Every year that Labour was in power they announced a clampdown on avoidance and evasion of tax. Every year more complicated provisions were put into Finance Acts to make it more difficult for people to evade tax (illegal), and to make more avoidance schemes (legal) into illegal devices. You might have thought that after 13 years of doing that, the job would be done.
Apparently not. Now some Labour figures tell us there is £120 billion of evasion and avoidance. All we need to do, is stop all this overnight, and most of the deficit disappears. Meanwhile the Coalition government continues much like Labour before it in this area,with complicated Finance Bills designed to chip away at evasion and avoidance.
The truth is more complicated. Avoidance is what most people do. It is actively promoted by all governments, as avoidance is another name for tax incentives or preferential treatment as government seeks to influence our conduct. No government has ever wanted to stop avoidance, because no government has ever wanted to stop influencing how we spend and save our money.
The main incentives or avoidance methods for individuals include tax relief on pensions contributions, tax exemption for investments held within a pension plan, CGT relief on your prime residence, tax relief on ISAs, tax exemption on interest earned on certain National Savings accounts, and VAT exemption for purchases of basic items.
Individuals are often looking at ways of lowering the total amount of tax they pay. Avoidance could include the following legal decisions for example:
1. Using a contractor to do work on your home who is below the VAT registration threshold to avoid VAT charges
2. Entering Central London by car outside the hours of the Congestion Charge
3. Buying a larger home than you need so more of your total investment is covered by the CGT relief on first homes
4. Investing as much through National Savings and ISAs as you can afford to avoid tax on investments
5. Going by subsidised bus rather than car to avoid fuel duty
6. Buying larger items that attract VAT just before a VAT rise
7. Home brewing to avoid various liquor duties
8. Playing the lottery instead of betting to avoid gambling taxes
Some people go further and break the law to evade tax. They might, for example, pay a tradesman in cash to escape VAT when the local business is registered to pay VAT. Such cash payments may also contribute to other tax evasion by the tradesman. They might place money abroad and fail to declare the income to the authorities. They might fail to declare all their cash earnings if they have any.
The tax system is now so complicated that people who do intend to pay all their tax and make honest declarations can make mistakes, as I see from my constituents cases sometimes. The Revenue would be wise to distinguish between those out to fool the system, and those who fall foul of its complexities. Tomorrow I will look at corporate tax.
February 25, 2011
John,
A good post but it reads like it has been cut short, interrupted, waiting to be finished. Over taxing allied with complexity leads to accountants developing avoidance schemes (I have heard).
Tax should be simple, low, fair (in the true meaning of the word not the euphemistic, Vince Cable, bastardation disguising rampant redistribution) and compulsory. Evasion would be minimised, avoidance more or less pointless and the total take increased as the high rollers come here to pay their tax.
Your thinking is second to none; finish the post.
February 25, 2011
“Playing the lottery instead of betting to avoid gambling taxes.”
As I understand it taxes imposed on the punter disappeared about ten years ago and there is now a tax imposed on the bookie’s turnover. No doubt this additional cost to his business means he increases his margins to compensate, but there is no tax directly on the punter.
The decision not to bet on the three-legged nag in the 1.40 at Wincanton and instead to back the three-legged nag known as the National Lottery cannot reasonably be attributed to tax.
February 25, 2011
We tax far too many things in this country (practically everything from the air we breathe, via CO2 taxes, to the food we eat, to the water we wash with) some of them with more than one tax and in every step of the process tax is piled upon tax.
It’s no wonder people look to try and minimise this legalised theft when we see how much of the money is spent on ‘services’ that no one working outside them wants or needs and when waste is endemic in all that government does.
February 25, 2011
I gave up calculating my own tax bill years ago, because I always paid a lot more than the we software calculated.
If universal benefits work then why not a universal tax.
February 25, 2011
Anyway who says there is going to be any profit to tax.
