Tax evasion, tax avoidance, and “ordinary sensible tax planning”

Left wing politicians always wish to believe there is a crock of gold for the Treasury if only it showed some determination to end tax evasion and tax avoidance. They think these crimes and malpractise are the preserve of the rich. Tackling it more resolutely would be just, as well as filling a black hole in the naitonal accounts.

The first error in this thinking is to assume previous governments have not tried to do just this. Every government spends large sums and employs large staffs to hunt out evasion, and to legislate to make some avoidance illegal.

The second error is to confuse avoidance and evasion, without also considering what the Revenue and Customs themselves describe as “ordinary sensible tax planning”. If Labour want to stop all tax avoidance, they had better start by asking the government to withdraw all its own marketed schemes to urge us to indulge in tax avoidance or “ordinary sensible tax planning”. National Savings has gained a large share of the savings market in the UK for its nationalised product range by offering tax free savings certificates. Savers can legally avoid both income tax and capital gains tax on some of their products.

The Treasury’s policy of allowing income and capital gains tax concessions on savings held through an ISA would also presumably need to be swept away. Is it avoidance to put money into a tax exempt pension fund? Or to pay a donation to a charity, calling on a tax rebate at the same time? Some avoidance is part of a grand plan by government to encourage certain kinds of financial conduct.

The third error is to think the main cuplrits when it comes to the criminal activity of tax evasion are the better off. No sensible accountant, company director, lawyer, or other professional is going to fail to declare income or sales to lower their income tax or VAT bill. They would be likely to be found out, and they would lose a great deal from successful prosecution. Many wish to uphold the rule of law and understand their professional status depends on doing so.

It is people who are less well off who have the opportunity and the motive to indulge in tax evasion, or who might make mistakes with record keeping which result in tax evasion. Electricians, plumbers, jobbing builders, mobile hairdressers, the organisers of the local dance or music classes, market stall holders – anyone handling cash from the public – could forget to declare all the income to the taxman, and could be shy about putting all revenue into the VAT return if they need to make one.

If more action was to be taken against tax evasion it would entail a new level of scrutiny and audit of all these small businesses and events where cash is handled. I think the Revenue get their actions about right in this field. Judging from my correspondence they sometimes overdo the doubts and probing with honest people. As I understand it they have commonsense views of how much a person is likely to be earning from various activities, and look more closely at ones falling well below the average. They follow up tip offs or information sent in alleging evasion. They can examine a person where the gap between lifestyle and declared income seems large.

There is no large crock of gold to be found from a different approach to evasion and avoidance, unless they mean by that the removal of a series of tax allowances and incentives put into tax law to foster certain kinds of conduct. What is true is tax does have a huge impact on our collective conduct. High Stamp duties discourage home sales, capital gains tax puts people off selling investments and buying different ones, and high marginal income tax rates put people off venturing or working harder.

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37 Comments

  1. Posted September 21, 2010 at 9:30 am | Permalink

    According to Danny Alexander the coalition government is going to spend another £800,000,000 of money we don't have in an attempt to recoup another £7billion in unpaid taxes. The expenditure is certain whilst the claimed benefit seems highly speculative.

  2. Posted September 21, 2010 at 9:34 am | Permalink

    2003 Pensions bill.

    You know the one. The one that gives just MPs an exemption on taxation for their expenses and pay offs.

    Tax havens for MPs, cock ups for the plebs isn't it.

  3. Posted September 21, 2010 at 9:51 am | Permalink

    Putting money in a pension is not tax avoidance. While you get tax relief on the money you put in, you are taxed on the money you take out when you retire, and as the money you receive from the pension should in theory be higher than what you paid in, you could end up paying more tax.

    In recent years, pensions have often paid out less than what was paid in, so people do get a tax saving, but that wasn't the reason they paid money into the pension.

    • Posted September 21, 2010 at 2:33 pm | Permalink

      Regardless, Tax avoidance – lawfully ordering your affairs for optimum tax efficiency** IS legal.

