Here’s how Britain’s tax system is rigged against the many

The tax system is set up to serve the rich. This election, it's time for change, says Prof Prem Sikka.

The UK taxation policies have systematically advantaged corporations and the wealthy, leaving the rest to forego social rights and put up with deteriorating public services. This election should be an opportunity to realign the system so that it serves most of the people.

Tax leakage

The share of gross domestic product (GDP) going to taxes has fluctuated. In 2008, it was 39% in and around 34% now. This is considerably less than the tax revenues of major European countries. The fall in the UK share of taxes has been accompanied by savage cuts in public services, local authority finances, degradation of the National Health Service.

Due to tax avoidance, evasion and errors, HMRC fails to collect tax revenues of around £34-£35bn a year. Others estimate the amounts to be between £58.6bn and £122bn a year. So over the last nine years, tax revenues of between £300bn to £500bn/£1100bn have not been collected.

The rate of corporation tax declined from 28% in 2010 to 19% in 2019. Cuts to corporation tax rates between 2010 and 2016, when the corporation tax rate was 20%, are estimated to have reduced the nation’s revenues by at least £16.5bn a year. This has neither boosted wages nor stemmed tax avoidance.

Despite the huge giveaway, almost one-in-five of the UK’s biggest companies paid no corporation tax in 2018. Half of the medium-sized companies listed on the stock market are paying less than the corporation tax rate of 19%. Amazon, Google, Microsoft, eBay, Apple and other global giants are well known for using complex corporate structures to avoid UK taxes.

Serving the wealthy

In 2013-14, the marginal rate of income tax for individuals with incomes above £150,000 a year was reduced from 50% to 45%.

The first £12,000 of capital gain is tax free. Depending upon the nature of the gain, the rate of capital gains tax for basic rate taxpayers (i.e. those subject to a rate of 20%) is at 10% or 18%. Those subject to marginal rates of income tax of 40% and 45%, pay capital gains tax at the rate of 18% and 28%.

Dividends are also taxed lightly. The first £2,000 is tax free and the remainder is taxed at rates from 7.5%, 32.5% or 38.1%, depending on the income tax bracket of the individuals.

There is no logical case for taxing capital gains or dividends at a lower rate than income. By adding them to the income of the individuals and taxing the sum total at the appropriate marginal rates, the government can raise between £90bn and £120bn over the life of next parliament.

The less well-off face benefits freezes and bedroom tax and may be content to listen to brass bands and karaoke in the local pub. The well-off go to theatre and listen to orchestras. Their pastime is subsidised as theatres and orchestras receive subsidies.

Benefits for the rich

Wealthy individuals also benefit from a variety of other allowances. The entrepreneurs relief means enables selected individuals to pay tax at the rate of 10% on lifetime capital gains of £10 million. This relief is worth £2.4bn a year. A former head of HMRC has stated that the relief does not deliver the assumed economic benefits, is abused and should be withdrawn.

Donations to registered charities are deemed to be net of tax and they can reclaim a tax credit equivalent to the basic rate of income tax. The law permits wealthy individuals to benefit from charitable donations. Here is an example, from the HMRC website: “You donate £100 to charity – they claim Gift Aid to make your donation £125. You pay 40% tax so you can personally claim back £25.00 (£125 x 20%)”. So the wealthy individual dodges tax by making charitable donations.

Working class children go to crumbing schools with large classes. Wealthy individuals send their children to elitist places like Eton with small classes and secure social advantages. Such places are registered as charities and thus not liable to corporate taxes. They are exempt from VAT on school fees. Despite cuts to the government’s budget for education, council-run schools pay normal business rates, but private schools with charitable status get the 80% relief which over the last two years has been worth around £223m. Last year, Eton alone received £51m in school fees and £8.5m in donations. The donations by wealthy parents also enabled them to avoid tax (see above).

Neoliberals never tire of reminding us that the top 1% of earners pay more than a third of income tax. 42% of adults paid no income tax because their incomes were below the tax-free personal allowance to £12,500 a year. This is a shocking evidence of inequalities in the distribution of income. Successive governments have appeased the elites by granting them ever more tax concessions.

This is just a glimpse of some of the tax policies that have systematically advantaged corporations and wealthy elites. Such appeasement should end and investment in social infrastructure and redistribution needs to be prioritised.

Prem Sikka is Professor of Accounting at University of Sheffield and Emeritus Professor of Accounting at University of Essex. He is a Contributing Editor to LFF and tweets here.

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7 Responses to “Here’s how Britain’s tax system is rigged against the many”

  1. nshgp

    220 bn a year going on the debts that Prem Sikka ignores. That’s 220 bn a year that doesn’t go on services. That’s 30% of taxes.

    Without those debts, there would be no austerity. There would be no wealth gap. Almost all people would have wealth from investing their NI.

    The core problem is that the state took the wealth and redistributed it. But you can’t talk about the consequences because that would mean you admit to the cause.