I’d have to agree with John Straw, a recruitment agent who writes in CityAM this morning that new graduates lack drive and ambition compared with aussie and kiwis. He blames this on the no-loser anti-competitive ethos that New Labour introduced to the schools. This is not true of private schools.
I would have to agree. I have not seen a decent state school uk graduate for over 5 years now – even when we’ve been offering 25-30k starting rates in the banks where I work.
February 25, 2011
The figures trumpeted by Labour and the Unions are nonsense. Of course HMRC tries to collect every penny it can. Any figure on the political left who engages in any of the avoidance techniques you list is a hypocrite. Another way of looking at this question is to ask what the proportion of tax / GDP is. In the UK I believe it is now >40% thanks to Brown’s ecomonic policy. That compares for example, with c. 25% in the US. There is a clear inverse correlation between tax/GDP and long term growth. The answer to the UK’s problems is lower taxes to spur incentives to growth.
February 25, 2011
John
Your usual commonsense understanding of tax avoidance.
I guess the real reason for so many people wanting to avoid tax, is because the rates are simply seen to be too high, and by many punative. In simple terms those working/trading in a cash type industry, or who are self employed, where many small cash payments can be taken, do exactly that.
Lower the tax rates, and the effort to avoid tax will probably become more than the trouble its worth. Whilst I have no knowledge of the size of the black economy I would suggest it is not as high as is practiced in many other countries, where cash and the barter system is not only alive and well, but the norm.
Aware of the laffer curve on tax take, but are there any other statistics which show how actual avoidance relates to tax rates.
Years of government “investment” in the form of increasing the size of the tax investigation department, seems to have failed to uncover the missing £ millions which are always quoted for such action by Labour.
The result after years of tinkering with the system, a much more complicated and expensive tax system for us all, where you appear to be guilty (automatic fines) until you prove yourself innocent.
Perhaps it really is time for a flat tax rate, and a personal allowance of £15,000.
February 25, 2011
One of the most moral (and beneficial for all) things that someone can do is to avoid tax and use the money directly for something useful, generous or productive instead of allowing the state waste it on their many daft and absurd projects or worse still in using it in PR to indoctrinate us.
Cut out the wasteful middle man and do something useful with your own money.
The more they get of us this year the more people they will employ to think of reasons and ways to get even more of us next year. It is everone’s responsibility to use their money wisely and that does not include giving it to the state – if legally it is possible to avoid doing.
February 27, 2011
The problems is that often, to legally avoid tax, you sometimes have to do rather daft things with it like green energy but if you look hard enough there are some good ways through self invested pensions and the EIS schemes and similar.
Cut out the state sector and the banks wherever possible – they both enjoy huge margins. Just use your own money to do something sensible with it rather than letting the state or the banks do the opposite.
February 25, 2011
Flat taxes continue to be the answer.
The allowing of companies to carry losses forward and offset against future profits has been highlighted recently. This lost revenue would be better spent in lowering the level of tax for all companies.
February 25, 2011
John,
Come on? I am on your side but you are not making sense or being honest with yourself.
I can think of a number of multi-nationals who are operating in the UK using a foreign registered company, indeed some of them include “UK” in the company name even though the company is registered abroad in a tax haven. Or they use a complex structure of companies to move money around the world and engineer the spreadsheets to make most of the profit appear in those countries where they are taxed least.
They not only do this to avoid paying UK tax, they also do it to ensure the parts of the business with the most questionable activities are registered in countries where financial reporting and the equivalent of company’s house registration is much more lax. Preventing anyone from exposing what they are up to in many aspects of their operations.
Much like many British ships now fly flags of convenience – if nothing is done ever more companies operating primarily in the UK will be registered abroad. This doesn’t make sense for any of us, and sure does not help legal, decent and honest businesses in this country who are trying to play fair.
If all companies did this the UK would quickly meltdown financially. There is nothing wrong with wanting a level playing field and supporting those companies which not only play by the letter of the law but also play fair.