      ** That is paying just the amount of tax you are obliged to do so, not a penny more not a penny less.

      Tax evasion is not.

      The nonentity, struggling to maintain support of his party on Radio 4 this morning, knows the difference but chose deliberately to blur the distinction. And whoopde – do, as Nick (in an earlier comment) points out MPs have made their own pension avoidance schemes exempt from the Law.

      Regarding pensions, of course they are tax efficient paying in, it makes sense to encourage the individual to pay more into his pension early on so that the investment value of the pension is more likely to be sufficient to ensure a reasonable pension during his or her retirement than otherwise might be the case. This in turn leads to less or no dependency on the state while retired yet the state still gets an income stream as the pensioner now pays tax on his pension income.

    • Posted September 21, 2010 at 8:02 pm | Permalink

      "and as the money you receive from the pension should in theory be higher than what you paid in, you could end up paying more tax."

      After inflation of course…

  4. Posted September 21, 2010 at 10:32 am | Permalink

    All wealth comes from private business. No wealth has ever come from public spending. Tax on business and individuals is counter productive and steals wealth from all of us. A certain amount of public spending is necessary to maintain infrastructure and provide basic services but everything above that minimum level is simply demanding money with menaces (something all governments excel at). The coalition should direct it's efforts to reducing expenditure, paying off sovereign debt and sticking to the basics. No grandstanding at international conferences, no signing away sovereignty, no invading other countries, no harassing working people. Just leave us alone and do the basic stuff to keep the country running.

    • Posted September 21, 2010 at 10:59 pm | Permalink

      "No wealth has ever come from public spending."

      Obviously you have not heard of Cambridge Antibody Technology, and the zillions of other spinouts from universities that have produced much wealth for the nation. Research in universities is largely publicly funded (well, the Wellcome Trust also provides a heck of a lot of money for biomedical research).

  5. Posted September 21, 2010 at 10:32 am | Permalink

    I think our Lib Deb 'friends', are just using dog whistles for their pack of muts.

    Tax incentives in the right place could get this economy moving in no time, and that is the only way to help the honest poor, and do something about the feckless poor.

    • Posted September 21, 2010 at 2:34 pm | Permalink

      Amanda: "I think our Lib Deb 'friends', are just using dog whistles for their pack of muts."

      Spot on.

  6. Posted September 21, 2010 at 11:07 am | Permalink

    The government’s desire is to shed jobs in the public sector to reduce the rate of growth of the national debt.

    If the private sector is to take up the most of the outfall then it is going to be difficult, with the stall in bank lending to small companies and the effects of increasing capital gains and income tax.
    I think that they should focus on this more.

  7. Posted September 21, 2010 at 11:34 am | Permalink

    It would be interesting to know whether the union leaders who identify a '£120 billion' potential gain from avoidance and evasion make contribuions to pension schemes, or as you say, buy ISAs or national savings certs. If so they are part of the £120 bn themselves. The problem isn't really political views on this, its that these guys simply have no idea what they are talking about.

  8. Posted September 21, 2010 at 11:38 am | Permalink

    All fair points and one might also add the issue of the very complex tax system seems almost set-up for legitimate tax avoidance. A personal niggle is the non-sensical triple employment tax called income tax, employers national insuarance and employees NI. All three come off the bottom line of the worker ~ fact.

    So why not just be honest and do a revenue neutral change in the tax code by making all three a single "employment tax" and just be honest with people, (even the low paid) about exactly how much they are paying.

    • Posted September 21, 2010 at 3:22 pm | Permalink

      I agree that the term "employers NI" is dishonest because it is borne by the employee .

