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UK Labour Party's plans for tax avoidance "crackdown" could have unintended consequences, experts say

Out-Law News | 25 Sep 2014 | 10:47 am | 2 min. read

Anti-tax avoidance measures that would be introduced by the Labour Party if it was elected to form a government at next year's general election would introduce more uncertainty and complexity to the UK's tax system, according to tax experts at Pinsent Masons, the law firm behind Out-Law.com.

The party's leader, Ed Miliband, told its annual conference that a future Labour government would conduct a "coordinated crackdown against tax avoidance" by closing "loopholes" allowing hedge funds and employers of temporary workers to pay less tax. The party has also proposed a new 'mansion tax' on homes worth over £2 million, and a new 'windfall' tax on tobacco that would raise money for the NHS.

Tax expert Heather Self of Pinsent Masons dismissed the announcements as "tinkering around the edges of the tax system" rather than setting out a "strategic vision" of how a Labour government would run the UK tax system. The policies would add complexity and would be unlikely to raise the revenue predicted by politicians", she said.

"Windfall taxes in particular are a dangerous tool as they introduce uncertainty into the corporate tax system," she said. "As this tax would almost certainly be passed on to consumers, a much simpler measure would be to increase the rate of duty on tobacco products," she said.

The policies announced by Miliband in his speech are part of a plan to set aside £2.5 billion for an NHS "time to care fund" to pay for additional midwives, care workers, GPs and nurses. A Labour government would do this not by borrowing or raising personal taxes but by "[clamping] down on tax avoidance including tax loopholes by the hedge funds ... [and] a mansion tax on homes above £2m," he said. It would also "raise extra resources from the tobacco companies".

The party also plans to crack down on 'umbrella' schemes used to employ temporary workers avoiding their tax and national insurance liabilities, and to close the 'quoted Eurobonds exemption'. This scheme was introduced in 1984 as a way of encouraging international investment into the UK. It allows overseas investors to receive the interest on loans made to companies without the deduction of a 20% 'withholding tax' payable to HMRC, provided that the security is listed on a recognised stock exchange as designated by HMRC.

Labour claimed that its proposed 'mansion tax' would raise £1.2 billion from homes worth more than £2m. However tax expert Ray McCann of Pinsent Masons said that there was now "general recognition" that simply introducing a tax on property was unlikely to raise the expected level of tax and would be difficult to implement fairly.

"A mansion tax would inevitably be seen as a tax that does not properly in many cases correlate to ability to pay which will cause considerable uncertainty to those affected by it and would introduce further complexity in measuring the likely tax yield," he said.

"Whilst equally it is clear that the UK tax system has become over-reliant on taxing work - that is, employees and employers - it is unlikely that on its own a mansion tax as proposed would raise very significant revenue in the overall scheme of things and the cost of collection would be greater. This would be especially true in those parts of the south east and London where property prices are often disproportionate to income. A much fuller understanding of what any new tax would raise - and, more importantly, what economic and social impact any such tax would cause - would need to be undertaken," he said.