AMT – Not the British way of doing things!

Often I think about what I would change if I were Chancellor of the Exchequer. For example, there are many things I like about our current UK tax system, and there are many things I don’t like about the current UK tax system. I’m usually quite vocal about the bits I don’t like, HMRC getting less user-friendly, and especially Making Tax Digital, but on the whole the system is simple and it works.

But that doesn’t mean it can’t be improved or, heaven forbid, replaced altogether with a different system.

Apart from the UK tax system, I am also interested how tax is applied in other countries around the world. I don’t think you can seriously begin to understand how the UK tax system works, and dare I say “appreciate” it, if you don’t think about alternative tax systems used elsewhere. So, bearing that in mind, my ears pricked up when I heard a tv report recently mentioning AMT in the USA. Unfortunately the tv programme didn’t mention any details but a quick internet search gave me the information I was looking for and that got me wondering…

The Alternate Minimum Tax system or AMT is designed to ensure everybody pays a certain amount of tax each year and I have no doubt a part of our population would welcome similar legislation being introduced to the UK, after all the raison d’être of AMT is to stop wealthy taxpayers paying only a small amount of tax on large incomes.

The system works by having two tax computations.

The first tax computation is similar to our own in the UK where various allowances and reliefs are offset against income and gains leaving a taxable amount against which the different tax rates are applied and the tax liability calculated. Of course this is where various “tax planning techniques” can be applied to reduce the taxable amount and therefore the amount of tax payable. In the UK, your tax liability stops with this first assessment and you pay the amount of tax due.

But under AMT there is a second tax computation quite separate from the first. This second computation is much simpler and doesn’t allow for a lot of the reliefs and allowances included in the first, instead it simply applies a flat rate of tax on income exceeding a predefined threshold.

So let’s bring this to life and do a quick “what if” based entirely on made-up figures…

We have John, he earns £150,000 a year. He prepares his Self Assessment tax return every year (or five times a years if MTD comes in, but for this example I’ll just ignore it and consign it to the rubbish bin as a bad idea – I need to be made Chancellor!) and pays £53,300 in income tax, leaving John with £96,700.

John’s next door neighbour, Sarah, earns the same £150,000 but is much more financially astute and by using a combination of various tax reliefs and investments doesn’t pay any income tax at all, leaving Sarah with all her £150,000.

At the moment, that would be the end of the matter, each would pay their own amount of tax and we move on to the next year.

But supposing AMT was a thing in the UK. In that case it wouldn’t be the end of the matter, there would be that second computation or assessment to contend with. And supposing the AMT tax legislation said something like “a flat rate of 20% will be taxed on all annual income over £100,000, but will only be charged if the taxpayer hasn’t already paid this amount in income tax.” How would John and Sarah be affected?

Both have £50,000 of income over the £100,000 threshold and so would be subject to AMT of (£50,000 x 20%=) £10,000.

John has already paid more than £10,000 in income tax this year so he has no AMT to pay, but Sarah hasn’t paid any income tax to reduce the AMT tax so she would be liable to the full £10,000!

As I said earlier, the concept of AMT is to make sure “wealthy” individuals do not pay “too little” tax on their income and I can see that this might be morally desirable but I would be very wary if such a system was introduced to the UK tax system. It might begin by only taxing taxpayers with very high income thus gaining approval from some of the population (although I do refer you to my earlier post where the tax system is explained in beer) but I could see the thresholds and parameters soon reduced as it starts to be used as a political tool to generate more and more tax for the government coffers (again, I refer you to my earlier blog post!)

There are already enough mechanisms in the UK tax system without the need to introduce a tax like AMT. The higher rate tax could be increased, personal allowances tapered away sooner, many of the tax reliefs could be taken away or reduced, and don’t forget we already have the General Anti Abuse Rules in place to prevent arrangements put in place to purely save tax. So I think we already have the tools in place, there’s no need to bring a new tax in which basically says if after all the above you still manage to use the tax law to your advantage then we’ll tax you anyway.

An old accountant once said to me, “trouble is, HMRC think the tax legislation is theirs. It isn’t, it’s the law of the land and belongs to all of us so they can’t bend it for their purpose just as we can’t for ours!”

If you have some spare time, then think about how you would tax your population if you were Chancellor. Would you tax them at all? Or do you have some other method to raise money to pay for our NHS, police, security, amenities etc etc etc? Careful though, it can soon get very complicated very quickly and one thing’s for sure, you can’t please everybody!