Not anymore. A morality clause has been added to the social contract. Public opinion on tax planning is changing.
Stamp duty, introduced in 1694 to provide funds for war against France, was relatively easy to collect as it was a physical stamp on a document. When, in 1696, window tax was introduced, it was initially seen as a politically expedient solution: it was easy to assess and to collect, the wealthy paid more than the poor and it avoided the controversial issue of income tax. At the time, disclosing personal finances to the state was seen as a morally unacceptable invasion of privacy.
By the early 1700s revenue from window tax had started to decline. People were performing rudimentary “tax planning” by bricking-up their windows and new houses were being built with fewer windows.
In 1784 another property-based tax, brick tax, was introduced. Again builders tried to get around it – this time by using larger sized bricks. This game of cat-and-mouse with the taxman continued for some years, with the government introducing higher tax rates on larger bricks and builders reverting to timber construction where possible.
It was finally abolished in 1850 on the grounds that it was restricting much needed industrial development. Meanwhile, as Victorian cities became ever more crowded and social conditions deteriorated, window tax grew increasingly unpopular. It was known as a “tax on light”, and repealed in 1851.
Industrialisation and urban development had made these property taxes unworkable. However, the same forces had strengthened the case for income tax, which had been introduced – albeit on a temporary basis – in 1799 by William Pitt the Younger. It was repealed on a few occasions during periods of peacetime, but was a relatively constant fixture throughout the 1800s.
By 1901, with 80 per cent of the population living in towns, income tax had become an important source of government revenue. During the 50 years to 1914, real wages had doubled and the rate of income tax stood at 6 per cent. The First World War, and the increase in national debt, caused it to rise to 30 per cent. The next significant increase would not be until the Second World War.
Ironically for such an enduring tax, it remains temporary to this day. The law permitting its collection expires each year on 5 April and is not renewed until the next Finance Bill receives Royal Assent. But modern taxpayers can abandon any thoughts of refusing to pay between April and July as the Provisional Collection of Taxes Act 1913 gives the government powers of collection.
By 1944, with so many people now caught in the tax net, the government needed a more efficient method of collection, and Pay As You Earn was introduced. Instead of tax being paid every six or 12 months the underlying basis of PAYE, namely that tax is deducted at source from wages, not only made collection more effective, it also established an expectation that people who earn should pay tax on those earnings.
If income tax was born from the need to support the state, national insurance had a very different political lineage. With its origins in the UK’s emerging Welfare State, it was designed to support individuals who were unable to work because of illness or unemployment.
Following the National Insurance Act 1911, the first National Insurance stamps were issued in June 1912, giving employees entitlement to unemployment and sickness benefit. They were physically attached to a card, which was then issued to the person when they left employment. Being made unemployed is still sometimes referred to as “being given your cards”.
Through national insurance, the government was using tax legislation to do more than simply raise revenue: it was using it to support political ideology. The social contract had changed to include a moral element as well as a political one, and it was being applied to other taxes.
For example, to encourage investment and post-war growth, governments taxed company profits at two different rates: a low rate for retained profits and a higher rate on profits distributed to shareholders. However, the difference in rates was large when labour was in power and reduced when the conservatives took over.
There is a moral case for using taxation to support social and economic goals. But the irony is that when governments manipulate tax rates according to their political beliefs, they undermine the moral imperative in taxpayers who do not share the same doctrine. The social contract becomes weakened.
During the 20th century, as successive governments sought to impose their political ideology by manipulating the taxation system, tax legislation became ever more complex.
The days when people could employ simple methods of avoidance, such as bricking up their windows, were long gone. More sophisticated professional advice was needed, and the accountancy profession stepped in.
When Menzies was established in 1912, the Institute of Chartered Accountants in England and Wales had around 3,000 members. Membership now stands at over 140,000. It is also no coincidence that the tax adviser’s bible, ‘Tolley’s Tax Guide’, was first issued in 1916 and has been published annually ever since.
The last century has seen the profession grow in standing as advisers became increasingly specialist in tax law, but that role is changing. Recent media reports highlight public outrage against aggressive tax planning schemes, much of it driven by a combination of spending cuts, economic stagnation and the widening gap between rich and poor.
The new morality of tax planning may be a temporary phenomenon driven by perceptions of injustice. It will probably lessen when the economy pulls out of recession, but to ignore it and lie low until the media spotlight moves on would be a mistake.
The reason is that the accountancy profession is evolving. For over a century firms have profited from increasingly complex legislation, providing compliance and planning services whilst claiming to be “trusted adviser” to their clients.
They are now being forced to consider moral issues as well as legal ones. The role of impartial technical expert has been consigned to the past. Truly trusted advisers will need to look at the bigger picture, have an opinion and advise their clients accordingly.
In the grey area between what can be done and what should be done, some firms will undoubtedly take a more aggressive line than others, but what will affect their reputation is their ability to justify their approach and be consistent in their advice. The profession has changed dramatically since deregulation allowed firms to market their services. This is simply another stage in their marketing evolution, going from technical service provider to valuable, trusted brand.
Richard Godmon is a tax partner at Menzies LLP.
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