Wednesday, 28 January 2015

Tax-free... apart from all the tax he paid.

Emailed in by MBK, The Guardian at its self-righteous best:

Peter Mandelson received £400,000 tax-free in cash last year from a company he owns, accounts filed recently at Companies House reveal.

The company, of which he is the sole shareholder, gave the former secretary of state a loan for that amount in the financial year 2013/14 – a move described by a leading tax campaigner as likely to have been motivated by tax avoidance.

Salary payments or dividends from a small business are liable for tax under UK rules, but in the case of a loan to a director – provided a certain minimum rate of interest specified by HMRC is charged – the borrowing is not liable for tax. The official interest rate that applied at the time was 3.25%...

Richard Murphy, a chartered accountant and director of Tax Research UK, said Mandelson’s use of loans raised questions.

“How to extract cash from small companies whilst paying as little tax as possible on the way is a massive part of the UK tax avoidance industry,” he said, “Directors taking loans from companies they own is one way in which this is done, which has been widely condemned in the past when done by footballers and others.

Stuff and nonsense, and the Murphmeister really should know better.

Taking Mandy and his personal company together, he has to pay about £225,000 tax in total to end up with that magic "tax free" figure of £400,000.

It is because of a crude but effective anti-avoidance rule that says if a company 'lends' a shareholder £1, it must pay 25p quasi-advance corporation tax (known as Section 455 tax) just as if it had paid a dividend in the good old days when we had advance corporation tax i.e. withholding tax on dividends.

(This rule does not apply to loans to employees who are not shareholders, i.e. from a football club to a player, there are different anti-avoidance provisions for that).

The company can only make the loan and pay the Section 455 tax out of post-corporation tax profits, so it collects £625,000 in bribes and bungs fees for services rendered, pays 20% corporation tax, leaving £500,000. £100,000 goes towards the Section 455 tax and £400,000 is lent to our hero.

Now, the overall rate Mandy pays is 'only' 36%, compared to normal employment income (basic rate overall 40.2%, going up to 53.4% for additional rate taxpayers, which is what Mandy would be), but hey.


L fairfax said...

Mandy is still saving money whilst being a member of party that is anti this type of thing.
Not that I have any objections to tax avoidance - I try to do it myself. It is the hypocriscy I dislike.

Kj said...

So when/how is the section 455 tax reversed?

Mark Wadsworth said...

LH, that's a separate topic. I was talking about the twattishness of The G and Mr M making wild and untrue statements about how the tax system works.

Kj, if the loan is repaid, the company gets the s455 tax back.

Or the loan can be cancelled and turned into a dividend

So the company gets £100k tax back and the borrower has to pay income tax on the dividend.

Before we had the stupid 45% rate, the borrower had to pay 25% of the dividend received, so on £400k loan/dividend he pays £100k income tax.

So the government didn't care less whether the loans were repaid or not, it made no difference.

Kj said...

MW: thanks. Sensible and simple solution. A similar rule is currently being debated here as well.

L fairfax said...

True it is bad that Richard Murphy says things that are untrue.
This is a good story for people who don't like the Guardian or Labour. The Guardian prints untruths and a senior Labour politician is a hypocrite

DavidECooper said...

Nothing Richard Murphy said was incorrect. Most of the nonsense is confined to the introductory paragraph, where it describes the loan as "tax free" (as opposed to "tax efficient", which it is).

Basic problem is sloppy journalism. I love the Graun, but sometimes its not too strong on basic arithmetic.