Managing Your Cash Flow
Popular tax avoidance myths (and how to debunk them)
10 min read
12 December 2014
Andy White, a tax partner at chartered accountancy firm Carter Backer Winter, talks about the popular tax avoidance claims and why most of them are false.
1. All businesses are under a moral and legal obligation to pay the right amount of tax
No, they’re not. There is no such thing as the “right amount of tax” any more than there is the “right price” for any other supply of goods and services. It is for Parliament to legislate the tax system and it is the duty of all businesses to contribute in accordance with the law. It is not for taxpayers to set the amount of tax they pay – therein lies the path to anarchy.
2. Tax avoidance is illegal
No, it’s not. Sometimes, journalists mention that tax avoidance is not actually illegal but this is often buried in the small print towards the end of an article urging various celebrities to be treated with pariah status.
In many cases, the practice indulged in is not only not illegal but may actually be strictly in accordance with the legislation. HMRC find current legislation increasingly difficult to apply correctly as it is becoming more extensive and arcane. There are some schemes that haven’t even come to court yet that could be found in favour of the taxpayer. Isn’t this akin to a headline “famous celebrity caught for driving at 29 mph in a 30 zone”?
3. Participating in an avoidance scheme that doesn’t work is illegal
No, again. It may not work and may cost a lot of money but it’s not illegal.
4. There is no difference between tax avoidance and tax evasion
Oh too easy. Yes, there is. Even the man on the Clapham omnibus knows this one, doesn’t he? Tax evasion is illegal and rightly so. It can also lead to criminal prosecution. But there is a huge difference between failing to declare income on the one hand and, on the other, telling HMRC all about a tax arrangement and entering into a genuine dispute with HMRC as to the tax effects.
If the Government doesn’t like a “scheme”, then it has the right to legislate against it. That is completely different from allowing HMRC to interpret the law in any way they wish.
5. Huge multinational corporations should be forced to pay tax in the countries in which they do business
They already are. It’s called VAT.
6. Engaging in aggressive tax planning is the moral equivalent of violent crime
No, it’s not. But to read some of the more lurid reporting from newspapers who really ought to know better, one could forgive the reader from becoming confused. Try this from no less than The Times: “George Michael, four members of Arctic Monkeys, Sir Michael Caine and a loan shark convicted of rape are among more than 1,600 people who tried to shelter £1.2bn through one of Britain’s most aggressive tax avoidance schemes”.
What is the relevance of the fact that one of the members of the Liberty tax scheme was a loan shark convicted of rape? Is the intention to imply that such an individual is the “type” that would engage in tax avoidance?
Let’s change the sentence slightly to expose it for the lazy journalism that it is: “George Michael, four members of Arctic Monkeys, Sir Michael Caine and a model railway enthusiast are among more than 1,600 people who tried to shelter £1.2bn through one of Britain’s most aggressive tax avoidance schemes.” Does that say something about model railway enthusiasts?
7. Any transaction that is designed solely to avoid tax and has no other economic purpose is illegal
Really? So authorised pension schemes, ISAs, Enterprise Investment Schemes and VCTs should all be outlawed? The purpose of these tax-efficient structures is to encourage individuals to invest in areas where they might not otherwise do so.
For the investor there is no reason to invest in say, a pension other than for the tax breaks, since it would be perfectly possible to make the same underlying investments outside of a tax shelter. It would be interesting to know how many journalists who “expose” tax avoidance put assets into the name of a non-earning spouse…
8. HMRC should be the sole arbiter of the efficacy of a tax scheme
No, it shouldn’t. HMRC has an apparent inability to handle even routine matters correctly, and possesses a myopic vision when it comes to tax avoidance. They are on record as saying that making a contribution to an authorised pension scheme is a form of tax avoidance (albeit at the benign end of the scale) and continue in their publications to insist, for example, that loans from Employee Benefit Trusts are taxable income despite court after court telling them that they’re wrong. It cannot be right that a Government agency continues to be economical with the truth in this way when they know the Courts have said the opposite.
9. HMRC now have the right to over-rule the courts when it comes to tax avoidance
Well, we know this is not true. Or do we? HMRC seems to think it is. Let’s look at their press release after they lost, yes lost, the Rangers EBT case. “These are avoidance schemes and we will continue to tackle those who do not pay up. It is not right that a small minority can avoid paying what they owe while the vast majority pay the right tax on their earnings.” Perhaps someone ought to tell them that the court found that this was not an “avoidance scheme” and explain that those who participated in it have not paid the tax because they don’t owe it.
10. HMRC’s new powers to demand money from taxpayers who have undertaken avoidance schemes pending resolution of the issue by the courts, is needed to stop people exploiting the delay in bringing these cases before the tax tribunals
No, it isn’t. Taxpayers are not, for the most part, interested in the delay. On the contrary, they want certainty, which is why a number of them are now taking up settlement offers in order to get on with their lives. Furthermore, these new powers encourage HMRC to delay further. Why bother bringing the case to a tribunal if they already have the money? It also effectively makes HMRC judge and jury, a process regarded as heinous by most enlightened countries.
11. Undertaking a scheme with a “DOTAS” number means that the scheme is “HMRC-approved”
Absolutely not! The DOTAS scheme was introduced to facilitate HMRC investigations of packaged avoidance schemes. Allocating a reference number to a scheme says nothing about the effectiveness of the scheme. It simply means that the scheme falls into the category of those that have to be disclosed. Any scheme promoters who say the opposite should be avoided like the plague.
12. It is a far more serious offence to fail to declare a few pounds of interest from a “holiday fund” bank account in Spain, perhaps inadvertently, than it is consistently and systematically to under-declare business takings by hundreds of thousands of pounds
Of course this is a myth. Isn’t it? Well no, actually. The Government is proposing a new law that will make the former a criminal act (even though it may have occurred through pure ignorance and with no intent to evade tax) while continuing to offer amnesties in respect of the latter. Fortunately, they have dropped the proposal at the last minute but the very fact that they were considering it indicates a worrying indicator of their thinking.
Andy White is a tax partner at chartered accountancy firm Carter Backer Winter.