Monday, March 23, 2009

Sir Fred Goodwin's tax worries - right or wrong?

As pressure mounts on Sir Fred Goodwin to give up or give back some of the monies he is due to receive from RBS, the question arises as to what would be the tax consequences?

We are all taxable on the monies paid to us by our employers and pension providers. Assume you then choose to give some of that money back to your employer or to anyone anyone, what are the tax consequences?

Gift Aid is the only facility of which I am aware that provides tax relief for money that you voluntarily give away. So, unless Sir Fred Goodwin was to give 'back' some of his earnings and pensions to a registered charity (using the Gift Aid system) he would not secure any tax relief. And despite RBS current situation it is certainly NOT a registered charity.

This is an important consideration. Let me be clear that I am NOT defending the sums Sir Fred has received and is due to receive. I did note that that when first challenged he made clear that he would not "voluntarily accept a reduction in a pension entitlement" that had accrued over many years including prior to his joining RBS.

I took this to mean that if a legitimate legal challenge were made that he would accede to this. Not that he would have a choice then of course. It is also clear from more recent reports that he is aware that unless he is legally deprived of some of the monies involved his tax bill would remain unchanged.

Assume, for simplicity's sake that if you earned £10m you would have to pay £4.1m tax. You would only be able to give 'back' £5.9m without being out of pocket. The pressure on Sir Fred is to give back the gross amount (£10m in this example) in which case he would then be £4.1m out of pocket.

I have since seen it suggested that a concern over the tax bill is the reason why Sir Fred is unwilling to repay the lump sum that he received from his pension fund. He is quoted as saying that he would pay back the lump sum so long as he can get an assurance that the tax man won't come after him. He is concerned that tax would - in theory - still be due on the £2.7m payment, even if the money has been handed back. Whatever we might think about the sums payable to Sir Fred I must admit to some sympathy with this view. What about you?


  1. I could make many comments on the whole situation - but it's hard to take a balanced view on such large sums sometimes.

    On the one hand, the amounts of money are disgusting. However, that alone is not a reason for it to be taken off him - if there was clear proof that it had been obtained by deceit, then that would certainly be another matter.

    I was amused near the start of the debarcle when it was stated by our illustrious leader that he would use 'all legal means at his disposal' to get the money back.

    Then very shortly afterwards, comments were made along the lines of '.. or perhaps we should change the law SO we can get this money back..'. That's even worse than the money being lost in the first place.

    I actually believe that if the government is able to force Sir Fred to return the money, a dangerous precident will have been set - where the government acquire the power to say "No. You have earnt too much - give it back." - although the circumstances are not as simple as that.

    As to tax - well - I suspect if he were to hand the cash over, that would not be the end of Sir Fred's woes...!

  2. The rates of tax you used in your example need to be re-examined. Unless the pension pot is specifically protected, - and it may be,- there is a 55% charge where the excess over the lifetime allowance is drawn down. The life-time allowance for 2008/09 was £1.65 million. There is no NI on pension payments, even if the pensioner is under state retirement age.
    There was a Q&A on a related topic in reader's forum of Taxation 19 Feb: 'hello and goodbye'. There were two differing answers.

  3. Thanks Grumpy and Becky.

    Becky - the tax rates in the example are not intended to refer to the position re pension payments

  4. Of course GB & AD could just include a retrospective clause in the budget to say that :-
    Bonuses from failed banks where they are now cotrolled by the taxpayer should have tax rates of 95% applied to them.
    they could also withdraw the MP second home concession from anybody who couldn't prove that the second home was being occupied and used solely for the MP's occupation (or tax it at 98%)

  5. My reading of the early press articles was that there was an expectation that HMRC would be expected to give back the corresponding tax already paid if Goodwin gave back part of his pension. We will know that this waiver/refund of liability is now outwith the powers of the Revenue, since Al Fayed, but it would not surprise me that Goodwin and his advisers would still be arrogant enough to expect a special case to be made.

    We also need to remind ourselves that retrospective (or retroactive) taxation is perfectly possible, but is not (even with the current shower's history of retroactive law making) generally enacted because it is contrary to the rules of good law. In political speak, it risks loses votes.

    But, in this instance, who is going to complain about a 100% tax on bankers or, better still, a 100% tax on Fred Goodwin's RBS derived pension. The tax collected will not even scrape the surface of public finances but it would cheer us all up.

    The current government could impose such a tax, and be free of the risk of challenge.

    The possibility of using tax law to achieve a political quick win must have crossed the minds of those advising on the issue, but my guess is that they will continue pussyfotting about because Goodwin and his ilk probably have too much dirt on the politicos.