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Tax professionals defend income deferral after Goldman’s retreat

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The ‘court of public opinion’ sets a dangerous precedent, says Baker Tilly tax partner

A leading firm of accountants has defended the deferral of bonuses and dividends until after 5 April to take advantage of the forthcoming reduction in the top rate of income tax from 50% to 45%, after Goldman Sachs decided this week to abandon a plan to delay payment of UK bonuses.

The move would have seen payment of deferred bonuses from the last three years delayed from February until early April, the Financial Times reported.

Sir Mervyn King, governor of the Bank of England, said he found it ‘a bit depressing that people who earn so much find it would be even more exciting to adjust their pay-outs to benefit from the tax rate, knowing that this must have an impact on the rest of society, which is suffering most from the consequences of the financial crisis’.

The FT had quoted Margaret Hodge, chairman of the Commons public accounts committee, as saying many wealthy bankers were the ‘first to complain’ if the snow was not swept from the roads or trains were delayed. ‘They just don’t give a toss about collective responsibility,’ she said. ‘But they have a civic duty to pay their fair share.’

However, Ian King, business editor at The Times, noted that ‘one of Britain’s great traditions is the ritual, on the night of the Budget, in which motorists fill their petrol tanks and stock up at the off licence on the way home to avoid higher excise duties coming in at midnight’.

‘What Goldman considered was the same principle,’ he wrote. ‘Nor is what Goldman contemplated any different, in principle, from the way millions of ordinary Britons seek to protect more of what they earn from the taxman by raising their pension contributions or sacrificing a chunk of salary in return for childcare vouchers.’

The 50% rate was ‘widely acknowledged by business organisations and international observers as harming the British economy’, George Osborne said at Budget 2012. He announced that the rate, applied to taxable income over £150,000, would be reduced to 45% from April 2013.

Tax professionals noted that the advance notice gave rise to tax planning opportunities. Writing in Tax Journal last March, Janet Hoskin, partner at Pinsent Masons, said a number of steps could be taken to minimise income taxed at 50% ‘without the need to resort to “morally repugnant” aggressive tax avoidance’.

Nicholas Stretch, partner at CMS Cameron McKenna, said the announcement gave rise to ‘all sorts of opportunities for employers and employees to save tax by delaying payments of bonuses and vesting of shares awards until after [5 April 2013]’.

This week the BBC’s business editor Robert Peston said that what Goldman was considering was ‘not opaque and highly complex tax planning, designed to bamboozle the taxman’.

An ‘adjustment of payment schedules’ was neither unusual nor confined to bankers, he wrote. ‘It is being contemplated right now by all manner of businesses, big and small, as the top-rate income tax cut looms; if that weren't the case, then the basic rules of business behaviour would have been rewritten.’

He went on to ask whether there was ‘a new rule of good corporate citizenship that any business or business person should pay the highest prevailing rate of tax possible, even if there is an easy and legal way of paying less tax’.

George Bull, senior tax partner at Baker Tilly, said in a client briefing on Wednesday that Goldman Sachs had bowed to political and public pressure.

‘This in itself raises an important question. There was nothing illegal in the plan to defer bonus payments until the top rate of income tax had reduced. While parliament and the courts have come down hard on artificial tax avoidance, judges have been equally clear that nothing in UK tax law requires a person to pay the maximum, as distinct from the minimum, amount of tax.’

The firm had noted, he said, tax law ‘seems to be out of step with public opinion’.

‘If that is the case, then parliament should open a debate on the shape of a tax system which meets the public interest. While social and ethical considerations are crucial in a civilised society, using the court of public opinion to try and find guilty those who have merely voiced intentions sets a dangerous precedent.’

The intention of parliament

Tax avoidance is ‘about exploiting loopholes within and between laws in the UK and elsewhere to get a benefit parliament did not intend,’ said anti-avoidance campaigner Richard Murphy this week, during an online debate with BDO tax partner Stephen Herring. But Herring argued that Murphy did not recognise that ‘it has always been the role of the tax courts to determine what parliament intended’.

Herring won the debate, Accountancy Age editor Kevin Reed declared, with 53% of the votes. The Goldman row had demonstrated the difficulties posed by the tax avoidance issue, Reed said.

‘MPs criticised the bank for considering pushing back bonus payments so they fall in the new “lower” high rate,’ he wrote. ‘But deferring payments could have been easily forseen and legislated against. By not dealing with that, can we say that giving bonus payers the opportunity to shift payments was, or wasn't, the intention of parliament?’

He added: ‘It's not exactly a case of the bank setting up an exotic scheme involving subsidiaries and sending funds on a circuit. But in the context of being viewed as nasty “take take take” bankers, GS decided against the move. Instinctively it feels they made the right “choice”.’

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