices across UK challenger banks [Search result]FT

A review of the progress of the Help to Buy scheme – National Audit Office

Woodford: The fallout for investors [Search result]FT

Think tank says small minority responsible for missing £8bn of self-assessment tax due – SMF

Property market looks “slightly more stable” according to RICS survey – ThisIsMoney

UK commits to ‘net zero’ CO2 emissions by 2050 – BBC

The Playing With FIRE doc is moving north to screen in Birmingham on 5 July – via Twitter

Economists’ hilariously off-base consensus as to where US rates should be right now is your latest reminder that forecasting – like many things – is more art than science – The Irrelevant Investor

Products and services

Four Marcus-challenging 1.5%-paying savings accounts compared – ThisIsMoney

Online holiday booking scams and how to avoid them – Guardian

Ratesetter will pay you £100 [and me a cash bonus] if you invest £1,000 for a year – Ratesetter

Real test for smart beta products still to come as their usage rises [Search result]FT

Understanding what Shepherd Friendly’s 2.85%-paying ‘savings bond’ really offers – ThisIsMoney

Why the next cycle in Bitcoin pricing could be a tamer ride – Bloomberg

Hargreaves Lansdown pulls £45m from remaining open Woodford fund – Guardian

FIRE second thoughts mini-special

Back from Cyprus and early retirement, and back to work – Retirement Investing Today

Mid-life crisis – Indeedably

What Sam would do differently if he could retire early all over again – Financial Samurai

Comment and opinion

What are the chances of finding an active manager with skill? – Behavioural Investing

How to win any argument about the stock market – Fortune

Bog-standard target wealth funds have bested Yale’s endowment fund over 10 years – Morningstar

How to make better (and quicker) shopping decisions – Get Rich Slowly

The case against small caps [Research]CFA Institute

Put as many money decisions on autopilot as you can – Abnormal Returns

How to deal with suddenly coming into life-changing money – The Financial Bodyguard

Diversify your perennial pasture portfolio – The Real Wealth Farmer [via AR]

A quant’s investing lessons shared with his former self – Validea

How to become a duration detective [Deep dive on bonds]Morningstar

An attempt at valuing the high-flying growth company Beyond Meat – Musings on Markets

Value investing probably isn’t dead – Alpha Architect

It takes 7-10 years to see returns come in for an early-stage venture portfolio – Fred Wilson

Brexit

Boris Johnson pledges [i.e. fantasizes about] dropping Irish backstop in ‘orderly’ Brexit plan – Guardian

Johnson is the Howard Hughes of this leadership race – Marina Hyde

Rory Stewart’s leadership bid speech is worth watching [Video, starts c.25m in] – via Twitter

Kindle book bargains

The Millionaire Next Door by Thomas J. Stanley – £0.99 on Kindle

How to Make a Living with your Writing by Joanna Penn – £0.99 on Kindle

The 80/20 Principle: The Secret of Achieving More with Less by Richard Koch – £0.99 on Kindle

Bean Counters: The triumph of the accountants and how they broke capitalism by Richard Brooks – £2.59 on Kindle

Off our beat

The race to replace Viagra – Guardian

And finally…

“We balance probabilities and choose the most likely. It is the scientific use of the imagination.”
– Arthur Conan Doyle, Sherlock Holmes: The Definition Collection [Read by Stephen Fry, this audio book is a 72-hour delight. Expensive to buy – but it costs just one monthly credit via Audible. Probably the greatest bargain on Amazon!]

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{ 37 comments… add one }
  • 1 HK Expat June 14, 2019, 7:54 pm

    Apple, Amazon, Facebook, etc. It is not (just) the dodgy money that does this. Transfer pricing, IP royalty payments and booking profits in tax friendly jurisdictions are standard fare for major multinationals, especially Americans. I seem to recall that Apple Ireland is their most successful subsidiary booking 10+ billion with 10(?) employees since they route all Uk sales through them and therefore pay no/minimal UK tax.
    Unfortunately state tax systems can’t keep up with a global world in their current form but there are too may structural barriers to easily overcome (trump-USA first which will do down any non US nation in its favour, EU which will prevent individual countries addressing the problem over and above one size fits all (20% VAT regardless of circumstances anyone?) etc.
    Unfortunately the government institutions are fighting the last war- probabily with individuals within it having half an eye on their next job with the very companies they are suposedly regulating.

