Budget Special: Payment in shares outlawed in bid to save pounds 110m

THE BUDGET AND YOU: Plugging tax loopholes
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The Independent Online
The Chancellor's crackdown on individuals delaying income tax and avoiding National Insurance contributions by being paid in shares in their own companies is the latest in a series of cat-and-mouse measures going back several years. It is estimated that this will produce tax savings of pounds 110m in 1997-98.

Since the late 1980s, when the cap on NI contributions was lifted, employers have sought to avoid liability to a tax that amounts to a tenth of pay- roll costs by paying staff in such "currencies" as unit trusts, gold, diamonds, platinum and fine wines.

Instead of introducing a general anti-avoidance provision, with exceptions where appropriate, the Government has merely blocked each loophole as it arises. Recently, employers and their advisers have sought more obscure methods in the effort to keep one step ahead of the authorities.

The Chancellor has long been known to be a proponent of attacking certain tax-planning schemes and yesterday he reiterated his adherence to a policy of making sure "we get the right tax from the right people".

There has been little effort so far to produce legislation cracking down on the NI avoidance schemes.

Among the latest moves to block loopholes are:

The tightening of capital gains tax rules so that individuals cannot roll over a taxable gain into a security that is not taxed. It is estimated that this will raise pounds 20m from completed transactions and prevent a much larger loss of tax in future.

The prevention of individuals and companies avoiding stamp duty through issuing foreign currency bearer shares, which are exempt from the duty, rather than issuing bearer shares denominated in sterling, which would normally attract a 1.5 per cent charge. It is estimated that this would raise pounds 50m a year.

Clarifying the position where individuals transfer assets abroad and are still able to benefit from the income arising from them. This is not expected to raise significant sums.

Richard Collier-Keywood of Coopers & Lybrand said the moves were a sensible reaction to recent developments. City advisers have been braced for a crackdown on schemes designed to reduce the tax paid on bonuses to bankers and other professionals.

The London Stock Exchange recently announced that bonuses paid by its member firms soared nearly pounds 100m to a record pounds 315m in the year to June.

The authorities have already been understood to be challenging one popular technique used by investment banks to avoid National Insurance contributions, by paying bonuses in the form of life policies that are subsequently cashed in.

Opinion in the financial services community is divided over the extent to which other organisations make payments into offshore accounts, especially since having money paid into such accounts carries no immediate tax advantages, on the grounds that it is where the recipient was based when earning it rather than where the money is paid that interests the Revenue.

Besides the payment-in-shares plans, some of the most popular tax avoidance schemes of recent years have been:

Bonuses paid in the form of life policies. They have been used by a small number of large investment banks over the past two to three years.

Pre-retirement employee benefit schemes (Prebs) paid into a discretionary trust set up by the company. Though officially no individual has any right to the money, in practice there is an agreement between the company and its executives that a slug of the money is theirs. The absence of a right over the money means that the executive does not pay tax until the fund is distributed, and if, in the words of one tax specialist, "they are retired and living on the Costa del Sol, they might not pay tax at all".

One variant of the Preb is the loan from a trust. Money can be lent from the trust to employees or their spouses.

Another variant is the loan against the offshore trust. Provided the employee can demonstrate that there are funds in the trust, and that there will be some form of distribution, a bank may grant a loan, and so allow an employee to gain income through having funds deposited offshore which are not immediately liable for tax.