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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.

19th Nov 2019
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John McDonnell
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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.

Replies (10)

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By mdoodney
19th Nov 2019 12:07

Interesting article but I'm not sure I agree with the example used being described as 'tax avoidance', the gifting of property in a will such as this just looks like vanilla tax planning to me. I realise the boundary between the two can be blurred but this type of planning illustrates none of the convulated arrangements and 'odd' steps that I think of as associated with avoidance intended to achieve something not intended by Parliament.

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Replying to mdoodney:
Hallerud at Easter
19th Nov 2019 14:05

Avoidance is surely merely any planning, be it the will example above, using Isas, pension contributions, EIS reliefs etc, they all try to ensure a reduction in tax that would otherwise have been paid if a different path had been taken.

The fact that politicians conflate by terminology the more artificial constructs used by some with these more vanilla arrangements is more a problem for the politicians, in their use of language they remind me of Humpty Dumpty.

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Replying to mdoodney:
By vstrad
20th Nov 2019 14:56

Given the complexity of our tax code, how is the typical taxpayer, or typical accountant come to that, to know what Parliament intended? Politicians who complain about tax avoidance are just making excuses for their own failures to scrutinise tax legislation properly.

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By AndyC555
20th Nov 2019 08:50

" see how each of the political parties chooses to address tax avoidance."

Not so much this but how political parties choose to define tax avoidance.

My own view is that there is no such thing. If it's illegal it is tax evasion, if it isn't illegal it is tax compliance.

No-one considers driving at 30 mph in a 30 mph zone as "speeding fine avoidance". If those in charge want to change the limit to 20 mph, they can. But wailing about the 'morality' of this is nonsense.

It's true that there are many quirks and anomalies in tax legislation but if one of my clients falls the wrong side of those quirks or anomalies, I can't go to HMRC and bleat on about 'fairness'. When it suits HMRC, the law is the law, when it suits HMRC (or more properly when it suits politicians) the law is forgotten or over-ridden by cries of 'paying your fair share' and 'tax justice'.

What we now have is a campaign to define tax avoidance as the difference between what tax is due under the law and what tax some parties feel someone ought to be paying.

It's disappointing that the voices representing the accounting profession aren't defending this position with the same vigour that those attacking it are.

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Replying to AndyC555:
By Trethi Teg
20th Nov 2019 10:28

A mere "Thanks" to AndyC555 would not be enough. Probably the most sensible contribution I have seen on the subject of "tax avoidance" for years.

Agree 100%.

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Replying to AndyC555:
By raycad
20th Nov 2019 15:51

I would also endorse the comments of AndyC555. Everything these days seems to be a matter of perception; one might even say political correctness. It's no longer good enough to say "It was acceptable in the Eighties!"

The source of the trouble, in my view, lies in the provocative tax avoidance schemes used a decade or two ago, typically using offshore companies and loans that were not really loans, but there were dozens of variants. This led to the inevitable Government-led crackdown by HMRC, the introduction of DOTAS, the anti-Abusive Avoidance legislation, APNs and the contractor loan rules. If you keep poking the lion with a stick it will eventually attack you! The problem when you cast your net this wide, though, is that you then catch a lot of "small fry" in your net.

HMRC also played a blinder (depending on your view!) in what was blatantly a PR campaign against Avoidance (with a capital A) by co-operating with TV companies and, for example, allowing covert footage of presentations to be broadcast and the unconscionable (and illegal) release of the names of prominent footballers and other celebs, such as Jimmy Carr. Such has been the success of this "naming and shaming"campaign that these days being labelled a tax avoider is one notch above being an alleged paedophile! And we have all seen where that road leads to.

A few years ago I was involved in the planning and implementation of a plain vanilla salary sacrifice arrangement involving lorry drivers benchmark scale rates. We provided full details of the arrangements to HMRC's Clearance team and they issued formal clearance. A couple of years later, following a PAYE inspection the essential P11d dispensation was cancelled on the grounds that the haulage firm did not require receipts for lunches etc.

To cut a long story short our howls of protest eventually went right up to the Head of some part of HMRC's Counter-Avoidance division and she said to me "Well, it's avoidance, isn't it?" Clearance - what Clearance? (The irony is that HMRC's self-imposed requirement for receipts for benchmark scale rates has now been dropped!)

So here we are in 2019 where the shadow Chancellor, no less, seems unable to differentiate (or chooses not to) between aggressive tax avoidance and mere tax mitigation/planning of the kind listed in this thread. Some would say that's just reaping the whirlwind. But a sad state of affairs, nonetheless.

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Replying to AndyC555:
By Foxy
20th Nov 2019 17:14

'No-one considers driving at 30 mph in a 30 mph zone as "speeding fine
but people are, rightly in my opinion, annoyed when people drive at say 45mph in a 30mph and get off on a technicality.

As long as the Government aggressively pursue 'avoidance' by tightening the legislation rather than penalising people that use current (legal) avoidance methods, I can't see a problem.

At the same time, simplifying the tax system would make it a lot easier to identify avoidance and evasion, as well as reducing costs and wasted time. But I've yet to see a government of either colour pursue that strategy!

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Replying to Desert Orchid:
By Foxy
21st Nov 2019 21:52

The trouble with this example is 'where does it end?' A few hundred becomes a few thousand; full taxpayers, who also want to buy their children a present, are subsidising the (albeit relatively small) lawbreaker. I personally favour zero tolerance so everyone knows the score.

The issue with multinationals is difficult as it's clearly a combination of HMRC 'incompetence', the companies ingenuity and it being a really difficult problem to solve. Two solutions that may work are i) moving from CT to VAT and alleviating 'local' taxes such as Business Rates, and ii) harmonisation of EU tax regimes. Neither of which may be politically attractive to the government!

Perhaps you could ask your "the small self employed taxpayer" (or non-taxpayer) how they would solve the problem, if they feel aggrieved!

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By lynamn
22nd Nov 2019 10:22

No doubt the politicians concerned would have a different view from me as to whether the tax treatment of MPs' expenses amounts to a tax avoidance scheme (in part, not as a whole). And if they get more in pension that would be afforded by an equal contribution to a money purchase scheme, does that amount to pension contribution avoidance?

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Replying to lynamn:
By Foxy
23rd Nov 2019 16:22

It's always appeared archaic to me that they are not provided with an office, stationary, flat (if not London based), civil servant support staff* etc as they would have if they worked for a corporate. And have to use the civil service travel policy.

* Recruited, paid and managed as opposed to 'family and friends'.

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