  • 2 Norfolk June 14, 2019, 8:15 pm

    It must be harder to be a conspiracy theorist these days, because so much more is out in the open, why hide when you can act with impunity? Work for any large company and you quickly see from the inside how wages, benefits, bonuses, perks, everything, is structured to pay as little tax as possible. As a percentage of income, the cleaners probably pay more than the directors, so a step up, the company as an entity does it too and outcompetes any that play fair in a race to the bottom. Then you have an army of individuals separately within the economy who can pay an array of financial advisors to quite often legally protect their money from any taxes.

    This necessarily leaves an ever decreasing, thin layer of those unfortunate to earn enough to have to pay tax, but not able for some reason to protect that income and then the bulk of the submerged iceberg who just don’t earn enough. (was it 2/3 of workers don’t earn enough to pay income tax at all?) That’s why central banks globally are printing money like Zimbabwe to cover the shortfall even with austerity as we hurtle towards negative interest rates. (Goodbye to the possibility for the average person to achieve FI if there are no returns on investments)

    As you say though, the gravy train is close to the buffers with the poor being squeezed until their eyes pop, hence the establishment shills pointing them at publically visible and vulnerable scapegoats. And does Joe Public even think about this kind of thing? I would love to know what percentage of the population actually know most people of means don’t pay tax. I’d bet its in the single digits. Say this on the street and people will look at you like you’re mad though, even while examples on a conveyor belt make up the daily news on their TV in front of them.

  • 3 Living Cheap In London June 14, 2019, 10:04 pm

    “I would love to know what percentage of the population actually know most people of means don’t pay tax.”

    – “of means” what do you actually mean in £ terms? A lot of people who earn 6 figure money pay a lot of tax ? I appreciate there is a lot tax avoidance out there, but i wonder where you are drawing the line?

  • 4 Norfolk June 14, 2019, 10:50 pm

    HNWs can afford the experts who cook up schemes to park their money in trusts etc., that the authorities don’t even know exist until too late. It’s like drug manufacturers slightly changing the chemical formula every time to legally side-step described banned substances. But even guys in vans with a trade earning 50K p/a can have 2 sets of books and keep anything in cash. When I asked a qualifying acquaintance what they’ll do when cash is phased out to stamp that out as well as enable bail-ins of people’s savings if necessary, I was told they’d barter by swapping work. (I’ll do enough plumbing for you to balance out you fixing my car even if it has to go through third parties) Even the unskilled can trade something, like watching someone’s pets when they’re on holiday.

  • 5 Brod June 14, 2019, 11:01 pm

    Interesting article to appear in the same week as Mark Melton’s touching on life assurance in trust to avoid IHT.

  • 6 The Investor June 15, 2019, 2:07 am

    I think the normally rich still pay a lot of tax in the UK, especially on income. The Moneyland argument is still more the realm of foreign oligarchs and the *very* wealthy and whatnot, though the extension was that their ways are filtering down through the system.

    E.g. (My bold):

    “HM Revenue & Customs this week published an analysis of the income tax paid in the UK by salary band, region and gender.

    In total we paid £174bn income tax in 2016-17, the latest year for which figures are available.

    But of that, £52.5bn – nearly a third of all tax raised – was paid by the 381,000 taxpayers who earn more than £150,000 a year. The tax paid by those 381,000 individuals (overwhelmingly male) was more than all the income tax paid by the first 20 million taxpayers.

    https://www.theguardian.com/money/2019/mar/09/actually-the-rich-pay-lots-of-tax-but-on-income-not-their-wealth

  • 7 JimJim June 15, 2019, 7:23 am

    Who pays what will be an argument for all time, more complex than Douglas Adam’s Bistromathics, those who have not rue the bill that is stripped from their salaries without a way of working around it. If there is a way of avoidance, it will be exploited. Those who have can often afford to employ the services of accountants who legally (or otherwise and argue about it later) work around the system of taxes. It would be hard to argue that the tax system is a level playing field. I often wonder if it is just not optimised to cause the “right” amount of pain to all concerned to keep things moving in a positive direction.
    We all avoid tax if we can. The builder with cash, the banker offshore or the saver in their ISA. We love a bargain. I will say that I believe too little tax causes society to break down and too much (especially if it not collected evenly and fairly) has the same effect.
    I have never managed to have a job where it was easy to avoid tax, have you?