I could also mention that the way a number of the outsourcing companies are operating is well outside what I would call morale or decent, and really their sophisticated lobbying and spin to all levels of government should be seen through. The UK needs to be a lot less naive when dealing with these people.
All of this is very different to someone choosing to drive down a road when the toll is lower due to it being off peak hours.
Regards
February 25, 2011
Stop tax evasion at a stroke – bring in a very low flat rate tax that it isn’t worth evading. As you point out stopping avoidance is impossible and counter productive.
February 25, 2011
In a country where 1% of the population provide 25% of the tax collected, I would also want enshrined in law methods of actually holding onto some of my legally earned cash.
I would ask whether it is the complexity of the tax structure itself that is responsible for the many “evasion” techniques, and surely in this country it would be better to change those laws around to focus on only the schemes which benefit the economy, so that more folk become “business angels”. Definitions and regulations can be set by the government.
On top of which, at what point does it become non cost effective to actually employ someone like Barclays to actually move your cash around and avoid tax?
Wouldn’t a simple flat tax of say 18%, with all the benefits protecting the lower paid in the tax allowances, ensure that the country would have a more beneficial redistribution of wealth and also money available for those public services?
I see no point in paying people to collect money from people that is then given back to those self same people. The redistribution should already be there, and then the government does not need the massive bureaucracy to collect it, but can concentrate on those that it can prosecute.
Otherwise I’m in full agreement with your ex-party chairman.
February 26, 2011
The claim that “1% of the population provide 25% of the tax collected” is false. According to wikipedia (http://en.wikipedia.org/wiki/Income_in_the_United_Kingdom), in 2008 the top 1% of households paid 12.8% of income tax. And more importantly, that is just income tax, so ignores NI, VAT, etc. (Unfortunately they do not quote the figures for all tax combined.) Focussing just on income tax is the same kind of misleading argument used by the Republicans (aka the Tea Party) in the US to justify ridiculous tax cuts for billionaires.
And of course one of the reasons that the top 1% pay so much income tax is because they earn so much. That wikipedia page does not give these figures (although you might be able to estimate it from the figures they do give). But they do say that the top 1% own 21% of UK wealth. If you own/earn so much you should indeed be paying a heck of a lot of tax, and stop whining about it.
February 26, 2011
Whoops, that should be people (more specifically adults) not households (not that that would make much of a difference).
February 28, 2011
It is true that 1% of income tax payers pay 25% of the total income tax and 25% pay 75%. (round figures obviously but consittant over an extended period)
February 25, 2011
“The UK now has the longest primary tax code, and one of the most complicated, in the world. In 2009, Tolley’s tax guide, the handbook of tax legislation, ran to 11,520 pages, a 10% increase on the previous year and more then double the number of pages from 1997.” http://fullfact.org/factchecks/george_osbornes_tax_book_example-1477
BTW. “8. Playing the lottery instead of betting to avoid gambling taxes”. £1 ticket = 50% prize money; 28% compulsory charity tax; 12% lottery duty; 5% for the retailer and 5% for the promoter. Some corporation tax, possibly, on the last two items.
February 25, 2011
Your list of tax avoidance measures is very interesting. So here are some counters and questions:
1. Why should the VAT registration threshold be other than zero?
2. A lot of the receipts from the Congestion Charge finance TfL’s fleet of subsidised buses. Is that a Tory policy? Have we considered replacing the Congestion Charge by high parking charges, particularly higher on street parking charges, so that the Boroughs not TfL get the money and there are fewer impediments to moving traffic?
3. What logic is there in not applying CGT to first homes? And on the other side, is it not logical to give tax rebates on capital losses, and also to strip out inflation before making the gain/loss calculation? Staying on the subject of house taxes, why apply stamp duty on a transaction where no value is added, yet not apply VAT to new construction where a lot of value is added?
