The public's double standards over tax avoidance and tax evasion

Outrage
To be in Britain in 2012 means that it is quite impossible to avoid strident headlines about wealthy and earning individuals avoiding tax by utilising schemes. The case of the comedian, Jimmy Carr, has attracted particular publicity and it has led to confusion among not only the public but also journalists as to the difference between avoidance and evasion of tax.

In case anyone here is still confused. “tax avoidance” means avoiding paying tax by perfectly legal means if often rather arcane and somewhat artificial. “Tax evasion” means failing to declare to HM Revenue & Customs income, gains or commodities or services which should be taxed according to the law. Therefore tax evasion is illegal.

Avoidance of doubt

I believe my position on tax avoidance is clear.  and I am aware of my own responsibilities as a provider of taxation advice.  However, may I spell it out a bit further? I do not recommend any tax avoidance scheme (a cunning plan devised by some specialist provider), and will not introduce my client to any arrangement which has any degree of artificiality. If one of my clients is approached by someone else then I will ensure she or he understands the risk and pain of close scrutiny by HMRC before making a decision.

I do not go as far as the politicians in saying that tax avoidance is morally wrong. In the case of large corporate entities, the duty of the directors is to their shareholders, and that means preserving as much of the pie as possible to feed those who have invested their money in the business and incidentally in the livelihoods of their employees. There is an awful lot of confusion and strident headlines from irresponsible or plain ignorant journalists about avoidance. Most recently I saw a large corporate which had been in the news over a tax avoidance issue being accused of further avoidance because it had made a real, not artificial loss, and therefore had no profit to tax.

I suppose in defence of journalists, many are being bombarded with material from so-called experts who may be campaigners with bees in their bonnets.

Morality
Really, in respect of money which is legally ours, the moral judgement as to its use is in our own hands. I may not respect someone who makes no contribution to society, but I will not set myself up publicly to pronounce on moral issues. I have known vastly wealthy and successful people who gave absolutely nothing to charity, and of course personally I thought they should. Many years ago I also knew a very famous person who gave a great deal of his money to charity in a very low-key way. I wish the public knew what a really good and decent person he was (and a very nice man anyway), but I don't think he would have wanted the public to know, quite apart from my being bound by confidentiality. My lips are sealed.

Of course I do help my clients to pay less tax by claiming every possible relief and arranging their affairs to pay less tax in a way “that Parliament intended”, which is a phrase becoming popular with tax judges.

Shady customers
The public is swept along by the media hysteria about avoidance and yet there is still so little about tax evasion. Tax evasion is illegal. Every time someone offers to re-felt your flat roof or re-surface your driveway with a really good discount for cash, that means they will probably not declare the income in their tax returns. Of course, being the dishonest fraudsters they are, that means that if you have a problem later, you probably won't be able to get them back to fix it.
Some of these driveway people actually don't believe in paying any tax at all and this lot robbed the Exchequer of over half a million pounds which is our money. If they don't pay their share, we honest taxpayers have to pay more. This dodgy plumber also got caught too.

Accessories to fraud?
As long as the public aids and abets fraudsters by paying them cash, everyone else loses out. It is likely that far more tax is lost to dishonest small traders than in respect of legal tax avoidance by a far smaller number of wealthy individuals.

In the end we can all do our share of ensuring that everyone pays their “fair share” of tax, and that means not parting with bank notes when a cheque or credit transfer or payment be card would normally be appropriate. Just because a few avoid tax legally is no excuse for assisting dishonest people to dodge tax, because they might as well be nicking that tenner from your back pocket.

Scary tax planning in a changing world

I cannot remember a time when the tax regime in Britain was in a position of such flux. As we know the cost of the banking crisis and the recession has cost the government, or at least UK plc dearly. There is a huge deficit to be made up, exacerbated by the futile policy of reducing VAT from 17.5% to 15% for thirteen months. There is talk that after the election whoever is in power will have to raise VAT to 20%. There is not much we can do to mitigate this in advance, and from the Government's point of view, indirect taxation on sales is inescapable. We are all paying VAT on a daily basis, and we have to hope that any currently exempt or zero-rated goods and services will not have a charge imposed.