  • 8 Ben June 15, 2019, 7:50 am

    @jimjim
    “I have never managed to have a job where it was easy to avoid tax, have you?”

    My (then) hairdresser’s partner worked on north sea gas platforms or some such, she complained once that they ‘have’ to go on several long holidays a year in order for him to be non resident for tax purposes.

    Scissors were extremely close to my ears, so I didn’t say anything more.

    Plus I’m a stay at home dad. No tax to pay in this job!

  • 9 Vanguardfan June 15, 2019, 8:24 am

    When I was a worker bee moving up the salary ladder, I was amazed to find that the higher my income became, the smaller the proportion of it that went in tax. My innocent self had always believed the opposite. (Tax reliefs, particularly on pension contributions, were the main reason). More recently I’ve discovered there are all sorts of arrangements available to keep tax rates even lower for well paid individuals (limited companies, salary sacrifice into pensions). I’ve never been in this position but even as a PAYE employee not able to sal sac, it was still an inverse relationship between income and overall tax take.

    Now that I’m very wealthy, an infinitesimal proportion of my net worth is paid in tax each year. (I’ve not calculated the tax take as a proportion of my total earned and unearned income, but I’m willing to to bet it’s possibly the lowest it’s ever been).

    Yes, I’ve read those ONS figures. I don’t believe they tell nearly the whole story- for one thing they ignore wealth, for another I suspect many self employed people have a misleadingly low denominator for their total income.

    I do think that the recent policy of raising the personal tax allowance is a mistake. It does nothing for social cohesion to create a huge underclass of non taxpayers – just breeds resentment. Even if it has created a fun game for wealthy FIRE types to work out how they can reduce their post work tax bill to zero.

    The ironic thing is, even Corbyn’s Labour Party hasn’t properly worked out how to make a fairer system – still banging on about raising income tax rates among higher earners.

  • 10 The Escape Artist June 15, 2019, 8:28 am

    Hi TI
    Many thanks for including the link to the Birmingham showing of Playing with FIRE. This film is a positive force for financial literacy that has the potential to reach far beyond a narrow middle class bubble into all parts of society. Can I ask all the UK PF/FI bloggers reading this to give it some exposure on their blogs / social media. I have no financial interest in the film but I know its a force for good.
    Thank you.
    Barney

  • 11 JimJim June 15, 2019, 8:49 am

    @Ben, Parenthood is a much under appreciated state of employment both in terms of job satisfaction and remuneration. If it were stipend, then I’m sure tax would be due. It sounds like your hairdresser didn’t find it easy to avoid tax either 🙂

  • 12 Anonymous lurker June 15, 2019, 9:27 am

    @ The Investor, Nicholas Shaxson was writing about this years ago in the book Treasure Islands. It has only got worse. Great article.

  • 13 Jim June 15, 2019, 10:27 am

    slightly off topic and kind of the inverse of the tax take, @Ben assuming your partner is working and kids under 12, if your the one claiming child benefit (and you can be) you will get the NI state pension credit, although i’m sure that point exists within this excellent site

  • 14 taxes June 15, 2019, 3:11 pm

    @HK Expat: How is the EU preventing those taxes? France has a tax on Internet companies and the EU commission has investigated the Apple tax arrangement you criticised, keeping €13 billion in Ireland.
    VAT isn’t “one size fits all” 20% either, the standard rate ranges from 17% to 27%.

  • 15 Cantab June 15, 2019, 3:13 pm

    @Ben

    I recently met a gentleman in a professional capacity, who had a heart complaint. He was blaming it all on the stress of being on the receiving end of HMRC’s Disguised Remuneration Loan Charges. It was all sooo unfair you see, because it was right that he got paid more you see? Because he didn’t get sick pay, pension etc…

    And now he barely has two pence to rub together (me thinks he doth protest too much, he didn’t seem to be doing too badly), never mind pay the taxes he spent 20 years dodging.

