Peter Mandelson has been accused of avoiding tax by taking a £400,000 loan from his own company instead of withdrawing the money in salary or dividend payments, which would have to be taxed. The accounts for Lord Mandelson’s company, ‘Willbury Limited’, which was set up two weeks after the 2010 general election, show it charged £15,211 in interest on the balance, however, no repayments were made, nor was any repayment schedule or loan term set out. Richard Murphy, a chartered accountant and director of Tax Research UK, said extracting cash from small companies whilst paying as little tax as possible on the way is “a massive part of the UK tax avoidance industry”. A spokesman for Lord Mandelson said Willbury pays all relevant UK corporate taxes and Lord Mandelson pays all relevant personal taxes.
Source: The Times, Daily Mail, The Sun
We hate to defend Lord M, but he is, in this case at least, not guilty. As so often when allegations of tax avoidance start flying around, rationality picks up its hat and coat and leaves the room. If I borrow £400,000 from Barclays, no-one would for a moment suggest that I ought to pay tax on what I have borrowed. So why should a different rule apply if I borrow from a company which I happen to own? To the extent that the interest I pay on the loan is at less than the “official rate”, that is certainly a benefit: but it’s a benefit which is captured and taxed under the “benefits in kind” tax code. And if the loan remains outstanding for a substantial period there is an additional special tax charge on the company: so arguably the “benefit” of borrowing from a company is rather over-taxed than under-taxed. Certainly, taking a loan from a company can be an important element in short- to medium-term tax planning, but an egregious wheeze to avoid taxation on a permanent basis? No.