      However I see a need to move away from general taxation towards hypothecation so instead of lumping it all together I'd like to it itemised .
      breakdown on pay slips .
      I can't think of another way of making people aware of what their taxes are paying for .

      for pay as you go items :-
      General Taxation £*****
      Interest on national debt £*****
      Welfare state PAYG
      Unfunded public sector pensions payout
      State pension PAYG

      Funding items (which we don't have at moment because it's almost all on the tick)
      State pension funding
      Public sector pension funding

      • Posted September 22, 2010 at 9:29 am | Permalink

        That is a quite brilliant idea!

        It is so easy to achieve simply by means of a simple calculation on a spreadsheet. So if you pay say £536.28 in overall payroll tax in a month, we could fro example say 23.56% interest on national debt etc. anyone with a passing familiarity with a spreadsheet could do this.

        Perhaps if people knew just how deep we were in debt there would be fewer calls for "The government should fund <insert plea> as a matter of urgency"

        Great idea. Those who wished to hide the scale of their recklessness would oppose it.

        • Posted September 23, 2010 at 12:07 pm | Permalink

          If national debt also appeared on payslips it would make the difference between deficit and debt abundently clear .

          It would be confusing if there was only 1 item showing how much will be used to pay back national debt as even smart people would not know to interpret a negative value as an increase in notional personal proportion of national debt .

          Probably better to have 2 items :-

          – "national debt payed back" . ZERO
          – "notional personal proportion of national debt increased during last month" £****

          • Posted September 23, 2010 at 12:57 pm | Permalink

            It would be nice to show net payment to the EU too even for an opponent of the EU like myself it is impossible to honestly quantify the benefits side of belonging to the EU .

            Secession would solve that problem .

    • Posted September 21, 2010 at 8:18 pm | Permalink

      I agree with that 100%.

      Up the tax allowance to £10,000 and have a single tax schedule above that.

      I would go further when it comes to tax changes.

      I would allow anyone to claim any benefit applicable to their circumstances.

      Then, in the tax system, you tax them accordingly.

      For example: If they claim Child Benefit and earn over a certain amount, I'd tax that allowance at 100%. This avoids the need for complex means tested claim forms. They could claim but, if they earn too much, what would be the point? They'll have to pay it back (plus interest).

      For those with complex tax scenarios, the true figures would come out in the wash. The onus would be on the individual to decide if it's worth the hassle to apply for that benefit.

      However, under no circumstances must HMRC be involved in the development of the computer software!

      As I've said before. Sub-contract it to the likes of Amazon.

      • Posted September 22, 2010 at 9:33 am | Permalink

        I would be more inclined to abolish new child benefit, in say 10 months time altogether (leaving it to wither on the vine for the next 18 years for those who already receive it).

        Sub-contracting is a nice idea. I can speak to amazon immediately to feed my book habit and they are super-efficient. Compeare that to the 10 year (seriously) nightmare with HMRC when I was threatened with all sorts including jail (you sleep well those nights!) only to have them admit a decade later, I owed nothing.

  9. Posted September 21, 2010 at 11:55 am | Permalink

    More blindingly obvious reasons why we need a flat tax system.

  10. Posted September 21, 2010 at 12:43 pm | Permalink

    This is an argument for a single rate flat tax system as Stuart F an A. Sedgewick before me have suggested – but that still has deadweight costs and good old fashioned evasion.

    So why not think about scrapping income tax, VAT, corp tax etc. entirely and just having Land Value Tax (with exemptions for pensioners if you want) which has no deadweight costs and is impossible to evade? That way honest people don't get mugged twice – once to pay for public spending and then again to pay for dishonest's people share of public spending?

    PS, collection rate for Council Tax and Business Rates are about 98%, as opposed to about 84% for VAT (the worst tax of all).

  11. Posted September 21, 2010 at 12:44 pm | Permalink

    One of the biggest aids to tax avoidance is the complexity of the tax rules, which more than double each year. The more rules there are, the more chances that there are of finding loopholes, and as the tax lawyers employed by the government, in spite of their huge pay, are unlikely to be as competent as those employed by the very rich, the government must be in a no-win situation.
    The easiest way is a flat tax situation, with no exemptions for anything, which would mean that everyone could understand it and it would be easier to find those who are genuinely evading taxation as distinct from those who are legally avoiding it. Governments, of course don't like this as it is obvious to all when there is a tax increase, with the present arrangement they can sneak in some changes/increases by altering allowances, and then claim the basic rate is unchanged.

