Theresa’s May stated intention to reduce corporate excesses as part of a broader initiative to develop a fairer form of capitalism came at a time when the identity of the new British Prime Minister would not be known for around nine weeks. But 24 hours is a long time in politics and, if everything goes according to latest plans, Mrs May will have taken over the keys to No. 10 Downing Street within 24 hours.
It’s therefore timely to consider what part tax might play in her promise to tackle boardroom excesses and the development of fairer capitalism generally.
The past may not be a guarantee of the future, but it’s certainly a guide and sets a helpful context. So, looking back, it’s interesting to recall the significant tax developments of the last few years:
- the top 3 per cent of earners pay around 40 per cent of income tax;
- London accounts for 30 per cent of the UK’s tax revenue;
- UK legislation and the OECD BEPS initiative have completely changed the landscape for multinational tax planning;
- tax avoiders are required to pay first, argue later if their schemes are challenged by HMRC;
- tax evaders can be named and shamed in public;
- many of the attractive features of the 'non-dom' tax regime have been abolished or watered down.
Notwithstanding all of these changes, boardroom pay inequalities continue to raise concern with many observers pointing out that unhealthily large disparities between the remuneration of the highest paid director and the average (let alone the lowest) employee foster a range of undesirable trends in society including:
- low social mobility;
- damage to company performance;
- reduced profitability;
- the contribution of low pay to poverty-related health issues, which in turn increases the costs of the NHS.
This government and the predecessor coalition have introduced a minimum wage, increased the personal allowance and set the basic rate band in a way which is intended to take many people out of the tax net. Although it’s a moot point, we don’t expect to see further significant changes in these areas over the next year or two.
So, if the tax system is to be used to focus the attack on boardroom excesses, what form might that take?
The government has demonstrated that it has no qualms about using the tax system to tackle what it perceives to be social 'bads' (the opposite of social 'goods') so these are some of the things we might expect to see applied to boardroom remuneration which exceeds acceptable limits. The big question, of course, is what those limits should be.
Should there be a fixed ratio between top earnings and average wages, or top earnings and minimum wages within the company? If so, should that ratio apply to all companies? Or should it reflect the different circumstances of different types of business (for example, banks where the average wage is relatively high reflecting the skill of the workers, as distinct from security companies where the average is relatively low reflecting the less skilled nature of much of the work undertaken)? While there might be endless arguments about setting ratios, the government and its advisers are likely to regard fixed ratios as a better approach than figures put forward by remuneration committees, or agreed at shareholder meetings.
Following that line of reasoning, what happens if executive remuneration breaches the limits set by the ratio? It’s fairly easy to contemplate a higher rate of employers’ national insurance. And possibly a higher rate of employees’ national insurance as well. And then there is the question of income tax. The top rate is currently 45 per cent. Could the government reintroduce a 50 per cent top rate for directors whose remuneration exceeds the ratio for companies in their category? Then there is the vexed question of how to deal with share awards and the various forms of tax-preferred share option and incentive plans. If companies breach boardroom pay limits, might we see some of those tax advantages being withdrawn?
There is everything to play for here and great uncertainly over how this would work out in practice. But, if Mrs May fulfils her promise to tackle boardroom excess, then we can be sure that tax will have an important role to play.
If you would like any more information on this issue please get in touch with George Bull, or your usual RSM contact.