Taxation shouldn’t be determined by subjective opinions of fairness

THE Treasury’s latest consultation – Ensuring the Fair Taxation of UK Residential Property Transactions – has just closed. We responded to it, and disagreed not only with the substance of the policies, but also the way in which the consultation was framed around the vaguest of concepts: “fairness”.

The main proposal is for a graduated Annual Charge to be levied on UK residential property valued at £2m plus, which is owned by any “non-natural person”. Also, capital gains tax (CGT) is to be extended to catch disposals of such property by a non-resident.

Aside from the disappointing absence of any detail on the extension to CGT, the most curious thing about the consultation was the prevalence of the word “fair”, which cropped up on 16 separate occasions. The word “fairness” has a tenuous link to tax, yet it has become the mot du jour ever since the chancellor’s incantation on morality at the last budget.

Of course, tax legislation and case law are littered with examples of unfairness – ranging from the double and triple taxation of the same economic income, to the taxation of individuals on income they don’t receive. Recently, the tribunal in Rogge and others versus HMRC found that a taxpayer should be taxed on income he effectively paid to himself. The tribunal called it an “absurd conclusion”, but stated that it was bound by the wording of the statute.

If taxation is to be driven by a conception of fairness, it is hard to see how it could be deemed fair for anyone caught by the Annual Charge. It would be retroactive and is designed to catch transactions that may have taken place decades ago. Also, as a wealth tax directed at property values, rather than net wealth, it would disproportionately impact upon those living in expensive areas, as well as those who have chosen to invest their wealth in property.

But irrespective of the inconsistencies in the consultation, in truth, taxation has little to do with fairness. Income tax was originally introduced as a short-term measure to fund the national debt arising from the Napoleonic Wars. That was 200 years ago. The tax system was not created in any formalised or coherent manner based on an objective notion of fairness. We have an arbitrary hodgepodge of rules, designed to extract funds from the population to cover spending and win votes.

There is no inherent fairness and no inherent morality in the system. It wasn’t built with that in mind. How can fairness be said to be a central tenet of a system that taxes income at 50 per cent, but capital gains at 28 per cent?

It has not gone unnoticed that the Annual Charge looks suspiciously like a Mansion Tax “lite”. The threshold of £2m is the same as that championed by the Lib Dems in their proposed Mansion Tax. It targets – albeit indirectly – broadly the same base of taxpayers: wealthy foreigners.

But it won’t take long for a government to extend the terms of the Annual Charge to cast a wider net. The history of taxation shows that once a tax is introduced, it is only a matter of time before it is extended to include a greater portion of the population.

But in the short term we should be concerned about how this Mansion Tax “lite” is perceived by the wealthy foreigners it is targeting. Whether we like it or not, the UK needs these people to help drive our economic recovery. We need to attract wealthy foreigners to the UK, and we need to retain those who are already here.

The government is happy – and rightly so – to make the UK’s corporation tax regime more competitive to attract multinationals. The benefits of attracting wealthy individuals into the UK – through the collection of indirect taxation – are similar to the benefits of attracting multinationals.

Yet we are openly pursuing tax policies that deter wealthy individuals from moving to the UK because of the complexity of the rules, the frequency of changes and the uncertainty of tax treatment because of retrospective taxation.

By allowing a woolly notion of fairness to creep into taxation, the political landscape is such that it has become almost impossible for politicians with vision to tax us in the nation’s best interest.

Mark Davies is director of Mark Davies and Associates.