PERSONAL ACCOUNT

What we can learn from the recollections of an accountant working in 1974

People of my generation and younger have little idea of what it is like to work in an ultrahigh-tax environment.

Pay rises, even modest ones, are today generally noticed, because even at the 40pc higher rate of tax, plus National Insurance, you are ( just) getting to keep the majority of any extra income yourself.

Our tax system has two main levers by which the total take for the Exchequer is increased.

Either the marginal rates of taxation are raised. Or the threshold at which they take effect is lowered.

And over the decades successive governments have yanked both of these levers up and down.

Whatever those on the Left might say – pointing, for instance, to the reduction by George Osborne in 2013 of the top 50pc rate of tax to a lower 45pc – the fact is that in recent years higher earners have borne a larger part of the income tax burden. That is not a clever or selective use of statistics: it is simply a fact.

And the reason that the tax burden has moved up the income scale is largely because the lower tax thresholds have also risen. The effect of this has been to move more middle and lower earners out of the higher rate of tax (dropping them back into the basicrate bracket) or indeed out of paying income tax altogether.

When, as Jeremy Corbyn proposes, the levers are flung violently in the direction of higher marginal rates that apply at far lower levels of income, history tells us to expect a number of outcomes.

Firstly, some people will emigrate. It would not be a great exodus: higher taxes would probably be no more than a tipping factor for those who already had some reason or wish to leave.

But none the less some will go. It happened in the Seventies and it will happen again: artists, authors or entrepreneurs – anyone whose income is large or lumpy – will suddenly have a fresh incentive to take their talents elsewhere.

Secondly, all sorts of peculiar forms of legitimate tax avoidance will be unleashed, along with all the costly advice and litigation that usually follow in their wake.

An accountant who started work in the Seventies sent in this lovely description of just one such manoeuvre. He wrote:

“I started my accountancy and tax career in 1974 and remember the consequences of high tax rates on tax planning.

“Senior executives complained at the amount they had to earn to provide enough income after tax to buy a suit. Accountants such as myself therefore offered ‘suit leasing schemes’.

“This was based on the law that the ‘ benefit in kind’ charge on a suit owned by your employer was calculated on a proportion of its secondhand value. The executive would go into a tailor with a company chequebook and buy a suit, which the company would then lease to the executive.

“We always advised that the suit should be made to measure, rather than off the peg, on the basis that once he walked out of the shop with a made-to-measure suit it was of limited use to others and therefore had a low second-hand value.

“It worked particularly well with executives who were hugely fat, thin or had disproportionately long limbs, as their customised suits were of the least value to anybody else.” Clever, without doubt. But wasn’t it also a tragic waste of time and ingenuity?

Perfect fit: tailored suits became a Seventies tax dodge