    There’s no dodging taxes on charity. It’s just that people have decided that they would rather have their money spent by the charity, and not by the state.

    On low wages, what do you expect when you allow in millions of low paid workers so MPs get cheap servants, corporate get wage slaves, and suppress wages.

  2. Joe

    The real cause of housing problems and NHS queues is immigration

  3. Patrick Newman

    It is a shame we have these apprentice semi-articulate fascists occupying space in this publication. Another example of the lack of fairness in the tax system is that everybody regardless of income pays VAT which in most cases is very regressive. Added to which are all the charges that have popped up for public services previously free. Council tax is also regressive even though it relates to property prices of 1991. This means in Westminster band H resident pays only £1507 a year even if you live in a £30m mansion and if you live ‘alone’ you also get a 25% discount (call it the playboy subsidy!) but in Liverpool, the lowest band occupier pays £1300 a year. Move on to energy charges here the tariff structure ensures high users pay the lowest charges per unit, and so on and so on!

  4. Patrick Newman

    You want a quick and dirty wealth tax? Just add two more bands to council tax to catch the super valued property owners/occupiers!

  5. 6033624

    I spent many years working for HMRC. I worked in collection dealing with Employers Tax/NIC, SA, CT and latterly TCs. There’s a basic truth to the entire system and that is that the lower down in the pecking order you are, the more harshly you are treated and the more penalties are imposed.

    This is not an error, this is written into the Taxes Management Act. This is something that has been done by successive governments Tory AND Labour. Self employed delivery drivers don’t get sweetheart deals, don’t get to use tax havens but they DO get ‘Daily Penalties’ of up to £75 per day for each tax return they have outstanding, this along with a penalty, estimates and interest can take you from owing nothing to bankrupt in under a month. Meanwhile, the equivalent for Companies, Corporation Tax has a single £100 penalty for being late submitting your return. The harshest measure available for companies in this respect is for them to be struck off the register at Company House. Take that in combination with Group Accounting and you’ll soon realise why the majority of this country’s tax take comes from basic rate employed people and not from the rich multi national companies that pay little to no tax at all.

    It’s easy for people to blame the Tax Man but the Tax Man can ONLY implement what the government of the day will allow. Successive governments have protected their friends and donors whilst hammering the poor. The government successfully lobbied for business people to be allowed to take off the expense of their GOLF CLUB MEMBERSHIPS when they were asking for extra time to pay their overdue taxes! Meanwhile (when HMRC were dealing with Tax Credits) those who had been overpaid and were due to repay that amount were not allowed to take account of food for their pet dog (were they supposed to ditch their much loved pet) NB that particular instance happened in a case I dealt with personally, the ‘Income and Expenditure’ form I had obtained was questioned by someone at the highest level (a pilot scheme meant we were being monitored by the most Senior or Senior Civil Servants on behalf of Gordon Brown’s Labour government) These decisions are political, they are made because the politicians believe that the poor should be treated badly and the rich should be treated well. They think the sick and the poor are just lazy. This is NOT the opinion of the civil Servants who have to enact their laws.

    This wold be bad enough if this way of thinking was only the Tories, it isn’t. The Blairite government was EXACTLY the same. I do believe that Corbyn thinks differently but the last PLP was the tail wagging the dog and they are nearly as right wing as the Tory Wets.

    Put the blame where it lies, successive Labour and Tory governments looking after the rich and punishing the poor. You need to convince Labour MPs as much as Tories. As I found when a Civil Servant MPs don’t care much for taking care of the vulnerable or for following the rules. For example, the memo I got (along with many others) from a cabinet minister (whose name escapes me or I’d just tell you) telling everyone in our department to keep information back from Tax Credit claimants, the information was that if they delayed their application by a few days they’d receive a MUCH higher amount. We were supposed to hold back this information and lie if asked directly. Apart from being immoral this was against the Civil Service Code (something we were all at pains to adhere to, it includes not lying to people and acting to the best of your ability even if you disagree with what your job entails – difficult to do sometimes but ensures there’s no chaos every time there’s a change of government) This was not an isolated incident, there’s SO much more. But please understand these loopholes are ALWAYS deliberate as they’re ALWAYS in favour of those who make political donations.

    This is why I have no respect left for MPs

  6. Forenpsych

    Joe, the real reason for the housing shortage is lack of building, plus richer people having second homes. Or third and fourth ones, often bought as an investment and never occupied. Immigration isn’t a significant factor. And the real reason for NHS waiting lists being so long is that it is underfunded. Waiting lists have got longer as immigration has declined. And without immigration, the NHS’s problems are likely to continue. My Ghanaian half-cousin worked as a midwife in the NHS for 40 years, and has now retired to Ghana. Without people like her we’d be in even worse trouble.

  7. Here's what the IFS thinks of the Tory and Labour manifestos | Left Foot Forward

    […] IFS does not even note that over the last nine years, tax revenues of between £300bn to £500bn/£1100bn have not been […]

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