Ed Miliband
Ed Miliband said a Labour government in 2015 will clamp down on tax avoidance to raise more than £1bn Reuters

Doubt surrounds the funding of the Labour leader's flagship NHS policy as finance experts question the lack of detail and potential "unintended consequences" in his plan to close tax loopholes to pay for it.

In his speech at the Labour annual conference, Ed Miliband pledged £2.5bn (€3.2bn, $4bn) of spending on the NHS for a "Time to Care Fund", which would be used to hire tens of thousands more staff, such as nurses and GPs, if his party wins the 2015 general election.

In line with a commitment to deficit reduction, Miliband said this money would not come from government borrowing and instead be funded by tax revenues.

This cash would come from closing tax loopholes for hedge funds and companies, a "mansion tax" on homes worth over £2m and a new levy on tobacco companies. The mechanics of these proposed changes are yet to be revealed but from the crackdown on tax avoidance alone, Miliband claimed he could raise £1.1bn.

"They seem to have come out with a mixture of things which aren't actually a problem, things that have already been fixed, and things which are going to mess up lots of other business that is going on," Patrick Stevens, tax policy director at the Chartered Institute of Taxation (CIOT), told IBTimes UK.

"So let's have some more details. It's not as if I'm trying to do down Mr Miliband. I'm not wanting to have a go but if you're claiming you're going to raise £1.1bn... and you're doing it through tax avoidance crackdowns – and I'm in favour of tax avoidance crackdowns – it's got to make sense somehow."


One of the "loopholes" in Miliband's sights is the Eurobonds exemption, which reports suggest he believes as much as £500m can be raised by scrapping it.

This is where companies avoid a 20% tax from HMRC on debt interest payments by using a 1984 law that allows this levy to be avoided if the money is routed through a recognised stock exchange.

The exemption is used by offshore-listed private equity firms that own companies operating in the UK. They lend money to the businesses they own, which then pay it back – often at high interest rates – and so whittle down their taxable profits.

But Stevens said previous governments had looked in detail at the Eurobonds exemption and decided it should be kept in place because it was an efficient way of running the tax system.

"That's not what I call a loophole, it's a deliberate government intention that should be there," he said.

What is a Eurobond?

A Eurobond is a bond denominated in a currency not native to the issuer's home country. Eurobonds are commonly issued by governments, corporations, and international organisations.

Source: InvestingAnswers

One of the reasons is that it makes it easier and cheaper for firms to borrow money in overseas credit markets because they don't have to pay a tax on interest payments, an ability to raise capital to invest that could be hampered if the exemption disappears.

And the second is that other countries offer the same exemption on Eurobonds, so even if the UK scrapped it, its own firms would still not pay the tax – meaning HMRC would not be losing out on any potential revenue.

"So if you've got in some Caribbean island a private equity fund that is receiving interest from an investee company by way of the Eurobond exemption ... most of the investors ... will often be based in the US or some other high-tax country," said Stevens, who spent 16 years as a partner at accountancy giant Ernst & Young.

"They could get exactly the same exemption because they are in the treaty countries. Therefore, the fact they use the Eurobond exemption [in the UK] is simply a convenient way of them getting what they would otherwise be entitled to."

Regina Borromeo, a money manager at Brandywine Global Investment Management LLC, told Bloomberg it was difficult to know how to react to Miliband's stance on Eurobonds as it "could be just political posturing".

"With the UK elections approaching, this type of statement adds to concerns of more political headlines to come that could affect the bond market," she added.

Unintended consequences

Miliband also plans to scrap a tax relief for hedge funds that exempts them from stamp duty when they transfer shares to an intermediary, such as a broker, as part of a financial transaction.

But it isn't just hedge funds who use this exemption. Pension funds, financial institutions and ordinary investors also benefit from the relief, the abolition of which threatens to disrupt and penalise the savings of ordinary consumers.

Russell Morgan, financial services partner at EY, told IBTimes UK the intermediary tax relief is "a fundamental feature of the way in which UK shares are traded in the market as it prevents stamp duty charges hitting market-making and other intermediary activities".

"The direct tax impact of changing the rules to restrict the relief will therefore fall mainly on banks who trade with hedge funds and other investors through derivatives, but indirectly it would end up with for investors as the banks would look to pass the cost on," he said.

"It is impossible to know exactly how the market will react to such a change in transaction costs, but it may be that trading volumes simply drop. A big reduction in transaction volumes could put pressure on the City's profits.

"A good comparable example would be to look back at what happened when Italy introduced a tax on financial transactions, resulting in trade volumes falling dramatically. There could also be a missed opportunity to capitalise on business expected to be divert to London if the 11 EU states that are considering introducing the Financial Transactions Tax goes ahead."

He added: "The real stinger is that it would indirectly hit UK pensioners whose pension funds invest into hedge funds."

The CIOT's Stevens fears ending the relief would be "distinctly untargeted" and that a lot of thinking has to go into changing the law.

"The jury's out on whether that would be a good change in the law, bearing in mind unintended consequences ... I don't know to what extent you are going to be able to target who you are going to hit in this way," he said.

"Most people that I talk to suggest that it is quite a difficult thing to do. I don't believe [Labour] have thought it through in any kind of technical terms and so my bottom line at this point is firstly if they are intending to make changes in this way, it will have much wider consequences than hedge funds.

"And it may be that it is more counter-productive to do this kind of thing bearing in mind that most of us want to try and keep the pension fund industry on track to provide for everybody's pensions."

Umbrella companies

Miliband also wants to crush the abuse of "umbrella companies", which are firms that carry out the payroll responsibilities for agency workers on behalf of recruitment firms. These have been used to exploit tax relief for expenses and national insurance through inflated and false claims.

But HMRC already has the powers to pursue instances where it believes umbrella companies are being abused for tax avoidance purposes, said Stevens.

"Over the last couple of years, there have been huge changes to the law in umbrella companies to enabled HMRC to well and truly crack down on them," he said.

"HMRC seem to have, as far as I can tell, almost all of the powers they want to deal with umbrella companies. So what additionally is likely to be done I honestly don't know.

"They've got to get HMRC to go out there and do them over, which they are gearing themselves up to do, but what a new government would need to do in addition I honestly don't know."