The moral tone in media coverage of wealthy U.K. individuals’ tax affairs and fears about reputational damage may discourage the rich from using risky tax dodging schemes, according to new HM Revenue & Customs research.
In a report published April 29 about what motivates tax compliance behavior among wealthy individuals and how to increase it, HMRC explored a variety of topics, including what influences those individuals' behavior, the ways in which they plan their tax affairs, and their views on how HMRC can increase voluntary compliance among them. HMRC had commissioned the report from IFF Research.
Drawing from several dozen interviews — 32 with wealthy individuals with incomes exceeding £200,000 a year or assets of more than £2 million, and 10 with tax agents with wealthy clients — the report comprises a wide range of observations. However, the report stresses that it adopted a qualitative approach to the research because wealthy individuals “are a relatively small, hard-to-engage population” and it would have been difficult to get enough participants for a survey. Researchers break down “wealthy individuals” into “affluent individuals,” those who have net wealth of less than £10 million, and “high-net-worth individuals,” those who have net wealth exceeding £10 million. They also refer to “non-doms,” or non-domiciled residents, who are U.K. residents that have a permanent, non-U.K. home. (Prior analysis of non-dom status.)
On the whole, one key factor that influences wealthy individuals’ tax behavior is a desire to contribute to society, but there is a “delicate balance” between this desire and their intolerance of the U.K. tax system becoming “too punitive or onerously complex ,” the report says.
Several wealthy individuals and agents said that if the tax regime or tax levels do become too punitive or complex, then those factors may “drive wealthy individuals towards avoidance; and prompt some non-doms to relocate — and this thus would reduce the exchequer’s tax revenues,” according to the report.
The majority of wealthy individuals want to pay the “legally correct” amount of tax but are annoyed at how that concept has become a “morally loaded issue,” both in media coverage and in public and political debates, the report notes. “While resented, the moral tone of media/public discourse therefore seems to have been an effective deterrent,” the report later adds.
Moreover, the increased public attention on wealthy people’s tax affairs has emphasized how time consuming and costly an HMRC investigation can be, which further discourages noncompliance among the wealthy, researchers found.
Other factors that influence tax compliance among the wealthy include a sufficiently low headline income tax rate, anxiety over reputational damage felt by both individuals and their agents, and the court system’s identification of specific schemes as being unacceptable and unworkable.
While the wealthy and their tax agents said they generally viewed HMRC positively when it comes to response times and knowledge, some reported that HMRC was inconsistent in both its tone and position regarding wealthy individuals’ tax affairs and was sometimes adversarial in its approach.
“There was an appetite for a more consistently constructive approach from HMRC but, paradoxically, concern about the stressful, time-consuming, and costly consequences of being challenged by HMRC appeared to be deterring more risky tax arrangements,” the report said.
Researchers also gleaned some insight into what motivates wealthy individuals that have a stronger appetite for risk, including avoiding what they viewed as unfair inheritance taxes and concern about passing on their assets to their children and only engaging in tax minimization schemes that are tested and validated by legal precedent.
Conversely, those with a lower affinity for engaging in risky tax arrangements were driven by a desire to preserve their quality of life and peace of mind and by an understanding that their financial advisers won’t take responsibility for recommending a risky tax arrangement.
These motivations imply that HMRC could adopt more effective messaging to increase tax compliance, such as “warning those with a higher-risk appetite to avoid being the ‘guinea pig’ who proves a scheme doesn’t work; and — cutting across wealthy individuals more generally — the idea that, by using only safer tax arrangements, you protect the peace of mind and quality of life that are among the key advantages of being wealthy,” the report says.
The research also pointed to a desire among the wealthy for more clarification from HMRC about what constitutes risky tax practices so individuals “can stay on the right side of the law,” as well as more punitive action against scheme promoters to address the source of tax minimization schemes, the report says. “However — and again paradoxically — this lack of clarity may have contributed to deterring individuals/agents from engaging in questionable arrangements,” the report adds.
The findings show that HMRC has followed a key recommendation in a House of Commons Public Accounts Committee’s January 2017 report on collecting tax from high-net-worth individuals, an HMRC spokesman told Tax Notes. In that report, the committee recommended that “HMRC should assess what more it could do to deter very wealthy taxpayers from bending or breaking the law, particularly in the light of changing behavior.” That research should also include what new powers might increase HMRC’s effect on wealthy taxpayers, the committee said.
HMRC will now use the research to increase its understanding of wealthy taxpayers to help develop and tailor their support services to those individuals, the HMRC spokesman said. “This research will be considered alongside any proposed changes to ensure that we continue to put the customer at the forefront of how we do business in HMRC,” he added.