Over the last ten years there has been a marked tendency to make tax law discretionary. New tax rules are left intentionally vague to allow the tax man to tax no matter what.
Tax evasion is illegal. But tax avoidance (or tax planning as it is called in civilised circles) has now become suspicious to the point of being put on an equal footing with the illegal and the shady. As Mark Serwotka's Public Services Union puts it:
Is it not normal that when you close a deal you look up what the law is and then try to minimise the tax you will owe? Why pay 20% if legally only 10% is due? It seems like good housekeeping to me. In fact most people do it in one form or another; they may for example make a will. Yet it is precisely this tax planning which is targeted, and vague discretionary tax rules are the means to achieve the clamp down.
The chief executive of a small financial institution recently told me that he has been trying to find out for months whether or not any bonuses he pays his staff will be subject to the bonus tax. The rules are completely unclear.
During Labour’s tenure, there have been three particularly worrying developments in tax policy.
The first is that we are “taxed by law and untaxed by practice” – meaning that the government issues tax laws that are much wider than can ever have been intended, and the inland revenue then issues guidance that exempts various people from the tax. The problem is that the exemptions set out in the guidance are not legally binding, and therefore taxpayers rely on it at their own risk. Also the guidance can be repealed at any time at the whim of the revenue, whereas the draconian law will remain on the statute books until repealed by parliament.
Second, tax legislation is becoming more and more “principles-based”. Rather than setting out precise rules, it states a broad principle and the taxpayer needs to work out how that principle translates to his or her own situation. Fewer and fewer people fall into neat tax categories, and inland revenue rulings are needed to clarify whether you will be owed tax or not: “Yes, of course tax is due. What was the question?”
The third worrying development is the use of retrospective tax laws. This week the Chartered Institute of Taxation (CIOT) raised concerns following an amendment to tax rules relating to manufactured dividends. Last week, Treasury Financial Secretary Stephen Timms announced that the new legislation would apply from October 1st 2007, slamming a retrospective tax on some pensioners. This is just the most recent example of this sort of arbitrary behavious. John Whiting, tax policy director at the CIOT, said:
“We think it [retrospective legislation] damages the key principle of certainty in the tax system that is so important to its reputation and is inherently unfair.”
Legal certainty, that is, the Rule of Law, was invented for a reason. It was a guarantee to ensure that people were treated equally. To ensure that people did not become rulers' pawns. To put legal constraints on what rulers could do to their citizens. Vague discretionary tax rules, and retrospective laws, are the polar opposite of these principles.
Vague or retrospective tax laws mean that businesses and individuals cannot plan their future, because the tax risk cannot be assessed – it will all depend upon tax rulings or future political decisions. Are we surprised they increasingly call it a day and move to snowier places? If Mark Serwotka manages to convince the next government to go for tax planners he may very well raise a few tens of billions in year one, but his members may have to be asked for the shortfall in all future years. And what typifies countries were the rule of law is of the fluid? A huge black economy, and bribes to please those who make the discretionary judgments.
The impetus comes from an increasingly tax-addicted government supported by a motley lot of the hard left and their friends in the media who believe that they will not end up paying the price for arbitrary tax laws. In a society which is no longer becoming richer, “getting the rich” (read: banker/bonus recipient/non-dom) is popular. So to a constituency out there, discretionary tax laws are probably seen as nothing worse than a means to make sure everybody pays tax. How wrong they are. Discretionary laws stab at the heart of freedom.