September 17, 2013 12:02 am

Accountants and private equity face tax crackdown

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Danny Alexander Commons Statement©PA

Danny Alexander will today announce a crackdown on tax loopholes being used by the “vast majority” of partners in private equity and accountancy firms to shelter their earnings from the taxman at a cost to the Treasury of up to £100m.

Speaking at the Liberal Democrat conference in Glasgow, the Treasury chief secretary will say he is closing “unfair” loopholes that allow partners to classify part of their earnings as eligible for corporation tax, which is half the level of income tax.

Mr Alexander will say: “We are cutting corporation tax to encourage firms to invest, but not to give the wealthy a way to avoid the 45p income tax rate. So when the vast majority of people in an industry are finding ways to exploit that difference, and that industry is the preserve of the very wealthy, I have no hesitation in acting.”

The Treasury believes most partners in private equity firms are using complex loans to avoid having to classify part of their earnings as income on which they would have to pay 45 per cent tax.

Partners are lending money to their firms, which they typically receive back with a hefty 30 per cent rate of interest, often in lieu of a salary. Thanks to Treasury rules, they only have to declare these loans at market rate, meaning they can pay tax on those earnings as if they had been paid at a more common rate of around 4 per cent. Although the firm then has to pay extra in corporation tax, it means the partner can avoid paying the full rate of income tax on what they are receiving.

The second loophole is being used extensively in the Big Four accountancy firms, according to Treasury aides. Many of them set up separate companies to pay their workers. Those companies then charge a nominal fee for those services, which can be millions of pounds. Although that fee is never paid to the company, and instead goes back to the partners, it is taxed at the 23 per cent rate of corporation tax rather than the full rate of income tax.

Together, Mr Alexander believes these loopholes could be costing the Treasury up to £100m a year. He will tell his party members: “It’s wrong, it’s unfair, and it’s got to stop.”

The Treasury chief secretary will also urge his party to take credit for the incipient economic recovery, insisting the coalition has guided the economy “through its darkest hour”.

In a veiled criticism of Vince Cable, business secretary, who has warned that the coalition has not yet created a sustainable recovery, Mr Alexander will say: “The brighter future that lies ahead is only there because of us, and we should shout it from the rooftops.”

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