Tax Avoidance Boon or Bane

The recent Times series on tax avoidance has triggered a huge spike in coverage of the tax affairs of the rich and famous.

David Cameron’s condemnation of Jimmy Carr’s tax arrangement as ‘morally wrong’, presumably based on newspaper headlines, was arguably unwise, and may well come back to haunt him as open season is declared by the press on Tory donors tax planning arrangements.

Rather ironically in the same week he welcomed the news of the introduction of a 75% tax for high earners in France:

“If the French go ahead with a 75% top rate of tax we will roll out the red carpet and welcome more French businesses to Britain and they will pay taxes in Britain and that will pay for our health service, and our schools and everything else.”

A more sure footed Ed Milliband made the following observations when responding to Cameron’s comments:

"I'm not in favour of tax avoidance obviously, but I don't think it is for politicians to lecture people about morality.

"I think what the politicians need to do is – if the wrong thing is happening – change the law to prevent that tax avoidance happening and I think that is the right course the Government should take.”

However, the mood music of popular opinion can sometimes be irresistible for politicians. The same Ed Milliband last year pronounced that:

“The bankers who took millions while destroying people's savings: greedy, selfish, and immoral; the MPs who fiddled their expenses: greedy, selfish, and immoral; the people who hacked phones at the expense of victims: greedy, selfish and immoral.”

The next Prime Ministers Questions with the two UK leaders could be quite interesting!

Whilst few will have much sympathy with Jimmy Carr, given his TV antics lampooning tax avoidance; Mr Milliband is right, individual judgement of personal tax affairs is a matter for tax administrations and not the court of public opinion.

The tax code in the UK is extremely complicated with Tolley’s Tax handbooks now reputedly running to some 11,500 pages of explanation!  Given this degree of complexity it is not that surprising some advisers seek to leverage this to reduce their clients tax bills.

The situation is further complicated by successive UK governments introducing tax incentivised schemes to encourage investments into key industries, such as films and creative media; the subject of the recent controversy, which earn billions for the UK economy, but are often seen as high risk investments.

Of course the difficulty with introducing morality into tax is one man’s tax planning is another man’s “aggressive” tax avoidance.

When we buy duty free we are avoiding tax, invest in a pension or an ISA we are avoiding tax, accept a benefit in kind rather than cash, we are avoiding tax, run our affairs through a company utilising dividends as opposed to paying income tax and national insurance we are avoiding tax, and so it goes on.

Neither is tax avoidance the privileged domain of big business or high net worth individuals.

Danny Alexander, Chief Secretary to the Treasury recently made an announcement in Parliament, having identified that large scale public service tax avoidance had been uncovered through an HM Treasury Review:

“The review has identified over 2,400 off payroll engagements in central Government departments and their arm’s length bodies that were live on the 31 January this year.

That is an unacceptable number of off payroll engagements given the lack of transparency on the tax arrangements of the contracts.

Mr Speaker that lack of transparency cannot continue.

Today each department involved is publishing on their website a list of off payroll appointees who, as of 31 January, were engaged at an annual cost to the department of more than £58,200.

The majority of cases relate to technical specialists – in fact over 40 per cent relate specifically to IT specialists.”

It seems that many of these arrangements have been used purely to avoid tax. The unfortunate outcome is that new legislation may be passed which would also hurt the private sector, potentially impacting on employment flexibility and costs, due to public sector transgressions.

The recent HMRC Tax gap analysis coupled with the revelations contained in the HM Treasury review indicate quite clearly that the UK’s issues around tax avoidance are very much homegrown.

Where do we draw the line then between what is acceptable and what is not?

Despite acres of comment on the subject the current system for deciding this is quite sensible and is stacked in favour of the tax collector as opposed to the tax avoider.

Pretty much all of the tax planning schemes that have made the headlines recently are subject to Disclosure of Tax Avoidance schemes (DOTA’s) regulation.

The DOTAS regime allows HMRC to keep up to date with what types of tax avoidance schemes are in circulation. This provides the opportunity to review and if necessary, amend legislation to block any scheme that the government considers aggressive and unfair.

HMRC can rule schemes offside and the only way a promoter could challenge this would be to go to court, which is risky and expensive. This check and balance is to be further strengthened as a result of the work on a General Anti Abuse Rule or GAAR undertaken by Graham Aaronson QC on behalf of the UK government.

The idea would be to make even clearer what would be offside and to give greater powers to address transgressors. Tools are available to tackle abusive tax avoidance and they are going to be strengthened.

So why is this issue arousing so much public interest?

In a climate of recession and cutbacks everyone wants to feel that all sections of society are making a fair contribution.

But this is where we get into some difficulty; fairness and moral judgement are subjective, they are a matter of personal opinion and are coloured by our personal view of the world.

Graham Aaronson QC in his study on tax avoidance made the following observation: 

“My approach to taxation, tax avoidance and the question of whether a GAAR would be beneficial for the UK is based on the premise that the levying of tax is the principal means by which the state pays for the services and facilities which it provides for its citizens. “

But should there be any limits on what the State demands and does the citizen have any right to order their affairs to pay the tax legally due and no more?  When framing an answer to that question how many people appreciate for example that the top 1% by income already pay more than a quarter of all income tax in the UK, and the top 10% pay almost 50% of all income tax collected. In contrast the bottom 10% by income pay just .50%.

The answer to those questions will probably be quite different according your world view and on which end of the political spectrum you sit. I would suggest that it may be affected too by whether you, or someone else, is paying the tax.

One view is as described by Simon Jenkins in the left leaning Guardian newspaper:

“Modern tax theory is rooted in more than revenue raising. It adheres to fairness, redistribution and incentive. For most people, paying taxes defines their citizenship. Whether or not avoiders are in the same class as "benefit cheats" is moot: most cheats have legal "sickies" as most film companies have brass plates in the Caymans. What is surely beyond dispute is that refusing to pay taxes in a shared community is anti-social, unfair and infuriating.” But Ryan Bourne writing for the Centre for Policy Studies, a right wing think tank expresses a different point of view:

“Those who argue the tax avoiders are immoral are talking about a particular form of tax avoidance: stuff that other people do which they, personally, disapprove of. We thus risk every case being discussed to death by the social conscience of the m