Taxgate - Round V – The Law is the Only Solution

With HMRC closed by strikes and a 38 year backlog in tax collection the time has come to introduce simple, effective legislation to prevent abuse of benevolent tax breaks.

Following a full week of Taxgate revelations, HMRC and Treasury should both be ruefully licking their wounds.

While high-profile users of schemes such as Jimmy Carr, Gary Barlow and Terry Venables have had a little bit of unwanted publicity and must expect to face lengthy tax investigations, the government departments have been lampooned and lambasted by The Times on a constant basis.

Some of the attacks are unjustified. However, it has to be said that government policies that will eventually see a halving of revenue resource are now being shown to have a devastating negative impact on UK plc. This will be made clear by today's strike that is likely to see the closure of the whole of HMRC.

Whatever they might like to say, the taxing authority's inability to tackle tax avoidance schemes and simple tax evasion is apparent to anybody working in the industry. This means that whereas in America, taxpayers and those who do not pay tax are quaking in their boots at the prospect of a visit from the IRS, in many cases their British equivalents are laughing all the way to the (offshore) bank.

This morning The Times suggested that 9% of those earning over £10 million last year were paying tax at the equivalent to the basic rate, 20% or even less. Maybe this is a great encouragement to free enterprise but then again …..

It was chastening to learn in The Times on Saturday that there are apparently enough tax cases awaiting tribunals to last for the next 38 years. If this weight of information does not provide a wake-up call to George Osborne and David Gauke, it is hard to know what will, other than a general election defeat.

Whether that would help is a moot point, considering the fact that few if any of these problems have arisen in the couple of years since the Lib-Con coalition came to power.

Is very hard to see how the government can justify its pursuit policy of cost-cutting. The National Audit Office has already issued one damning report and it is time for them to go further and carry a top to bottom analysis of the potential income and expenditure of HMRC.

The obvious conclusion that they are likely to reach is that a relatively modest amount of initial investment in good staff will bring back ten times as much income within a few years. This is made obvious by stepping back and looking at what was revealed last week.

Your columnist enjoyed a weekend in rainy Manchester and after spending the obligatory two seconds watching the Olympic torch stumble by, had the opportunity to explain to a relative with no experience of the field how some of tax schemes identified by The Times operate.

The reaction of the typical woman on the Manchester tram says a lot about our current tax legislation, if not the morality of those that take advantage of it. But coldly, it is very hard to explain the following without getting incredulous response.

  1. Someone can choose between having their salary paid directly into their bank account or having it paid to a separate company/trust which lends it to them permanently.

In the first case, they will pay a normal 40% or 50% tax rate; in the second that they will pay around 2% tax. The fact that this is already seemingly covered by legislation that was not being applied adds confusion.

  1. An individual invests money in the struggling British film industry and gets a tax break. This is on the basis that they will give the tax back a few years later having helped to see a film created.

For some not entirely apparent reason, they will get tax relief on far more than was invested and this caused my relative to ask some rather silly questions.

When she discovered that just before the tax was paid back, the investor shifted the money to Luxembourg removing the tax charge forever this caused her innocent jaw to drop.

  1. Somebody working in the music business for a minimum of 10 hours a week is entitled to a tax break if they make an investment to boost their industry. This seemed entirely laudable to my relative. However, on being told that the person working in the music industry does not work in music industry but gets a tax break anyway once again she was struggling to understand why this was not a case of fraud.

It is likely that some of those working in the (forever besmirched?) tax industry understand the schemes in the spotlight far better than my relative (or me) and can immediately see why there is no problem with any of these structures.

As if all of this was not bad enough, she was somewhat surprised by the need to wait up to 38 years to get final court decisions (and the unpaid tax) in some cases involving tax avoidance schemes.

The strange thing is that almost everybody involved in creating tax avoidance schemes it seems desperate to emphasise their keenness to operate within the wording of the law.

Having worked for a committee of the Office of Tax Simplification and railed against the current government for its tendency to introduce pieces of legislation on a knee-jerk basis, I have sadly come to the conclusion that the time has come to call to introduce yet more legislation in order to level out the playing field in order to eliminate what sound like examples of cynically abusive tax avoidance.

Mr Osborne now is the moment.

You can follow the trail in earlier articles

Is Tax Avoidance Morally Repugnant or Good Business Practice?

The Times v. The Tax Avoiders – Round II

When Does Tax Avoidance Become Tax Evasion?

10 Controversial Conclusions

Comments
ShirleyM's picture

Who advises the government?

ShirleyM | | Permalink

Please excuse my ignorance, but who creates the tax laws? I cannot see the average MP having the nouse (or the intelligence) to write waterproof laws, so they must be obtaining professional guidance and the MP's accept it at face value (with a little tweaking maybe).

So ... who provides the guidance, and why are there such gaping holes in it? Will these advisors be hauled over the coals for providing such abysmal advice, or is there an ulterior motive for the holes?

The Law

Philip Fisher | | Permalink

Shirley

In theory, it is the Government that writes new legislation. In the case of tax law, the actual writing would presumably be carried out by a parliamentary draftsman, briefed by representatives of the Treasury. You might also expect HMRC to have input most of the time.

Nowadays, the draft legislation is usually published for a three-month consultation period so that you (or anyone else) could point out any obvious errors.

Quite why a process like this leaves so many loopholes is unclear but I would hope that your conspiracy theory is not the reason. The more likely answer is too few staff with overly tight deadlines.

Other readers may be able to give a more detailed answer?

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