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City partners should pay more tax, says ex-City partner

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Former Magic Circle man Dan Neidle highlights ‘odd’ rates discrepancy between lawyers and bankers

A former Magic Circle tax partner has argued that City partners should pay more tax.

Dan Neidle, who retired from Clifford Chance partnership in April, has published a blog post arguing that the way City law partners are taxed at the moment is problematic.

The post, which appears on the website of Neidle’s non-profit organisation Tax Policy Associates, highlights that lawyers have an overall effective tax rate of 47%, whilst the bankers’ equivalent rate sits at 53.5%. Why the “odd and irrational” 6.5% discrepancy?

Neidle argues against the UK tax system’s focus on taxing income. “Our tax system puts so much weight on whether a person is an employee,” the former MC partner explains. “The question is whether we should change the law and tax partners in law firms and other large professional firms the same way as employees.”

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And it’s not just lawyers that should pay more tax, says Neidle. Other professions that are known for adopting partnership models are also be ripe for reform.

He speculates that if partners at law firms were subject to employer’s national insurance in addition to “management consultants, investment managers, and other large professional partnerships (whether in partnership or corporate form) and it’s realistic to think we’d be looking at between £1.5bn and £2bn of revenue”.

Lawyers seem to have had a mixed reaction to Neidle’s proposal. Malcolm Cammack, head of tax at Hogan Lovells, commented “finally, someone brave enough to say it”, whilst Dentons partner Chris Brennan wrote “why is there no ‘dislike’ button on LinkedIn?”.

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28 Comments

Hazza

This should go down well with his former colleagues.

Former CC

Do bankers buy in equity? If so then he’s right. If not then it’s as simple as the well-known argument that those putting in capital are slightly different than pure salaried employees (including salaried partners) because of the risk premium attached to sinking capital into an investment. Anyway, seems slightly off from him to argue this once he has retired (and benefitted from it) rather than when a partner.

Anon

One has to be a bit careful as a private practice tax lawyer in terms of putting out political views on tax policy that are not in your clients’ best interests (remembering that this sort of change would surely also capture fund carryholders, accountancy and consulting firms etc)

Sir Chasm

Yes, there is a strong moral case to let fund managers dodge tax through carry arrangements,

The libertarian lawyer

This pre-supposes that tax is justified in the first place.

Nicholas

As a tax solicitor, I can say that not many people in the tax world that Dan Neidle that seriously.

He does some good stuff like highlighting ludicrous marginal rates at the £50k and £100k mark, but otherwise he doesn’t make any concession for high taxes harming growth and aspiration.

Tax world

Cool – and you are who exactly? Dan Neidle is goated with the sauce so probably doesn’t care about a mid-level associate at a Band 3 swamp.

FF Sake

Only a guy like Dan could use a term like “goated with the sauce”

Nicked

That you don’t know the marginal rates are between the 100k and 125k mark is worrying.

@Nicked

Do you even know what a marginal rate is? Your comment suggests not.

Nicked

I do. the point was obviously aimed at the ludicrous 60p marginal rate between 100k and 125k. Everyone has a marginal rate, but that it clear so out of sync that is distorts economic activity which is a real red flag when it comes to tax policy.

PS I suspect I know much more about tax than you do.

@Nicked

Google did some heavy lifting for you there, huh. You referred to “the” marginal rate in your first comment and suggested that a marginal rate doesn’t exist at £50k.

You’ve been schooled by Nicholas below and I suspect that you’re a bit less informed than you think you are.

Nicked

@NIcked, I missed out “ludicrous” at 4.01 when responding to the earlier post. I don’t think there has been any “schooling” if you read below. I think the 100k-125k anomaly is a big issue because it really distorts transactions and discincentivises . Nicked made a fair point about the marginal rate at lower levels being higher once you take into account child support impact.

Come back to us when you have zero personal allowance and your pension relief entitlement is capped at 4k a year. I suspect we might be in for quite the wait.

@Nicked

Not sure what my own personal allowance / pension relief have to do with this conversation, but ok.

Actually I’m 2PQE and at the top of the band that you’re talking about – but you can’t verify it, so not much point continuing the conversation.

Nicholas

The £100k marginal rate takes into account losing free childcare. If you need free childcare you effectively lose money when you earn £100k rather than £99k. Dan explains this very well on his blog to be fair to him, and it’s “worrying” you don’t know about that.

Nicked

More worried about the 60p marginal rate between 100k and 125k, but the reality everyone earning over 50k is being screwed over by the government because Labour and the Tories are fixed on angry basic Red Wall Brexit voters who think making 50k is earning a lot of money.

Nicholas

Fair. The marginal rate is actually c.70% when you take into account student loan repayments. It means that graduates hit a marginal rate of 50% when they earn over £50k. And a graduate that stays between £50-100k for their whole career will never actually pay off their loan. The tax burden is so high.