4. Why make gains on National Savings and ISAs tax free?
5. Why subsidise buses?
6. Why should VAT always rise and never fall?
7. Granted, it is impractical to tax home brews. It is enough punishment to drink the stuff.
8. Why tax gambling, a zero sum game? Tax the bookies’ profits, that is sufficient.
We should remember Nigel Lawson’s golden words ‘Taxes should be low and everybody should pay them’.
February 25, 2011
Re Point 2
The last Conservative Government got the London Bus system right. Credit where credit is due. Despite not living in London I have used London buses more than any other in the last year!
Re car parking charges – are the charges at well known multi-story car parks in the West End not eye watering enough for you? I’m sure the company that runs the car parks will happily charge you more!
February 26, 2011
The big one is the CGT on first homes. It should definitely be removed, but slowly over a decade or so, to avoid shocks to the system. But you ought to be allowed to offset capital expenditure (e.g. for an extension), although unfortunately that is hard to police. (In the US pretty much all building work has to specify how much it costs, but obviously that does not happen here.) And there ought to be indexation (ho hum, the economically illiterate LibCon government failed miserably on that front).
Needless to say, the property capital gains of the last few decades are not down to the hard work of the people who own property, but instead just because a combination of low interest rates and inadequate house building has resulted in crazy house price inflation. So why this particular class of capital gains is not taxed is bizarre. (Although we have to consider how to deal with the occasional house price deflation that results in a capital loss. But if capital gains were treated like deferred income this could be sorted.)
Another tax avoidance is reduced or no VAT on certain politically correct items, like food, children’s clothing, domestic electricity/gas and books/newspapers. The latter is particularly ridiculous. Needless to say, the usual Guardian columnists could give lengthy arguments about why the other ones are “deserving” exceptions.
Another tax avoidance is inheritance tax for married / civil partnered people. This also should go, or all inheritance tax should go.
February 25, 2011
I’ve personally always played the tax system straight and fair. Made maximum use of things like ISA’s and PEP’s, and so on, but I always declared every penny of earnings and never did any fiddling of the expenses. If I had a query from the IR it was always courteous, and I replied to explain any misunderstanding, and to be honest I never ever had any problems. I may not have liked the amount of tax I had to pay, especially once IR35 started to bite, but the Revenue were always polite and fair, just following the misguided rules imposed by their political masters. That was quite a while back, as I retired in 2004, and I gather that since the amalgamation of the IR and HMCE into HMRC things have gone downhill rather rapidly.
(Goes on to raise quesitons about how much tax certain well known people pay without quoting chapter and verse as to why he thinks they may not be paying their legal dues. ed)
February 25, 2011
So how do we avoid the Census
A 32 page ‘questionnaire’ and £1000 fine if we dont fill it in.
How about MI5/6 reveal the true extent of their knowledge about the London Bombers first.
February 25, 2011
If only avoidance and evasion where Government aims: to avoid spending money; to evade doing so would be acceptable.
Government now is a misnomer and should be replaced by Spending Machine, whose entire function is to collect money in order to spend it, for its own sake, rather than preserving and where possible improving the framework wherein we might generate wealth for ourselves.
February 25, 2011
Quite right John, I have been saying the same for years on my tax website
February 25, 2011
It would be far better to have a simple flat rate taxation system written in plain English which we could all understand and required no great skills to calculate. If this happened, the government could save money in collection, companies would save money in avoidance schemes and these savings could be spent elsewhere on more useful activities making the country more prosperous. The higher the tax rates, the greater is the incentive to “fiddle”. The more complex the tax system, the less the chance of getting caught.
February 25, 2011
Tax is legalised theft.Money earned and saved by me is mine.As Ayn Rand so brilliantly said people who trade in favours but produce nothing are looters.Parasites rely on compliance and guilt .Succeeding governments have bled the people white with bleeding heart schoolboy socialism and expect us to be grateful for the pathetic small change handed back.The black economy is the only hope for growth this country has.To hell with the government, I will never become a bonded tax slave to support any politico.