    Took an exceptional amount of will power to keep things professional and not suggest he maybe should have invested some of that extra pay in a private pension (legally avoiding the tax) and ask why he, as a notionally intelligent man, thought a scheme which involved loans that would never be repaid and a neglible tax rate might ever be legal?

  • 16 Den June 15, 2019, 5:15 pm

    This is an interesting look at that subject.
    Turns out that, not only do mega corps avoid tax then stash it offshore, some of it is then lent back (with interest, of course!) to the very countries who were denied the tax in the first place!

    https://m.youtube.com/watch?v=d4o13isDdfY

  • 17 The Investor June 15, 2019, 5:32 pm

    It’s a tricky subject for me, because for various reasons I believe corporation tax should be 0% for all companies*! (I think we should tax the money when it leaves the company as salary/dividends/options/etc rather than being reinvested). But another thing the Moneyland talk brought home to me is how apocalyptically that might be exploited.

    *I’m overdue a post on this, thought it’s arguably off-topic for this website.

  • 18 RapaciousBanker June 15, 2019, 6:13 pm

    Ahhhh….I am on of these said bankers…absolutely, on our way to work, in my gold plated rolls royce, I laugh and scoff at the poor saps who are paying so much income tax, whilst I through my bent accountant, scheme up another mechanism to reduce my income tax.

    What are some of these commentators on….I earn a few hundred k a year (yup its a lot) and as far as I can tell as a % of pay, I pay a significantly higher percentage than someone who earns £25k or £50k a year. https://listentotaxman.com

    That’s not too say I am not over paid….I just don’t know anyway of reducing my paye tax apart from minimal child care vouchers and pension contributions to £10k. I have no idea what Norfolk and Vanguard Fan are referring to. If you earn £50k you can salary sacrifice your way to 0% tax. If you earn £400k you can’t?

    Seriously, if someone can tell me how to do this as an employee on paye please do let me know! I’ll cut you in on the tax saving……

    That’s not to say

    – a couple of my mates who are (a) blue collar workman (b) property developers from back home (c) owners of head hunting businesses seem to pay significant less tax than they should through various way either i) non declaration ii) under declaration iii) bartering iv) company expense offsets

    – wealth is pretty lowly taxed. Yup I can confirm, that I am screwing my expenses down to the bare minimum aka the escape artist, pocketing in the difference and over some years now through (a) circa £25k in ISA income now (b) 2* £12.5k personal tax allowance taken through BTL investments (c) 2k dividend allowance each for non sheltered dividends (d) 1k savings allowance each for cash savings, if i stopped work we could pull around £56k income tax free. That’s ignoring the house with the mortgage almost paid off (so imputed rent), no trying to take advantage of the £11.8k CGT, pension dividends rolling up at around £20k a year in my case (although I guess tax coming down the line).

    If I added it all up, its probably £100k a year income / effective income tax free.

    The biggest piss take?…..I could still claim child benefit of £1,700 for a couple of children as our taxable income would be <£50k.

    But…..to get there, I've worked out I've had to pay circa £1.5m income tax over the last ten years…..again not to say not over paid just the facts…

    So yup wealth feels lowly taxed but i've had to pay a hell of a lot of income tax to get there.

    If there was massive wealth taxes I would (a) look at Portugal – 10 year NHR low tax (b) look at Andorra – 10% – 15%. Not sure I would pull the trigger but thinking about it.

    back to the main question – please do let me know how I working for a large corporation can reduce my income taxes please. v keen to know!

    p.s. no interest in VCT / EIS investment schemes…..charges seem too high!

  • 19 ZXSpectrum48k June 15, 2019, 6:54 pm

    @TI. You want 0% Corp Tax? I get the microeconomic logic but you realize how mercilessly companies and individuals would exploit that tax arbitrage? At 19% CT, we’re already waving a banner saying “incorporate now to screw the HMRC”. The UK’s tax system is already one of the worst for tax arbritrage. We have income tax at 47% (45%+2%NI), CGT at 20%, CT at 19%, EA at 10%. You’d make it far worse.