Anon

What’s really odd is how the tax bands stop at £150,000. Which means the effect of the budget is that someone on £150,000 has the same numerical tax increase as someone on £50 million. And therefore a vastly higher percentage increase in tax (the more you earn over £150,000, the lower your percentage tax rise). If this budget was supposed to share burden it’s patently failed.

Anon

You obviously pay sod all tax to make that sort of comment.

The top 10% of earners pay 60% of all income tax. The top 1% pay 29% of income tax. The tax burden has been heavily shifted from the average earners to high earners time and time again since 2008 and every budget has another dig. Income tax relief on earned interest, personal allowance abolition, pension relief capped at £4k, the list goes on and on of measures to increase tax take from the higher earners. And then of course there is stamp duty, which is basically now a huge tax on Londoners to subsidise house purchases in the North and Midlands.

And worse, if there is any tinkering with the top rate Labour squeal “tax cuts for millionaires” and Middle England laps it up. They seem too thick to work out that someone at the bottom of the 45p rate after yesterday is only taking home £74k after tax.

In the City

Has sharing the burden really failed?? Lets look at that…

Clacton-on-Sea: Average salary there is £23k, which is about £3,400 a year in combined income tax and NI. Say 55-60% of their population is working within that average figure which is about 30k-34k people. That’s £100m-115m in potential IT and NI revenue from residents of Clacton. I expect that is a very generous estimation.

Using the 47% rate in Neidle’s blog, consider the average PEP of Travers Smith (£1.2m, with reported about 58 full equity partners) and Macfarlanes (£2.5m with reported about 60 full equity partners), the total IT and NI contributions of the equity partners at these two firms is £100m-105m. Approximately 118 people are contributing the same amount to the tax base as a fairly sizeable town.

Let’s look at an individual level, using your example. Someone paying 50m, assuming they declare it, pays £23.5m in deductions using the same 47%. I am a commercial lawyer in the City. I will not earn a gross income of £23.5m in my lifetime, yet someone with this much declared income will pay that much IT and NI deductions in one year.

Some people earn incredible amounts, but they also contribute an insane amount to the government’s budget. How much more can we really ask of them before they leave for somewhere cheaper, work remotely with travelling in for client meetings, and contribute nothing to the local tax base.

Laugh R Curve

A major problem is that in a modern knowledge-led global economy the poorly educated will contribute less and less economic input and their pay will reflect that. That covers a vast swathe of provincial England, particularly in the heavily Brexit voting areas. Clacton, Preston, and the like are now fiscal black holes. London and the South-East pay a tax surplus and the rest of the country is running a consistent deficit (I know Clacton is in the South-East but economically that part of Essex is not and neither is Kent). Brexit was partly driven by the Leave campaign harnessing the front edge of that effect and falsely attributing it to the EU.

The other big problem is the Boomers. Someone has to pay for the spiralling health care, pension and social care costs of the Boomers and the Boomers have made it clear that they are unwilling to chip in, as the reaction to May’s social care proposals in 2017 show clearly. In fact the Boomers want more, more, more funded by the workers.

Taxing the income of higher earners more and more is the lazy way out, but it will be nothing compared to what will happen if/when Labour get in. For anyone earning over 100k when it comes to taxes, the only way is up.

Djed

Convenient how he didn’t make this argument until AFTER he retired from the CC partnership. Unless he voluntarily paid more tax before he retired, he should probably keep quiet

Current Partner

But partners differ from employees in other ways. We each contribute capital to the firm for working capital and if the firm goes under then we lose our capital contribution (which is a six-figure sum). Indeed, and unlike employees, we could literally lose our house as a result.

Capital contributions at accountancy firms tend to be much lower than at law firms.

So it’s swings and roundabouts.

Anonymous

How many examples are there of partners actually losing capital contributions? If you discount firms where there was horrendous mismanagement, none. And even without that, hardly any and those that lost out took plenty of cash out of the business. The “capital contribution” isn’t justification for the beneficial tax treatment.

Sir Casm

Apparently there is something called a limited liability partnership. You should look into those if you are worried about your house.

Ex-accountant

When I was an equity partner at a top ten firm of accountants, the firm arranged borrowings in my name to fund my capital contribution. When I left a few years later the loan was paid off by the firm. In other words the theory of me contributing capital was illusory.

Yes, in theory, had the firm collapsed with no funds available to repay partners’ capital (after creditors) we would have lost out. But (a) That is highly theoretical and (b) it’s hardly a reason for partners in larger firms to pay so much less tax than senior employees in other businesses.

Kev

So, did he pay extra tax, or more than what he was required to pay, to the Government then?

Pot

Kettle.

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