I wrote a paper on tax havens for PCS last year. In it I explained the basis of most tax avoidance, which I said is based on a person or company seeking to do the following:
- Reallocate their income to a person or entity that has a lower tax rate than the individual whose activity really generates the income. The people or entities to whom the income is diverted might be:
- Other members of a person's family e.g. a spouse or children;
- A trust for the benefit of a person's family;
- A company owned by the individual but taxed at lower rates than those they might enjoy;
- In the case of those who can do so (which is mainly those not domiciled in the UK), an offshore company or trust.
- Change the location of a transaction. This is much easier for those not domiciled in the UK than for those who are so domiciled, but in both cases the opportunity exists if care is taken to relocate a transaction out of the UK if commercial justification for doing so can be created, with lower tax being paid in many cases as a result.
- Change the nature of a transaction so that it appears to be something different from what it actually is. This is commonplace, the most popular tactics being to:
- Convert income into capital gains, which are almost always taxed at lower rates;
- Convert earned income into unearned income such as dividends to avoid national insurance charges that only apply to earned income;
- Provide benefits in kind to an employee that are taxed at less than their full value.
- Delay recognition of income e.g. delaying a bonus so that it is taxed later, so saving on cash flow in the meantime.
- Obscure the information available on a transaction, at which point tax avoidance begins to blur into tax evasion, but for which tax havens are very useful indeed.
These five ideas will be, if I'm informed correctly, reflected on Newsnight tonight. And as I explained on Radio 5 this afternoon, none of them will be touched in any significant way by Graham Aaronson's General Anti-Avoidance Principle which Cameron claims will beat tax avoidance. Which makes the claims he and Clegg have made today very hollow indeed.
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Your 5 methods, as mentioned on Newsnight, would have a little more meaning if you gave some examples so readers (and viewers) can test your hypothesis and see if you are in fact correct in your assertions.
Read my work
Start here http://www.innovativefinance-oslo.no/pop.cfm?FuseAction=Doc&pAction=View&pDocumentId=11607 chapter 4
How is providing a benefit in kind to an employee tax avoidance? If I get a company car how is this tax avoidance?
And how is delaying bonus tax avoidance? There are strict rules which I am sure you know well that make the tax point the earlier of date of entitlement and date of payment so this cannot produce a cash flow advantage, if anything they make it disadvantageous to delay payment.
And in point number 2 then if something is “commercially justifiable” then how can it be tax avoidance?
The fact is most of these things are regarded by most insiders – including HMRC – as basic tax planning and certainly not tax avoidance.
We have a choice about what is, and is not, tax allowable
I am saying we are making to wrong choices
The result is that not enough tax is paid
So how can this be tax avoidance if they’re complying with the law? You might think that the government is too generous with what items of expenditure are tax allowable, but you can’t accuse taxpayers who comply with the law in this way of indulging in tax avoidance.
Yes you can
You can even make it illegal
That’s what the proposed general anti-avoidance principle will do
The simple fact is that tax is not “the law” – it’s how a series of events relate to a series of laws
And if the mix is wrong whilst each step is legal the whole can be declared otherwise
That’s exactly how anti-avoidance principles work – and work they do