Tax avoidance and politicians
Philip Fisher picks up on politicians' desire to attack tax avoidance and starts to ponder what might be in the political manifestos.
On this morning’s Today Programme, the erstwhile Shadow Chancellor of the Exchequer John McDonnell, a man who could be Chancellor of the Exchequer before Christmas, casually dropped into conversation the seemingly anodyne phrase “We must attack tax evasion and tax avoidance”.
In doing so, one of the most senior figures in the Labour Party echoed politicians on both sides of the House of Commons, who really should know better.
In the past, Conservative Chancellors of the Exchequer George Osborne and Philip Hammond both went out of their way to attack what they tended to categorise as “abusive tax avoidance”, while not going quite as far as Mr McDonnell.
No accountant should need the Tax Avoision 101 Class, but here goes.
Tax evasion is effectively fraud and nobody would seek to deny that it should be stamped out. A simple example would be an individual who failed to declare the profits from their activities as a self-employed accountant, thereby evading tax.
At the other end of the scale, tax avoidance is a legitimate means of minimising a taxpayer’s liabilities. For example, writing a will that leaves all of one’s property to a spouse, rather than to one or more children is a perfectly acceptable type of tax planning, even in the eyes of the most radical of tax reformers.
Abusive tax avoidance does not actually exist, even though rather than introducing a General Anti-Avoidance Rule, this country chose to water it down to a General Anti-Abuse Rule. However, this rule is so limited by a remit that only includes arrangements “beyond anything which could reasonably be regarded as a reasonable course of action” that it is almost never used.
This doesn’t stop Chancellors and, for that matter, Prime Ministers, from railing about the need to cut out what they regard as abusive practices and apply taxes in what is at best a grey area. Realistically, any government wishing to cut out sophisticated avoidance schemes that are not wholly unreasonable, will need to change the law.
It will be fascinating to see how this debate plays out over the next few weeks. John McDonnell’s comments on the Today Programme were made in the specific context of the wealth gap between this country’s billionaires, many non-domiciled, he might well have observed, and the millions who are living below or very close to the poverty line.
The party manifestos are due to emerge over the next few days and it is almost certain that Labour will propose tax rises designed to attack large corporates and independently wealthy individuals.
Despite the fact that the Conservative Party prides itself on containing figures who subscribe to the most recent Chancellor’s self-description as “a low tax guy”, they have already apparently backed away from a commitment to raise the threshold for higher rate taxpayers. At the same time, they have announced what is, in effect, a 2% rise in corporation tax next year.
In that the Lib Dems, the Scottish Nationalists and the Greens are all looking to balance budgets, there has to be every chance that they too will consider raising tax revenues.
Coming back to the central issue, this writer is eager to see how each of the political parties chooses to address tax avoidance.
At one end of the scale, it will come as no surprise to find that any or all of them seek to stamp out evasion even more strongly than in the past. Accountants should applaud such measures.
At the other, there could well be plans to turn certain examples of tax avoidance, particularly those regarded as “abusive” into evasion as a result of tweaks to legislation.
The sad fact is that, in the overall scheme of things, the multinationals who choose to pay virtually no tax in the UK will almost certainly manage to defend themselves against any kind of attack. So will those billionaires that Mr McDonnell would love to fleece. It is a sad fact of life that some, but by no means all, of those in the middle (i.e. us) will almost certainly end up on the wrong end of whatever is proposed.