February 25, 2011
In my very brief inclusion into local government, I discovered how very easy it is to assume that your money (tax) is my money to spend how I please. Also I can ask – and get – as much as I want. All, of course, in the best possible taste….
In those far off days (1990s) the officials were just turning from elected councillors into Cabinet Members with salaries dictated by their own, quite justified no doubt, idea of what they were worth. (Did you get the biting sarcasm there?)
So, Mr Redwood, how can you blame us if we react by “clawing back” as much as possible? The government, through its constant intrusion, makes us all liars and cheats anyway. That is why I loathe it. Up at your level, where you make the laws, this isn’t so apparent. Down here, it’s obligatory. If you don’t lie, you don’t get. In the 1990s, I was on the dole and that is the lesson which I learned on day one.
Today, like everyone else, of course, I am appalled by tax evasion.
February 25, 2011
I agree with John’s point about Labour. The hypocrisy is staggering.
I would love to see income tax replaced with one flat tax for all – all people and companies alike.
Evasion and avoidance would be extremely hard and enforcement/administration costs a snip compared to today’s dedicated tax industry.
I also think the tax should be extended to people of all ages, from age zero onwards so that larger families pay more tax.
Well, I can dream, can’t I?
February 25, 2011
John – I am astonished that no one has posted anything in response to this blog. I looked first thing this morning and thought “it’ll be interesting to see the responses to this”, but nothing!
Good post, though and thanks. I sometimes wonder if any MP’s of left-wing persuasion actually understand the difference between evasion and avoidance…
February 25, 2011
I always try to use cash, usually by splitting the difference. It makes lots of sense. Also you get a warm feeling that the dopes who lead us can’t waste that little bit.
February 25, 2011
Part of my working life is spent on advising a client which makes a lot of money out of a tax avoidance scheme. That scheme works on the basis that the aggregate of higher rate income tax and NI contributions so far exceeds what taxes must be paid under this scheme plus my client’s fee that it is well worth the while of individual’s to use the service.
A simple story but a vivid illustration of why high tax rates do not work. Many users of such schemes will go abroad if they are deprived of such a scheme. No problem because they are not UK resident anyway.
The UK untaxed (?) campaign gains spurious legitimacy through parts of the media, recently Newsnight gave it an uncritical run.
It’s not always very pretty, but it is grim reality.
February 25, 2011
What about banks reducing savings rates to zero – well savers you pay less tax! Tax dodging or daylight robbery?
February 26, 2011
Just a small, possibly pedantic point; in your list of legal tax avoidance measures you cite entering London by car outside the Congestion Charge hours. By calling this a tax avoidance measure you are, by definition, calling the CC a tax. This is of course the position of the US Embassy (and other embassies) to justify their non payment, estimated now at several tens of millions of pounds.
Boris of course maintains that the CC is a charge, not a tax, therefore foreign embassies a re liable, and they are breaking the law by non payment.
Just out of interest, do you maintain the CC is a tax and therefore you disagree with Boris?
February 26, 2011
What I notice is that the things we say are ignored. Nobody reads this and nobody cares. Its a sop whilst Rome burns.
February 26, 2011
I certainly am not comfortable with the idea of CGT on prime residence sales. It means anyone who has been in the same home for several decades, as I have, would get a nasty shock when selling, because so much money would be taken off them. There might not even be enough left to go and buy a replacement home. Our prime residences are one of the few things that dont get taxed, for God’s sake leave them alone; let us have some respite from the tax onslaught!