    It would also cost far less to administer, both in terms of staff and expensive computers..

  12. Posted September 21, 2010 at 12:57 pm | Permalink

    What you haven't mentioned is that your Coalition partners are confusing avoidance and evasion by stating that they wish to do away with both, when one is legitimate and one isn't. Perhaps you should hold classes for them.
    Perhaps also it would be less confusing for them if the phrase tax avoidance were to be replaced by tax minimisation, which is what it really is. Then we can get round to meaningful stuff like changing the law so that major Corporations who earn income in the UK also pay Corporation Tax in the UK.

  13. Posted September 21, 2010 at 1:31 pm | Permalink

    So it follows CGT should be equal to marginal Income Tax, this would reduce a lot of tax planning with no other purpose than to pay the lowest tax.

    So it follows that all residents should be taxed equally, the concept of non domicile being abolished.

    It follows that MP's/Lords and Senior Civil Servants should have similar pension schemes and tax rules as for ordinary people. Tax free per diems far in excess of taxable job seekers allowance.

    The debate should focus on legal avoidance which is not specifcally intended by parliament and use a prinicpal based law to ensure no benefit accrues because of the legal avoidance not specifically intended. Simple-really.

  14. Posted September 21, 2010 at 2:08 pm | Permalink

    On the other hand, I'd really prefer to cut right through the taxation hassle much more comprehensively by ending the irrational aggregation of "earned" and "unearned" income for tax purposes, and having a separate personal allowance for income from savings and investments, set at a level so that few people would ever have to pay tax on their "unearned" income until they started to draw a pension.

  15. Posted September 21, 2010 at 2:18 pm | Permalink

    Like everyone else in the pub that night I drank in celebration of ken dodd being found not guilty

    Says all u need to know about public attitude to heavy handed tax man

  16. Posted September 21, 2010 at 2:31 pm | Permalink

    The difference between tax evasion and tax avoidance is clear to anyone who has had an education. Unfortunately some Civil Servants within HMRC and quite a few politicians choose to deliberately confuse the two behaviours, one of which is obviously illegal whilst the other isn't. It is like confusing shoplifting with choosing which shop to enter and what to buy. If there was a law that said you must order your affairs so you pay the maximum amount of tax imaginable, then avoidance would rank with evasion. Thankfully there is no such law in England (yet).

  17. Posted September 21, 2010 at 2:34 pm | Permalink

    If the Government was serious about tackling tax avoidance, it could do so simply enough by spending a few bob on the advice of tax experts who know what they are talking about. It could be pretty much stopped if politicians wanted to. However the amount that would raise is unknown as it would probably lead to a whole new set of behaviours that might not involve investment in this country. Nobody actually knows, especially those who bang the drum about the billions that will be raised.

    Nobody who has ever paid "cash" to a tradesman should be hypoctitical about tax evasion. It is a bit like speeding – some people will always do it. Whenever you turn a blind eye you encourage it.

    Which is the lesser evil? Avoidance gets my vote.

  18. Posted September 21, 2010 at 3:25 pm | Permalink

    What about the elephant in the room though ?

    Tax exiles….. .

    The conservatives are needlessly exposed by association with (such people) .
    Cameron should have ditched (them) by now .

  19. Posted September 21, 2010 at 4:14 pm | Permalink

    Staggering.

    Do you think that any of the politicians have any idea of just how complex our tax laws are now?

    As a company of any size you have to take tax advice in a genuine attempt to comply with the incredibly complex legislation… which was in itself a moving target under Brown.
    And the same can be said of any individual with an investment portfolio too: the penalties for getting it wrong could be fairly painful.

