James Tillotson FCA takes a sideways look at the controversial topic of tax avoidance.
The news was awash again with reports of alleged aggressive tax avoidance. This time the BBC Radio 4 Today programme claimed to expose Anderson Group's exploitation of the Employment Allowance through the creation of limited company vehicles for its recruitment agency clients. It got me thinking, or re-thinking, about the topic of tax avoidance.
Closer examination of the details though raises some interesting questions. So we thought we'd write about it because it’s good to consider alternative opinions carefully. Here's a summary of an interesting, if different, perspective.
How tax avoidance has been defined
The avoidance argument used by so many politicians is essentially one centred on principle. They argue that people who live and trade in the UK have a moral obligation to pay their fair share to fund, among many other things, essential public services. When people pay less than what is deemed reasonable, the hit to the government's coffers means institutions like the NHS and schools then suffer.
A duty based on principle and conscience is all well and good but when we live in a system that operates by rule of the law of the land, where exactly does that stand? Search the web and there are numerous definitions of tax avoidance. This one from theFinancial Times Lexicon is a good starting point, “Tax avoidance is a practice of using legal means to pay the least amount of tax possible.” Short and simple.
An argument against tax avoidance existing
In an article for the Telegraph, Richard Dyson (the Personal Finance Editor) asserts that there is nothing wrong with tax avoidance. In his view it's a perfectly legal thing to do and in fairness, he may be on to something. After all when we wrote about the HSBC scandal an important point we noted was, “many (but not all) of the bank’s British customers cited in the BBC documentary may not have actually done anything legally wrong.”
As you will see later in this post, legality is the crucial point here. Dyson’s opinion is the avoidance issue described by politicians is their own fault, caused by successive governments who have left us with an overly complex tax regime that creates more issues than it solves. He describes it as a perfectly legitimate thing that we all do.
ISAs, pensions, tax free National Savings accounts and claiming back on expenses in your tax return are according to Dyson, legitimate examples of reducing your taxable income that fall under the header of avoidaing tax. These schemes were after all created by the state, meaning they're neither immoral nor illegal.
He concludes, somewhat controversially, that politicians have deliberately confused tax dodging with evasion (defined simply as escaping the payment of taxes through illegal means) in order to tax the wealthy so that the government can plug the gap between public spending and its tax take – the deficit.
However, has Dyson based his views on too narrow an interpretation of avoiding tax?
A more comprehensive definition of tax avoidance
Let’s revisit the definition because based on the above it poses an interesting question. Where do tax planning/mitigation stop and where does tax avoidance start?
Thankfully, The Lexicon goes further, “Tax avoidance is using the tax law to obtain a tax advantage that the government never intended. It frequently involves contrived, artificial transactions that serve no purpose other than to reduce tax liability. Tax planning involves using tax reliefs for the purpose for which they were intended”.
This meaning suggests that avoidance involves elements of bending the rules or acting in a manner that is not within the spirit of the regulations - not proceeding in a manner consistent with the intention in which the law was written. But does that make it illegal? As Dyson points out, “There may occasionally be a fine line between aggressive avoidance and evasion, but such circumstances are limited.”
Why tax avoidance might not actually happen
This is where Tim Worstall’s blog post for the Adam Smith Institute comes in, there is no such thing as tax avoidance. Essentially placing your money in a pension or not declaring income are both attempts to avoid paying tax. HMRC and the European Court of Justice ultimately then judge which methods are and aren't successful in achieving this.
Consequently the rulings of these institutions means once they've passed verdict, you’re either obeying the laws of the land or you're not. You’re either legally paying the right amount or, you’re illegally evading tax. If you’re acting within the law then you’re paying what Parliament has decreed you’re supposed to honour.
This all means bending the rules or, not operating within the spirit in which they were written is irrelevant because you’re either on the right side of the law or, operating outside of it based on what has been legislated for. If that is the case then you can’t be avoiding anything, can you?
The content of this post is up to date and relevant as at 04/06/2015.
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