I have this on Comment is Free today:
My two sons are practising for a school production of Oliver right now. One irritating consequence is that I hear them sing Fagin's line that "In this life one thing counts, in the bank large amounts" far too often. That he continues by saying "Why should we break our backs, stupidly paying tax? / better get some untaxed income" just adds to the irritation.
And yet the lines seem remarkably apposite, for isn't this exactly the philosophy of those MPs who have abused the parliamentary expenses system? And isn't it at the same time the philosophy of those who use tax havens?
The fact is that some MPs are proving themselves adept at abusing the spirit, if not the letter, of the rules that exist with regard to their expense reimbursements. The chance that any will be prosecuted is, I suspect, remote in the extreme. What they are doing is exactly akin to tax avoidance: they are, as the word avoidance implies, "getting round" the rules to secure benefit that cannot be justified by the economic substance of what they actually do, although the expense claim they are making is legally correct.
I have refrained from commenting on this to date. I admit I wanted evidence to form a judgment – and would still like more of it. I admit a certain apprehension in waiting for it: some of these people are my friends. I hope I will not be disappointed by their actions. However, I was asked to comment on the tax aspects of it on the Today programme on Radio 4 on Saturday morning, which gave rise to a flurry of activity as journalists pursued me on the same subject throughout Saturday. To their obvious disappointment, I had to say that the simple fact was that unlike almost everyone else, MPs' expense reimbursements are exempt income and so outside HM Revenue and Customs inquiry. That's why I fear I set them off chasing the capital gains implications of second homes, but that's not the issue I'm concerned about here. My concern is with the ethics of this issue and the reactions to it, as well as the solutions that are available.
I have no doubt that the MPs who have abused the system did so for one simple reason: they believed they could. They did that for two reasons. First, the regulator (in this case the Fees Office of the House of Commons) did for all practical purposes run a regulatory system under which a blind eye was turned to all but the most blatant exploitation. This wasn't light-touch regulation, it was negligent. The rule book appears robust; the reality was anything but.
There was another reason why the MPs who have abused the system did so: they believed they could get away with it because no one would find out. The system lacked accountability and any form of transparency. Nothing was on record; nothing was ever expected to be on record. And the income that was not on record was tax free. And those who enjoyed the benefit, and especially those who abused it, fought very hard to retain it.
By now I think the astute will see the analogy I am making: the system for MPs' expenses was, in effect, identical to that which exists in tax havens. There are rule books in those places that look tough, but to which little attention is given and where all but the most blatant abuse is ignored. "Chums regulating chums" is the rule of the day, much as it was in the House of Commons. And some of those within the system do not only abuse it, they also promote that abuse as if it is desirable. In the tax haven tax profession there are those who promote tax avoidance: getting round tax laws in a way that has no economic substance and that clearly abuses all expected use of these places. And just as some MPs clearly made it their job to encourage new entrants to the MPs' club to abuse the rules to justify their own behaviour, so do the tax professionals in the tax havens encourage new entrants to the profession to abuse the rules of taxation as if it is the right thing to do.
Both the expense-abusing MPs and the tax professionals who promote tax avoidance have lost sight of the ethical constraint that they should comply with the intent of the law. The revulsion that most are now expressing at the abuse by some MPs is exactly the same that I feel about members of my own profession who abuse the system of tax havens.
The solution for MPs involves four things. The first is that the rule book has to be enforced. Second the system has to be open and accountable. That means everything is on public record and audited. Third, an expense should be allowed only if it actually relates to the additional costs an MP incurs in doing their work – and finally, if, even despite that, there still remains personal benefit within it, then that personal gain should be taxed as a benefit in kind, as it would be for all other employees in the UK.
The exact same is true of tax havens. There the regulator has to be really independent, really able to enforce the rules, and really be seen to do so. Only transactions that have real economic substance in the tax havens in question should be allowed to be recorded there. Those transactions must all be subject to full accountability, be on public record and when appropriate be subject to audit. And when the transactions that are claimed to take place in the tax haven actually have no substance in that place then they should be subject to tax elsewhere – a process the tax haven should ensure takes place.
It is vital that the abuse within the House of Commons be tackled, and quickly. It is as vital that the culture be reformed. MPs who try to beat the system have either to recognise that they must both change their ways and their attitude , or they have no place in public life. But the same is also required of the accountants, lawyers and bankers who avoid paying tax. Their abuse is as bad as that of the MPs. The excuses they offer are as lame. The secrecy they use to hide their abuse is just as repugnant. These professional people claim they are doing a public duty by avoiding tax; in doing so they promote a culture as repugnant to most in society as that of the MPs who have abused the expense system.
Put simply, abusive MPs, abusive professionals and the regulators who have befriend and facilitated both are all as bad as each other.
Reform the House of Commons please, but extend the logic as is obviously necessary: clean up the professions from which so many of these MPs come as well or there is no chance that the culture will be reformed. These issues are linked: deal with them both or the abuse will continue.