  20. Posted September 21, 2010 at 5:03 pm | Permalink

    The Revenue is in such a mess if the Government think sit ill get 7 billion they are obviously not taking their medication. What we need is a radical reform of the whole tax and benefits systems. I personally favour a flat tax.

  21. Posted September 21, 2010 at 5:06 pm | Permalink

    I bet half of it is kitchen salesmen that never did their tax returns and builders doing stuff off the books.

    Trouble is, both the above are skint because of the bust, they spent all the 'taxes' on 'stuff' during the boom.

    Blood, stone, squeeze?

  22. Posted September 21, 2010 at 8:35 pm | Permalink

    When Gordon Brown started talking about tax evasion and tax avoidance in the same breath I was angry, for as a life long tax avoider and honest citizen I did not appreciate being cast as some form of low life told "not to do it" or Gordon would sort me out. The fact that he also said people do not understand the difference between avoidance and evasion simply made me more angry. Angry, but hardly surprised as this seemed to me typical of the man: he just could not bear the thought that there might be someone smarter than him.

    Obviously if government do not wish to see people avoiding paying tax then all the power is in their hands to change the law. Brown thought that he did not have to be troubled by the inconvenience of changing the law, all he needed to do was tell us what we should not do. What a prat! JR, I think I know what you are getting at when you say "to legislate to make some avoidance illegal", but it is not the "avoidance" that is made illegal as avoidance is always legal.

    Just when we thought all that nonsense was all over, now along comes the LibDems trotting out the same rubbish. I just hope their coalition partners put them right.

  23. Posted September 22, 2010 at 2:13 am | Permalink

    "capital gains tax puts people off selling investments and buying different ones,"
    Absolutely, I have some useless loss bearing shares which I am hanging on to until I need a loss to offset some gains. The economy and I would be better off if I put the (remaining) money into something worthwhile.

  24. Posted September 22, 2010 at 10:09 am | Permalink

    Traditionally National Savings served two purposes – to raise money for the government, and to encourage a widespread savings habit.

    That was until Gordon Brown became Chancellor, and told the Director that his job was just to raise money for the government as cheaply as possible, and he should forget about promoting saving.

    Personally I believe that it's in the public interest for the government to encourage people to save, both for economic reasons and because a stock of personal savings enhances the independence of the individual.

    But the practical reality is that if saving involves a lot of hassle, both in opening and operating accounts and also dealing with the taxation of interest, then it's less likely that people will even make a start let alone make it a habit.

    So I don't object to National Savings making it easier for people to save, both by disregarding the usual requirements for passport, utility bills etc and instead using the electoral register to check applicants – if they're still doing that – and also by offering accounts which won't get the saver involved in any complications with the taxman.

  25. Posted September 22, 2010 at 11:42 am | Permalink

    The current tax regulations run to 11,000 pages. The most complex tax system in the Western world.

    We need a flat tax system an end to the payroll tax NI and exemption from tax for earnings upto and including minimum wage

  26. Posted September 22, 2010 at 2:41 pm | Permalink

    I would have thought the real tax dodgers the government should go after are multi-national companies.

    Why not amend Corporation Tax so that companies which pay less than the average of five big countries in Corporation Tax pay a top up tax to the UK government?

  27. Posted September 22, 2010 at 5:21 pm | Permalink

    The best tax system is one the rich can't be bothered to avoid. One where people bother to earn that extra little bit. One which everyone can understand and doesn't require a huge industry to sort out. If it means little people are still pocketing little amounts, then those little amounts will surely be offset by all that extra tax coming in from the rich. People would presumably rather keep their money here if it paid them to do so; and other people from abroad might like to keep theirs here too.

    Oh, but that wouldn't be progressive, would it? It would be regressive and we can't have that. Much better to be a poor country tied up in a cat's cradle of complicated tax and welfare which sucks in dependency and drives out enterprise. Much better to print the money than earn it.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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