New Year, new politics

January 5, 2015

New Year, new government (fingers crossed).  Yes, it’s election year, so – advance warning – I’ll be straying quite a bit from my original brief of looking at tax consultations to take in looking at the wider field of policy and politics.

And I should explain that over the Christmas break I’ve been compulsively re-watching the boxed set of The West Wing

In the episode “College Kids” (West Wing, Season 4 episode 3) the idea is floated of making bonus payments over £1m non-deductible in calculating companies’ profits for corporation tax and using the resulting tax to make university fees fully deductible against income tax.

Why don’t we do that?

Personally I benefited from four years of free higher education and a maintenance grant and I believe that education is a public good to which every citizen is entitled.  If I were in charge I’d abolish student fees, reinstate student grants, and repay everyone who’s had to take out a student loan since they were introduced.  Parents and guardians and grandparents and enterprising students should at the very least be able to get an income tax deduction for any student fees they pay.  There is, even, a mechanism for getting that done – remember deeds of covenant?  Publish a form of words for a new Education Covenant which the donor can sign (to give an audit trail) and then let them claim back (via their self assessment) the tax on every payment they make to an undergraduate student.

About half a million students start full time university undergraduate courses each year.  Let’s ignore Scotland for the moment (sorry Scotland) and assume they all pay £9000 a year in fees.  That’s 4.5 billion, if I haven’t missed a decimal place.  Tax relief on that at 20% would be 900m, yes?  Multiply it by three (assuming they all do three year courses – back of an envelope figures) £1.8 bn

How are we going to pay for it?

The West Wing way.

The basic presumption is that earnings of more than a million aren’t really remuneration, rewards for services rendered: they are more akin to a distribution of profits.  So why should they be tax deductible for the company that pays them?

There were 11,000 people with incomes over £1m in 2011/12 of whom more than 3000 had incomes of more than £2m.

Call it about 15 billion (11,000 x £1m plus another 3,000 x £1m for the ones with £2m and then round it up by another two for the “more than” element – back of an envelope figures, sorry.)

Corporation tax on 15 billion at 20% would be £3bn and, oh look, we might be able to give some grants to the post-grads too…

Why didn’t they do it in the West Wing?  I haven’t got that far yet, but I imagine it was politics.

Why don’t we?  We have an election coming up.  Let’s put it into the questions we ask candidates.


  1. If such bonuses were to be truly treated as distributions of profit, then they’d be taxed as dividends. That would mean no NI and the dividend rate of tax.

    For the second million of bonus, that would mean the Treasury would get £138,000 less in employer’s NI, £20,000 less in employee’s NI, and £144,400 less in income tax (the effective rate is 30.56% rather than 45%) – a total loss of £302,400. Against that, corporation tax would go up by £200,000 – a net loss to the Exchequer of £102,400.

    So for big bonuses to be penalised, you’d have to treat it as a disallowable expense that is still NICable earnings and/or taxable as employment income (ideally both, as doing just one saves you only about 5%). That is of course perfectly possible to do, though it would be a bit of an anomaly.

    Under current rules, paying a bonus is very tax-inefficient – or, to put it another way, the current rules are very good for the Exchequer. For every £million of bonus, the recipient gets £530,000, the company gets £89,600 in CT relief, and the Treasury gets £380,400 (*after* the CT relief).

  2. Sure. But I’m not proposing to turn them into dividends, just to make them non-deductible for CT purposes. (And how many of them are paid via some kind of non-NICable structure like a personal service company anyway?)

    • I was going from where you said “The basic presumption is that earnings of more than a million aren’t really remuneration, rewards for services rendered: they are more akin to a distribution of profits. So why should they be tax deductible for the company that pays them?”

      If your reasoning for not giving a deduction is that they’re a distribution of profits, then there’s going to be an argument that they should be treated like that for other purposes too.

      If you don’t want to treat them as distributions of profits, but just want to penalise them through the tax system, then as I say that’s fair enough, just a bit inconsistent. But then lots of tax rules are inconsistent – I’d never look for coherence in tax 🙂

      If there’s a PSC in the loop, then for something like banking it would be hard to argue that IR35 doesn’t kick in to give an NI liability . Or indeed the new agency rules – one could hardly argue that a banker, with all the oversight that is involved in banking, isn’t subject to control.

  3. Oh well if you’re going to be serious about it…! Yes, it was just a “get the money from somewhere” suggestion, not a consistent philosophical proposition (ah, THAT’S why we’ll never have tax simplification!) And, yes, I’d want PSC payments to be disallowed over £1m too, but I have no confidence it could be done – I lost my illusions when I first read Newstead v Frost.

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