February 26, 2011
John, I worked for The Inland Revenue ( now HMRC ) for 22 years and still have friends who work there. The gap between what is owed and what has been collected currently stands at around £25BN. Over the past five years the organisation has been run by individuals who have little or no knowledge in the tax system and it has suffered for it (It is effectively like asking a plumber to service your car) ,those experienced staff who had worked their way up to some senior positions who actually knew what they were talking about became disillusioned and left. Front line collection services have been cut and the average number of visits to defaulting taxpayers has dropped from a minimum of 45 per week to 30. Maybe if HMRC got rid of ridiculous ideas such as Pacesetter ( more like Irish setter!) and just concentrated on getting people to collect tax and outstanding returns they might make a dent in the outstanding £25BN. No wonder the organisation came 103rd ( last ) in the recent Civil Service staff surveys.
February 26, 2011
The public sector (53%) is too large for the size of the private sector. The spending problem is hard to control as their are so many vested interests who have votes.
Spending needs to be looked from the top down,roles versus real needs, pay, pensions,with a default setting to reduce bureuacracy and to maintain or enhance essential frontline services.
That said:
Avoidance that is specifically intended by parliament is what it is. Generally all can take advantage of these provisions. Most of the above fall here 1-6
Aggressive avoidance is where the letter of the law (and motive is the substance of the transaction) is used to reduce taxes in ways which are (arguably) not intended or for general use. These would involve costs to most individuals in excess of the potential benefit. In most cases its probably legal as lawyers have probably given opinions prior to engaging the action. This is what some people are demonstrating about. Maybe rorting is a better word.
I believe a General Anti Avoidance rule would be useful, with an appointed court or tribunal given authority to return legislation or strike it out if it ambiguous. MP’s should be forced to do the job properly and make sure their intent was known, and therefore read and scrutinise legislation properly.
Can small business take advantage of all these ‘unintentional cracks’ in the framework , as can larger companies?
Why do we allow limited liability companies to have almost complete deductability of interest when this can encourage instability? What is the point of NI except a middle income tax?
Why is the pension cap so high?
Why tax labour higher than capital?
Why are seemingly the ‘bank and financial profits’ arguably largely distributed as bonuses and therefore not subject to Corporation tax? Also the apparent ease by which reward can be turned into capital gains (to advantage lower rates).
I believe taxes are too high relative to GDP (false GDP as pumped up by debt and ZIRP). I also believe the top earners are doing very well comparatively and all is not equitable between taxpayers.
You may not agree but please consider some of the issue and points raised in this blog about tax.
February 26, 2011
All the points 1-8 are red herrings especially the tradesman avoiding VAT. “They’re all at it I read in in the papers” The reality is that most are only concerned about being paid. They are not the same as having all your taxes in offshore legal scams and a cleaner paying 33%+ on her taxes. Whilst having no more benefits from the state. The poor are also indirectly taxed by companies charging higher rates to them. Most of the time they have little ‘choice’ The flat tax supporters need to bear in mind the moon is round and not flat like a plate. Maybe we could have a charity motorways Huh? Don’t say toll roads nobody wants them or to use them when they are built. Ignorant fantasists who never will have to live in the world they would like to create. Same old same old. Why shouldn’t the lower classes be taxed they only spend it on drink anyway which is why most of them are unemployed apart from being bone idle that is.
February 27, 2011
The tax system is a complete mess, unfortunately any attempt to sort it out will have the effect of making it even more complicated.
February 28, 2011
My prior submission didn’t seem to make it?
Avoidance can be specifically intended as points 1-6.
But some other avoidance may not have been intended, and may only be available to certain segments of a population in the sense the cost of the tax lawyer/advisor outweighs the benefit. Therefore larger multinationals tend to better placed to benefit.
A general anti avoidance rule would set the bar higher and seek to dissallow all non specifically intended avoidance. This would still allow politicians to draft tax law much more clearly to support whatever they specifically stipulate. It would tend to reduce the wiggle room for those clever lawyers. Some may argue it would aid transparency in tax and legislation as drafted and approved by elected officials.
PS We are not an undertaxed nation but there seems to be large potentially unintended loopholes which seem to require closing by further regular legislation post the event.