    You also have to consider the macroeconomics. In the modern fiat monetary system, the government creates outside money through it’s expenditure. It sterilizes this money printing via bond issuance or taxation. If you ever got severe inflation, you could raise taxes to offset that inflationary risk but, with no CT, all the increase would have to fall on households. Increased bond issuance to soak up money supply would be sub-optimal in an inflationary environment. So you’d almost certainly find yourself even more dependent on monetary policy tightening.

  • 20 Peter June 16, 2019, 1:01 am

    @Vanguardfan,

    > The ironic thing is, even Corbyn’s Labour Party hasn’t properly worked out how to make a fairer system – still banging on about raising income tax rates among higher earners.

    What about the property tax they are talking about? There’s no way to plan a retirement if it can be taxed in unpredictable ways when you have low income.

    https://www.telegraph.co.uk/news/2019/06/04/labour-has-shown-wants-nothing-less-abolition-private-property/

  • 21 Avanbuiten June 16, 2019, 7:21 am

    It is ironic that the advertisements link to a crypto currency get rich scheme which is dishonestly claiming endorsement from Martin Lewis.

  • 22 Mr Blue Shoes June 16, 2019, 9:37 am

    @RapaciousBanker

    I agree with you. I think as a PAYE drone they is very little you can do to pay less tax. Other than salary sacrifice as much as you can into pensions. As you said you are already limited to 10k. I have a couple of friends, no kids, no mortgage. That sacrifice 40k/year into their pensions and live on what is effectively minimum wage. This is much harder if you have dependants.

    We have had contractors at work who earn 2,3,4 times the rest of you but pay less tax due to incorporation. I feel the best way to make money and keep the majority is to be the company owner. Even if the company is 1 person. I often ponder what I would advise my children to work towards. Work hard go to university become a wage slave and Noah a lot of tax. Or do a trade straight from school and become a ltd. company ASAP.

  • 23 The Investor June 16, 2019, 10:05 am

    @Avanbuiten — Really? I haven’t seen that but sadly I can well believe they’re in the mix. Unfortunately we can’t micro-control those adverts — they come from Google Adsense. It really should be doing a better job of stopping them though, especially after he won that court case.

  • 24 The Investor June 16, 2019, 10:25 am

    @Mr Blue Shoes — As we’ve discussed on this site before, there are real costs, hardships and risks associated with being a legitimate small company — as opposed to being a fake contractor-style company, where somebody works as effectively an employee. I have friends who do the latter, who work for the same employer at the same desk for a year or more, and I think from a tax perspective it’s a joke. (I think it’s quite effectively for capitalism/the economy/their lifestyle, but that’s another matter).

    This is not the same as setting up a legitimate small business, however. Your Children in their Ltd Co. would be paying tax — and potentially plenty of it — as well as a bunch of other costs as a business, and when they withdraw money from the business. I know because I do. (If they were engaging in tax evasive action such as working cash in hand and not declaring it, clearly a different matter but also illegal.)

    There’s plenty of reasons for smart motivated young people who don’t want a traditional or academic career to skip university in my view — https://monevator.com/reasons-not-to-go-to-university/ — but avoiding tax isn’t really one I’d consider.

  • 25 The Investor June 16, 2019, 10:25 am

    @ZXSpectrum — Yes, there are definitely complications. I want 0% corporation tax the way some people want world peace (well, I want that too). It’s an aspiration, perhaps, rather than something to expect to roll-out with the next Tory manifesto. It would require extensive rejigging of the mechanisms of taxation. Like you, I’m aware of, for instance, the companies that paid for their employees cars, dinners, holidays, and whatnot in the 1970s under the stupidly high levels of marginal income tax. I have some ideas as to how this might be avoided/reduced (especially in our digital era) but I’ll save them for a post.

    I’m sure there are academics and idealogues who must have looked into 0% corporation tax and written about the pros and cons, but I’m minded not to read them at the moment as I independently came to the notion with my own thinking a few years ago and it’s quite nice to have a theory to turn about in one’s head without influence. (If I was chancellor — or even if I come to write the article — I’d do more research, obviously!)

