Tuesday, 7 December 2010

Tax Avoidance

There's been a lot of fuss recently about tax avoidance, particularly noted on Twitter with the #UKuncut hashtag and @UKuncut feed, publicising the tax avoidance strategies of Vodafone and Arcadia. This has, predictably, led to demonstrations and sit-ins at Arcadia stores, and complaints against Vodafone.

Firstly, there is a big difference between tax avoidance and tax evasion. Tax evasion involves an attempt to minimise or negate a tax liability by deception - telling Her Majesty's Revenue & Customs (HMRC) that profits or income is lower, or omitting to notify them of chargeable transactions. Tax evasion is illegal - it is a deliberate attempt to evade paying tax which is due.

Tax avoidance is managing finances in such a way as to minimise tax charges, but without breaking the law. This can range from detailing all costs to offset against Corporation Tax or Income Tax, paying into a pension arrangement, saving into an ISA, or using trusts to help reduce Inheritance Tax. Tax avoidance is perfectly legal - it is managing finances to avoid or minimise potential tax charges.

I have not seen any question, anywhere, of Vodafone or Arcadia being involved in tax evasion. If they were to be implicated in any way, then it should be up to the police to investigate and bring charges against them if necessary, which would be examined in a court of law. Tax evasion is wrong - it is contrary to the rule of law, and trials involving tax evasion cost the taxpayer money, reducing what can be spent on public services.

Tax avoidance is not wrong. Rolling a good throw in Monopoly to avoid landing on the Income Tax square is not generally frowned upon.

You didn't land on that square. You naughty, naughty boy.

An example.

You plan to save into a bank account, about £50 a month. You talk to your financial adviser about this (because, of course, given that I work for a financial adviser, I know that everyone in the country should have one) and he tells you that if you save into a normal bank account, any interest you receive will be taxed at 20% every year. £1 out of every £5 that you get in interest, the Government will take, simply because it can.

However, if you save into a different type of account, the Government won't charge that tax. So, do you want to have your cake and eat it?

The answer, unless you are a stark raving lunatic, is yes please.

Congratulations, you have just started saving into a Cash ISA. Perfectly legal way of avoiding a tax charge. Not evading paying one that is due, but preventing one from even occurring. Is that immoral? Most people would argue no.

Now let's magnify things up a bit.

You wish to leave your children £10million in your will. Most of it is contained in a £5million property. You've had a fantastic life, still have loads of money left, and want your kids to benefit from it. However, if you do this conventionally, this will leave your children with a whopping £3.74million Inheritance Tax bill to pay, which is a sizeable chunk of your money.

Again, you talk to your financial adviser. He tells you that, by giving your home to a limited company which you own, and paying rent on the property to that company, you will be able to avoid paying £2million in Inheritance Tax. Furthermore, you can then use a series of trusts to help mitigate the rest of the potential IHT bill. So would you like to have your cake and eat it?

Yes please.

What you have done is use Inheritance Tax business relief to exempt your main residence from tax, and then a combination of gifts and chargeable lifetime transfers to mitigate the rest. All perfectly legal, and it has saved your children £3.74million in tax. Is this immoral?

Ah, now that's a question, isn't it?

Some people would argue no, others yes. To those who argue yes, I ask this - at what point does tax avoidance become immoral? When, precisely, should you not plan your finances, but simply hand over your money to the State? Why is tax avoidance acceptable for the poor, but not for the rich?

The tax avoidance argument is nothing more than the politics of envy. Vodafone and Arcadia turn over massive profits every year, far beyond what most of us imagine earning in a dozen lifetimes. And thus, some people are insanely jealous of this. And this manifests itself as 'protesting against tax avoidance.'

If tax avoidance is legitimate for one person, it must be legitimate for another. I cannot understand why some people find it perfectly acceptable to discriminate against someone just because they have a lot of money.

Imagine if such discrimination were applied to women. Or to the disabled. Or to black people. Or to Jews.

Surely, history has taught us that if we have a society with one rule for some and another for others, then that society is apartheid?