UK contractors are now working in one of the highest taxed countries in the world, despite such punishing tax rates raising less revenue than lower rates would. That’s according to a new report by the Adam Smith Institute.
The think tank’s report, called The Revenue and Growth Effects of Britain’s High Personal Taxes, shows that HMRC estimates that the top 1% of UK taxpayers, which includes many contractors, will contribute over 25% of income tax receipts in 2010-2011.
The report also provides evidence that increasing taxes to such levels actually results in reducing tax revenues. It also warns that the introduction of the 50% top rate of tax acts as a “tipping point” for many high earners to take legal tax avoidance action. This, says the report, could lead to the UK facing ten years of flat growth and a loss of £350bn in unrealised tax revenues to the Exchequer, unless measures are taken to reduce personal taxes and repeal the top rate of tax.
Citing evidence from all the major developed economies, as well as examples from the UK’s tax history, the report shows that “high top rates of tax fail to produce public revenues and injure economies”. It say: “Survey evidence from finance, industry, sport, entertainment and elsewhere tell us that high-earners are inclined to take the rational course of minimising their tax liability.”
According to the report, such minimising of tax liabilities is manifesting itself with high-rate taxpayers emigrating, incorporating companies to hold funds, transferring assets to family members, deferring income to later years or “investing time and money in more sophisticated forms of tax avoidance.”
Included in the range of measures the report identifies as potential solutions are the proposals to immediately eliminate the 50% tax rate and reduce the higher rate from 40% to 35% in the forthcoming Budget. Although there are no indications such measures are on the Treasury’s agenda, such actions would clearly benefit many contractors.