It has become politically fashionable to attack tax avoidance. Many try to lump it in with illegal tax evasion, condemning both. The Chancellor tries to draw a necessary distinction between aggressive tax avoidance, which he dislikes, and run of the mill tax avoidance which many undertake. It is time politicans and the government recognised that a lot of tax avoidance is commonsense, much of it is actively encouraged by the government, and some of it has a moral purpose.
I want to give four examples of people who lower their overall Income Tax rate or Vat bills for good reasons.
The first is a retired accountant called Charity. She has a decent private pension from a tax sheltered pension fund. Her retirement income is bigger than she needs, as she lives modestly. Her leisure pursuits of listening to the radio, going for walks with her dog, and attending the local theatre are not expensive. She works one day a week as a volunteer for the CAB, is a JP, and is actively involved with a local animal charity. She is a very generous regular donor to the charity, using the government’s tax saving scheme for her donations. Both she and the charity benefit from the tax relief or tax avoidance on offer.
The second is a working mother called Prudence. She had ten years off work to bring up her children. When her husband left her she got an administrative job with the local Council. She is now making accelerated payments into her pension fund, as she wants to provide for her own old age, thinking it wrong to rely on means tested benefits as a pensioner if you can save for yourself. Her tax charge is lowered thanks to the pension tax reliefs available.
The third is a senior teacher called Mr Reader. He believes in good levels of public spending, especially for education, and has devoted his life to teaching, even though it used not to be that well paid. Following Labour’s good pay rises, he now has something spare each month to save. He lends it to the government through tax privileged national savings. He pays PAYE Income Tax. Because he does not want the hassle of having to declare savings income he takes advantage of the tax breaks on offer. He feels his savings contribute to higher state spending and think the tax breaks are moral.
The fourth is a successful small business owner called Ed. He now mentors local small businesses, and gives time as a volunteer to help start ups in his town. He has decided he should always try to employ sole traders to do any work he needs doing at home – plumbing, building, electrical work or help with the garden. He decides he will only employ small businesses that are not registered for VAT, saving himself and them the VAT burden. It means he can spend more on what he needs, and give them a bigger boost to their turnover as a result. He is therefore avoiding substantial Vat sums.
The government rightly welcomes the Big Society. That requires charities and volunteer activity to flourish. Tax breaks drive much of this generosity of spirit, and help furnish the charities and other institutions with the cash needed to organise the volunteers and create the work programmes. Politicians need to be careful lest in their enthusiasm to lump tax avoidance in with tax evasion they do damage to that strong UK tradition of volunteer work and giving, and undermine some of the government’s own tax saving schemes which have been designed to influence our conduct. They also need to be aware that tax savings drive much of the savings and pensions efforts of people, a bulwark of a free society. It is these savings which keep many people away from needing more benefits from the state in hard times and old age.