UKIP leader Nigel Farage says most tax avoidance schemes are “OK” after it emerged he set up a south Essex company that could shave thousands of pounds off his tax bill.
Mr Farage, whose party picked up a whopping 27 new council seats in recent elections in the county, uses a Leigh-based company called Thorn in the Side.
The move could potentially reduce his 2012/13 tax bill by more than £10,000.
The Ukip leader has previously said people who avoid tax are the “common enemy”
and branded rich people and successful companies avoiding tax “a problem”.
However, when confronted by the Echo about our findings he brushed off concerns.
HQ: Thorn in the side is registered to this accountants address
Mr Farage, who earns a £78,000 salary, plus allowances as an MEP, set up Thorn in the Side in 2011 to receive income of up to £4,000 a month from sidelines in media appearances and work on the lecture circuit.
However, he denies he is avoiding paying his fair share of tax.
He said: “This firm of accountants did a lot of business with City brokerage companies and was recommended to me.
“No one voluntarily pays any additional income to the Inland Revenue. Most forms of legal tax avoidance are OK, but clearly some are not.”
Mr Farage is the company’s sole director and shareholder and the firm is registered to the address of his accountants Buckley Watson, in Broadway, Leigh.
If he paid tax on the money as personal income it would be liable for a 40 per cent rate, plus national insurance.
By having money paid into a limited company it is subject to corporation tax of just 20 per cent.
Rehash: Nigel Farage
He added: “This is a rehash of old allegations.
“To receive money personally, I have to pay 40 per cent.
“Corporation tax at 20 per cent is for retained profits (kept in the company) only, therefore the criticism is ridiculous.”
In 2012/13, Thorn in the Side accounts show it had £62,825 in the bank and owed £21,548 to creditors.
It reported a profit of £45,488, plus Mr Farage paid himself a £7,500 dividend.
Taxed as personal earnings, this would have led to £21,883 tax and national insurance at the 40 per cent rate. But by paying corporation and dividend tax instead, the bill would be £11,497 – a total saving for the year of £10,386.
Register of interests: Mr Farage's EU record of the firm
A former Southend accountant, who would not be named, said paying wages into a limited company could undoubtedly reduce a director’s tax bill.
He said: “There is very little between tax planning and tax avoidance. Money can be built up as retained profits in a company and only subject to 20 per cent tax.
“Money can then be loaned to the director, which does not incur any tax, or taken out as dividends over a period at lower tax rates than income tax.”
Buckley Watson said its company was involved in “tax planning”, rather than “avoidance”
and has handled accounts for Mr Farage since 2003.
Widespread use: Spencer Watson
Spencer Watson, the firm’s founder, said using “personal service companies”
to reduce tax were common place.
He said: “They are used by millions of individuals in the UK to operate their businesses so as to protect their personal assets and to plan their taxes sensibly.
This s h o u l d not be confused with any form of tax avoidance.
“My firm does not promote or use any tax avoidance scheme and never has done.”
Farage Limited set up by Mr Farage is still paying off a £125,650 tax debt.
Tax bill: Farage Limited
Farage Limited, registered to Buckley Watson Accountants in Broadway, Leigh, was set up by Mr Farage, 50, and his commodities trader brother Andrew Farage, 47, in 2003.
In March 2011, HMRC lodged a High Court petition to wind the company up over the unpaid bill.
However, legal action was withdrawn five months later after the firm entered into a “voluntary arrangement” to pay it off in instalments.
Papers filed at Companies House last August show it is up to date with these.
However, Mr Farage came under fire over the company last summer after the Daily Mirror revealed soon after setting it up, he transferred his 33 per cent shareholding in the firm to an offshore trust (Farage Family Educational Trust) on the tax haven of the Isle of Man.
He apologised for “the mistake” and said he had never drawn anymoney from the trust.
Apology: Daily Mirror probe
In February 2012, Nigel Farage resigned as company secretary. It has been run by Andrew’s wife Wendy Farage, 40, since January.
Nigel Farage told the Echo: “The Inland Revenue are being repaid. Farage Trust, of which I was not a beneficiary, received no income from Farage Ltd. The Trust is dissolved.”
Using personal service firms to reduce tax is not illegal, but their use has been criticised as immoral and a way of avoiding tax.
By paying wages into a company rather than to the individual, they can pay corporation tax of 20 per cent on profits held by the firm, instead of the 40 to 50 per cent tax bands high earners would otherwise face.
In May 2012, Ed Lester resigned as chief executive of the Student Loans Company after it was revealed he was funneling his £182,000 pay and pension package into a personal service company.
No vote: ken Livingstone
Ken Livingstone was also criticised during the 2012 London mayoral race for using a personal service company. This came after he had said: “No one should be allowed to vote in a British election, let alone sit in Parliament, unless they pay their full share of tax”.
The BBC was heavily criticised for paying 3,000 freelancers through personal service firms.
Andy Silvester, of the Taxpayers Alliance, said: “Until the system is simplified, people will continue to look for – and find – ways to minimise their tax bill. Politicians need to fix the system, not look for loopholes.”