At these sorts of times and particularly in advance of an election the parties find themselves painted into a corner. Are they honest and admit that services will have to be cut and that charges will have to be made in the NHS and in education, or do they keep quiet and get on with doing what they perceive is necessary when in power after May (we still assume the election will be in May)? Will taxation be raised even more after May?

Regular readers of this blog will know that my view is that increases in taxation are counter-productive because they encourage dishonesty. I don't like it, but that is the reality, especially in the cash businesses HMRC hate, but frankly are not equipped to do anything about. Those professionally represented businesses have a close eye kept on them by the likes of us, but many who are not and particularly those who are not even registered at all (the black economy) are very hard to catch. This does not bode well for the immediate future because we then have a division between the honest and highly-taxed legitimate law-abiding business and the dishonest who are better off because they do not pay their taxes and are robbing HMRC and therefore all the rest of us doing our best to stay on the straight and narrow..

So, what do we professionals do? There is some tax planning which seems tempting in terms of the 2009 Pre-Budget Report. We know that the rate of income tax is going up to 50% for taxable income over £150,000. There is also a withdrawal of personal allowances on income over £100,000, which means that there is a marginal rate of 60% for incomes just over £100K and when you add in National Insurance the situation seems scary. What do we tell our clients to do? Have their bonuses now (unless they are in the bankers' trap), have them much later, or leave the country?

Well of course, it might be an idea for owner-managers to pay themselves dividends at 32.5% instead of 42.5% after April if they are in that sort of league. It might be sensible for spouses and partners to equalise their incomes to reduce rates, but frankly those sorts of arrangements may well be in place, especially as the income-shifting legislation is currently on the shelf because it was impractical and ill-thought out. However, being impractical and ill-thought out has not always prevented legislation from being introduced, and there is still the spectre of perhaps a higher charge on dividends in general or an imposition of NIC.

Our clients should talk to their financial advisers in view of the changes to the pension regime from April and the further restrictions on tax relief on premiums paid.

The whole point is that I cannot remember a period of so much uncertainty in the tax world. In past years we have planned ahead, but now we can and must take action on many fronts before April, because we know not what is round the corner. Our planning may not help our clients after April, but we must talk to them to see what we can do now.

From a business point of view, the one thing worse than a recession is the inability to plan ahead, because who knows what tax costs are round the corner? That is why I wish the party in power could be more candid about its general plan on tax increases. I wish the opposition would say that whilst it cannot reduce the proposed increases in the short term it will not invent any new taxes and that it will cut services, so that at least we know where we stand. The election is badly needed in terms of politics, but it is getting in the way of all our lives in terms of knowing where we stand or fall. How can a business make plans if it has no projection on costs?

Be responsible and pay your tax

Last Spring I wrote a piece entitled “Render unto Caesar...” which pretty much sets out my view concerning tax avoidance and those who are reluctant to pay tax. For the record I reiterate that I have no objection to people taking sensible uncomplicated steps to pay less tax. That is no different from choosing to fill your car with petrol, diesel or gas at a particular establishment which charges a little less than the one down the road. Daily essentials everyone buys on price because the value is the same. Complicated and artificial tax avoidance schemes really have no place in a responsible society.

There is a moral case to pay a fair share of tax. We may not like a particular Government but we all use the infrastructure, the roads, education, the health service and so on, and we should cough up according to our fair share. There are occasional refuseniks who choose to withhold a portion e.g. of their perceived share of the defence budget, quoting moral grounds, and they may at least appear principled if foolhardy in making a futile stand against the system, though at least gaining publicity for their cause.

What really gets my goat is those who dodge the system, take cash so that it does not go through their books and appear in their accounts (“save the VAT, mate?”) and those who fiddle in other ways, such as inflating their business expenses. None of these people are clients of us professional practitioners of course, because if we sign them up they are in the system they wish to avoid, and subject to our scrutiny.

Just the same, it is certain that there are still many tax dodgers and if any are reading this, let me tell you that if you have dodged £5,000 of tax you have stolen it from the Government and from us taxpayers and it is no different from stealing £5,000 from the state-owned Post Office. The punishment on getting caught may not be the same, but perhaps it should be? It is money taken from our back pockets.

The financial penalties for tax evasion have been raised subject to various targeted initiatives in particular areas. Should we see more custodial sentences? How can more dishonest tax evaders be caught given the limited resources of HMRC? What do you think?

© Jon Stow 2010