George Osborne was left 'shocked' after an analysis of the tax returns of multi-millionaires which he personally ordered found that they are exploiting loopholes to pay little or nothing at all.
A confidential study by HM Revenue and customs found they are using aggressive avoidance schemes to reduce their income tax rate to an average of 10 per cent - less than half the level paid by the average Briton.
The Chancellor personally studied the “anonymised” copies of the tax returns submitted by some of the country’s wealthiest citizens which showed some people are able to avoid paying income tax entirely.
The analysis convinced Mr Osborne that millionaires must pay a minimum rate of tax equivalent to about a third of their earnings, which has been described as a “tycoon tax”.
Mr Osborne told The Daily Telegraph: “I was shocked to see that some of the very wealthiest people in the country have organised their tax affairs, and to be fair it’s within the tax laws, so that they were regularly paying virtually no income tax. And I don’t think that’s right.
“I’m talking about people right at the top. I’m talking about people with incomes of many millions of pounds a year. The general principle is that people should pay income tax and that includes people with the highest incomes.
“I’m not allowed to be shown the names of the individuals but I’ve sat with the most senior people at the Inland Revenue, the people who run some of the high net worth units there. They have given me examples, anonymised examples, and so we are taking action.”
The report found that Britain’s 20 biggest tax avoiders have used three main loopholes to legally reduce their their income tax bills by a total of £145 million in a year.
Two thirds of them wrote off business losses in one of their companies against their income tax bill, reducing it by as much as half .
Several of them offset the cost of business mortgages or borrowing on buy-to-let properties against their income tax bill, while others took advantage of relief on donations to charity.
Mr Osborne is now determined that millionaires will have to pay tax of more than a third of their earnings.
From next year, the total amount of tax relief that any individual can claim will be limited to 25 percent of their income or £50,000 whichever is greater.
However, the proposal has sparked controversy as it will lead to restrictions on philanthropic giving which charities have claimed will cause major donations to stop.
Mr Osborne insists that he wants to protect and encourage philanthropy, but Treasury sources say the system is open to abuse as people are giving money to foreign charities which they have often established themselves.
The Chancellor said: “I was very clear in the budget that we are specifically looking at making sure we are still encouraging philanthropy and charitable giving. But that is a specific issue we can deal with.”
The Conservatives and Liberal Democrats agreed to cut the top rate of income tax from 50 percent to 45 percent next year after Mr Osborne agreed to the crackdown on tax avoidance.
Mr Osborne said: “I thought the 50p rate was a classic example of spin over substance. You produce a press release which says Britain has a 50p tax rate while you preside over a tax system where some people are paying zero percent tax.
“I’ve come up with a budget that has reduced the 50p rate to 45p, so we don’t have the highest income tax rate in the world. But I’ve also asked people who are currently paying zero to pay income tax.”
The disclosure that Mr Osborne is now studying individual’s tax returns if likely to add to the pressure on ministers to publish details of their own financial affairs.
The Chancellor told this newspaper that he was “very happy” to consider publishing his tax return but the proposal has sparked a Cabinet backlash.