    Just in case anyone is reading and wondering “why on earth”… very briefly, it’s starts with the belief that capitalism is in general a force for good that finds out what people want/need and meets that need in an increasingly efficient or superior fashion. (So Jeremy Corbyn etc need not apply. Also that’s not to say people want what they “should” want. I’d rather they didn’t want swimming pools full of plastic tat, etc). Anyway if you believe this, then why take money off the companies that are best meeting an emerging / ongoing need (as reflected in their profits/cashflow) versus one that is poor or failing (as reflected in low profits before tax).

    I’d rather the good companies kept the money to reinvest to keep meeting the need for as many people as possible until either the market is saturated (and their profit falls anyway) or owners / workers / associated parties take money out of the company via dividends / salaries / purchases of unrelated stuff like properties for related companies, etc. At that point the capital is no longer being best reinvested to meet that demonstrated need.

    There are lots of other benefits, too. E.g. Through my lens Amazon’s ‘no profits’ and low taxation is perfectly sensible — it is using the tax system as stands to achieve the outcome I want (hyper growth to meet clear needs). However as is often lamented, small companies/local shops/whatever don’t have the same opportunities for various reasons (scale, need to pay a small company owner a relatively high income etc). Make corporation tax 0% and the unfair playing field and many other distortions go away.

    Lastly, corporation tax is only about 10% of the total tax take *now*, so getting rid of it and replacing the lost revenue from other sources looks perfectly achievable to me, from that narrow perspective.

    But anyway, need to write up my thoughts properly some day! 🙂

    [Note: I made a few tweaks to V1 of this comment that you might have seen. Nothing substantial but for clarity. Need to write that post!]

  • 26 The Investor June 16, 2019, 10:29 am

    @ZXSpectrum: p.s., you wrote:

    At 19% CT, we’re already waving a banner saying “incorporate now to screw the HMRC”. The UK’s tax system is already one of the worst for tax arbritrage. We have income tax at 47% (45%+2%NI), CGT at 20%, CT at 19%, EA at 10%. You’d make it far worse.

    Remember that taking money out of a company is Corporation Tax plus Taxes on dividends or salaries. So, ignoring personal allowances for the first tranche of both, it’s basically your 19% for CT plus 7.5%/32.5%/38.1% for dividends and similar with respect to income tax.

    There are certainly still some advantages based around national insurance savings, and the ability to decide when you withdraw your money. But it’s not the massive tax-free gravy train I think it’s sometimes painted as.

    (Which is not to say I don’t think disguised employees who incorporate should not be properly employed under PAYE etc. I do.)

  • 27 ZXSpectrum48k June 16, 2019, 12:07 pm

    @TI. My issue here is that Ltd companies are becoming nothing more than investment vehicles. Many do absolutely no trading for most of their lives. Essentially, they are becoming tax deferral/tax avoidance entities.

    I was recently approached by a partner at a big 4 accountancy company. He’s involved in trying to get some contracts to manage the Libor transition. A massive gravy train for anyone who can get involved. He was theorizing that he might be able to use some ex-swap traders as consultants on a contract basis, at a day rate of say £2k. Did I know anybody who might be interested etc.

    I worked out the numbers. Make my partner a director. Company pays £40k pension contribution to reduce CT. We both take £8,580 salary to reduce CT and get state pension. Take £38.76k each in dividends @ 7.5% tax rate. The rest is left as retained earnings and rolled up in investments (no tax on dividends inside companies). When I retire, we dribble out these retained earnings out. Basically, I’m confident my blended tax rate would be no more than 23%. As an employee it would be 44%. When adults, we make both children directors to reduce the blended rate even more. The key is the ability to retain earnings; it’s pure tax deferral.

    Sorry but I think this is an absolute nonsense. We have to bring back the close company rules to stop this or force may companies to move from the being Ltd to being LLP, which are straight forward tax pass through structures where no profits can be retained.

  • 28 The Investor June 16, 2019, 12:41 pm

    @ZXSpectrum — Thanks for that example, very interesting. Totally agree it’s egregious.

    Not to be glib but I don’t see that situation being changed by 0% versus 19% on the face of it. Clearly there needs to be some other kind of regulation or enforcement brought in.

