Tax avoidance: Is it time to change the letter of the law?by
Tax avoidance may be legal but it is not good for the economy. Is this the moment for some aggressive law changes?
Once you start channelling your inner Jonathan Swift, it can swiftly (please forgive me) become highly addictive.
Having attempted to help the Chancellor of the Exchequer by putting forward a modest proposal about negative IHT last week, another bright idea that should assist him has sprung to mind.
As we know, Jeremy Hunt and Rishi Sunak are under constant pressure from some of their more extreme backbenchers to cut taxes. In reality, when these backbenchers enter the fray what they actually want is cuts to taxes for themselves and their mates i.e. the rich.
If the Chancellor really seeks to achieve the maximum benefit and the best chance of winning the next general election by cutting taxes, it would make far more sense to do so in a way that would attract the largest number of votes possible.
This could most easily be achieved by reducing or eliminating VAT on items particularly favoured by the hard-up or increasing the personal allowance by introducing a triple lock similar to that applied to the great benefit of pensioners.
However, in a spirit of generosity, this column now seeks to achieve the virtually impossible by setting out a proposal that can appease the hardline backbenchers by reducing taxes for the rich at the same time as either having a zero impact on the economy or, depending upon exactly how it is carved up, giving UK plc a net saving, which could be invested in more widely popular measures.
I have a cunning plan
If this sounds too good to be true, for once that is not the case. There is a slight problem for Messrs Hunt and Sunak, since the scheme may take longer than the 12 months that they have before the sword of Damocles threatens to leave them politically headless.
As Mr Hunt is constantly at pains to remind us, there would be no problem with tax cutting if the economy wasn’t in such a terrible state. Interest on debt plus a baffling inability to ramp up productivity or get millions of active (non-) workers to return has stymied the not-very-well-laid plans of mice and men.
So what is the solution?
A number of eminent barristers, not to mention highflyers in our own profession make vast amounts of money by taking advantage of what they refer to as “the letter of the law”.
For anyone who is not in the know, these expert practitioners spend vast amounts of time poring over tax legislation in an effort to identify drafting errors, inconsistencies and potentially plausible interpretations that frequently have little to do with the intentions of what Americans so quaintly described as the lawmakers.
In some cases, HMRC and, where necessary, the courts eventually determine that such attempts at tax avoidance have gone too far and decided that taxes must be paid, along with interest and maybe even penalties.
Even so, there is a culture that is willing to take a flyer on what most of us regard as pretty dodgy schemes, partly on the basis that they might just get away with the wild interpretations and also in the full knowledge that HMRC is so understaffed that it may never get round to picking up on what should be regarded as abusive tax avoidance or even tax evasion.
To add insult to injury, even when an issue is identified and back taxes are recovered, there is a limitation on the number of years of back taxes, if any, that can be recovered, meaning that the perpetrators might well have got a significant advantage, even if it is not as much as they had originally hoped for.
Just think how much wealthier the economy would be had artificial schemes such as converting salaries into loans or allowing salary sacrifice as a pure tax saving measure been closed when first identified.
There is probably a general consensus that many artificial schemes form a large part of a tax gap that HMRC assessed as £35.8bn in 2021/22 and some commentators believe could be three or four times that amount.
Change the letter of the law
This is an awful lot of money and where it is purely predicated on “the letter of the law”, there is a simple remedy. Change the law to put the interpretation beyond doubt – and do it quickly.
If this was implemented ruthlessly by a team utilising the greatest talents at HMRC and the Treasury, imagine how much money could be saved every year.
We all know that the likes of Amazon, Facebook and Google (aka Meta and Alphabet), together with many super-rich individuals have been playing the system for years.
This is where Jeremy Hunt could become Mr Even More Popular. If the strategy managed to bring in or save an amount of say £15bn, he could offer generous tax savings to his rowdy backbenchers. However, in effect, this would do no more than redistribute the wealthy’s wealth.
If Mr H wanted to pander to the common man as well, he could easily offer significant tax savings to rich and poor alike making everybody happy and increasing the prospect of continued public employment for another five years.