Neil Reddin: The right to avoid tax

Neil is a Chartered Certified Accountant and is also the cabinet member for Resources in the London Borough of Bromley.

Backdating legislation, double crossing small businesses, holding public services hostage – who really has the moral high-ground on tax avoidance?

One of the earliest charges that the Conservatives levelled against the “New” Labour government was that of taxing by stealth – and it has stuck and become embedded in the lexicon of politics. Not bad for a party that had then only recently suffered the biggest electoral defeat for ninety years.

Yet beneath the top of the stealth tax iceberg is a chaotic web of loophole-plugging and amendments that have left the UK’s tax system one of the most complicated in the world. A system where many “simplifying measures” only add to a complexity that even those operating the system – those working for HM Revenue & Customs (HMRC) – have difficulty keeping up with.

This leads us to another aspect – it is to do with the volume of tax legislation which serves to tackle anti-avoidance. Of course, so much of any tax statute is aimed at plugging “loopholes”, but there has been a discernable shift in the attitudes behind the measures - from a reluctant acceptance that anti-avoidance is part of the game played between the tax authorities, taxpayers and their agents - to something more insidious.

It is important at this stage to distinguish between tax avoidance and tax evasion – the latter being illegal. The principle of tax avoidance, however, as explained by Lord Tomlin in 1936, is that:

“Every man is entitled, if he can, to order his affairs so as that the tax … is less than it otherwise would be”. (IR Commissioners v. Duke of Westminster)

Increasingly, though, it appears to be the attitude of the government that the long held right of a taxpayer to order their affairs to minimise their tax bill, is tantamount to theft from the very “schools’n’ospitals” whose throats the left are so ready to hold hostage, whenever tax cuts are mentioned.

Lord Tomlin’s quote above continues:

“If he succeeds …, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.”

Err, sorry m’lud, not any more. Previously, a loophole would be closed in future legislation, or HMRC would come up with some way of combating the avoidance within existing tax law. Now, however, a minister may draw a line in the sand simply by way of a statement, and the subsequent legislation can then be backdated to catch any avoidance scheme put into place since that earlier date1. Such retrospective legislation is not only unconstitutional but it seriously hinders key business planning decisions. Even so, expect that, next time the CBI points out that our high-tax economy is deterring new investment, the response is more puff and lectures on “everyone paying their fair share of tax”.

Yet if we are considering moral arguments, then take the small businessman who converted his business to a limited company, to take advantage of low corporation tax rates for small companies – one of the few good things introduced by Brown – but who is then, a couple of years later, vilified for not paying his “fair share”, as the government backtracks on low company tax rates. It would be like accusing new cyclists of dodging their road tax and depriving public transport of vital investment, or an ex-smoker of denying the NHS the benefit of the revenue from the tax on his pack of twenty.

Even the principle of the independent taxation of spouses – so long demanded, particularly by women – is being eroded. Not long ago the Inland Revenue dusted off a piece of legislation dating back eighty years to tackle “avoidance” centred on companies owned and managed by a husband and wife. One case currently progressing through the courts (Jones v Garnett a.k.a. the “Arctic Systems case”) challenges some aspects of this, but there is no doubt that the clock is being turned back for the taxation of married couples.

The more vocal and eloquent anti-avoidance campaigners, such as Richard Murphy, even go as far as to suggest that accountants who enable their clients to take advantage of legal loopholes are acting unethically3. He argues that to exercise anti-avoidance demonstrates a lack of values on the part of both the taxpayer and tax advisor4.

Granted, the debate over the morality of tax is not new. There is the implicit admission by the Left that, for all the talk of people being willing to pay more for better public services, in truth they cannot trust the masses to spend their money on the right things – “look, even when they force them to pay for schools’n’ospitals, they don’t volunteer to pay more!”

Yet rather than tackling mere symptoms, every government should regard the level of tax avoidance as a barometer of the credibility of the tax system and the sustainability of the burden it places on the society it is also intended to serve.

The tax burden is about more than just the scope and rates of tax, but also the costs of complying with the system and satisfying the taxpayer’s natural desire to minimise the bill. Simpler taxes, formulated properly, can be harder to avoid, simpler taxes cost less to collect and simpler taxes are more transparent – and transparent taxes are harder to increase, meaning that governments must pay more than lip-service to efficiency and lean-thinking in public services. More pertinently for a Conservative government, transparent taxes can bring about greater political benefits by their reduction.