    With that said I am mindful of what you’re saying, and note again my “world peace” aside. I don’t say it’s easy, or even attainable.

    I am also alert to the fact that 0% may abolish certain frictions that exist with even just a very low rate of tax, which can then be exploited by the sort of shenanigans you describe!

  • 29 HK Expat June 16, 2019, 5:56 pm

    @taxes
    OK. I agree that my comment on 20% VAT across the board was a simplification. But EU VAT rules are very specific and draconial with very limited leeway. See https://ec.europa.eu/taxation_customs/business/vat/eu-vat-rules-topic/vat-rates_en.
    In summary- in their own words:
    “The VAT Directive sets the framework for the VAT rates in the EU, but it gives national governments freedom to set the number and level of rates they choose, subject only to 2 basic rules:
    Rule 1:  The standard rate for all goods and services
    Rule 2:  An EU country can opt to apply one or two reduced rates but only to goods or services listed in the VAT Directive.”
    Those basic rules are pretty much a straightjacket unless the rate is upwards.

  • 30 Mathmo June 16, 2019, 9:35 pm

    @ZXSpectrum48k — don’t forget to keep the company trading (ideally in a stable capital-intensive industry so it look a lot like investment) so that you can pass it on free of IHT…

    Thanks for the links, TI!

  • 31 LukeM June 16, 2019, 9:40 pm

    I do hope lots of people get to see Playing with FIRE. It’s strange to talk about a very watchable film about personal finance, but that’s what it is. The FI bloggers are on good form, the central couple are likeable, and there are laugh-out-loud moments, including an hilarious but unintentional one involving Vicki Robin (I think it might have been down to the editing).

  • 32 Indecisive June 17, 2019, 7:43 am

    > As we’ve discussed on this site before, there are real costs, hardships and risks associated with being a legitimate small company — as opposed to being a fake contractor-style company, where somebody works as effectively an employee.

    @TI thanks for defending those who run legitimate small companies – having run one for 13 years it isn’t the easy ride people paint it as (and HMRC now seem to think it is).

    As @ZXSpectrum48k says the main benefit remaining is being able to hold money in the company and defer withdrawals to future years, staying within the lower tax band each year. This is great if your business has peaks and troughs, but not helpful if you need the money to make a large purchase (*cough* a house *cough*). So it bites both ways.

    With people misusing Ltd companies – well that’s for the government to deal with. Just stop tarring us all with the same brush. I’ve seen the original “benefits” of running a Ltd company (limited liability, lower corporation tax, and (tangential but most financially rewarding) the flat rate VAT scheme) disappear, to the point where running a company isn’t rewarding in the way people expect.

  • 33 Mark Meldon June 17, 2019, 10:38 am

    @ Brod,

    There is nothing wrong with legitimately avoiding tax – that’s financial planning – but there is everything wrong with evading tax! It’s a routine thing, trusts an life cover – or, at least it should be!

    If you had £2.5m and a big appetite for risk by using things like VCT/EIS’s, etc. you need not pay tax on a sum as large as that while it is invested, maybe different when ‘recovering’ capital.

  • 34 taxes June 18, 2019, 7:34 am

    I don’t get it, how is this draconian or a straitjacket? The agreement on VAT was unanimous and the minimum rate is low enough that no one uses it.
    I only asked because you mentioned Apple Ireland and I remembered the case and the eye-catching €13 billion of back taxes the Commission pushed for.

  • 35 brod June 18, 2019, 11:13 am

    @Mark Meldon – but isn’t that what Amazon, Apple, etc do? Legitimately avoid tax?

    Legality isn’t the issue here.

  • 36 The Rhino June 18, 2019, 4:25 pm

    @Brod – yes, I imagine the prevailing thought among IFAs must be inline with MM, as thats their business, bit like asking a hairdresser if you need a haircut? but that’s not everyones viewpoint, as my colleague demonstrates. Legality in his case very little to do with it! For him there is plenty wrong with legitimately avoiding tax (and he will gladly tell you that at some length).

  • 37 The Rhino June 18, 2019, 4:42 pm

    And I guess the other point is, if you don’t want a haircut then what are you doing in a hairdressers in the first place?

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