Philip Stevens has a great article in the FT this morning. He condemns Jimmy Carr's tax planning but condemns Barclays much more. As he puts it:
Albeit belatedly, it dawned on Mr Carr that societies operate within sets of norms and ethics that reach beyond the fine distinctions of tax law. Now, there is something Mr Diamond could think about.
Oh yes.
And the same should be said of the accountancy, legal and tax professions - and all who say "it's legal so it's OK".
Not true. And it's good it's being said in the FT.
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Given your view it is clear that Jimmy Carr-style planning is immoral but 2 for 1 offers are not, I wonder whether you could provide some clarity on the following common tax ploys so your readers can be clear whether they are acting in an immoral way or not in respect of their tax affairs. In the interests of transparency and clarity, a ‘yes’ (immoral) or ‘no’ (OK) to the following would be very helpful given your expertise and your stance that we cannot solely rely on legality as a guide.
1. Putting money in ISAs rather than fully taxable deposit accounts
2. Putting money in a pension scheme
3. Making tax deductible charitable donations
4. Taking a tax-free lump sum from a pension rather than taking more as a taxable monthly pension
5. Paying off a mortgage rather than keeping the cash in taxable savings account in order to avoid taxable interest receipts
6. Putting money in non-taxable premium bonds rather than holding the cash in a deposit account and earning taxable interest
7. Couples transferring money between themselves so interest is earned in the hands of the lower rate tax payer.
8. Couples not transferring money to the higher rate tax payer thereby not maximising the tax potentially payable by them.
9. Staggering share disposals between tax years so the overall gain benefits from two years worth of CGT annual exemptions rather than one.
10. Transferring shares to your spouse so that the some of the gain can be sheltered by their annual exemption as well as your own.
11. Deferring dividends or bonuses until after the tax rate falls from 50% to 45%.
12. Carrying on a trade as a sole trader or partnership rather than through a company so avoiding significant amounts of employers’ national insurance.
13. Paying off the mortgage on your home in preference to paying off a buy to let mortgage as tax relief is available on the latter but not the former. What if the individual does not pay off the buy to let mortgage in preference to paying off the mortgage on their home?
14. Claiming PPR in respect of the gain on the disposal of your home.
15. Flipping PPR between several properties to reduce the tax payable on any gains on the eventual disposal of those properties.
1 to 6, 9,12 and 14 are all OK – and not avoidance at all
The substance and risks of the transactions accord precisely with what law intends and risks are real from taking those choices
I’ll try to clarify the others soon – distracted now
Remind me if I don’t.
Let’s deal with this:
As I said 1 to 6, 9, 12 and 14 are OK – not avoidance at all for reasons I’ve already noted.
So
7. Couples transferring money between themselves so interest is earned in the hands of the lower rate tax payer.
8. Couples not transferring money to the higher rate tax payer thereby not maximising the tax potentially payable by them.
Money is one thing: it is ofte hard to tell who owns money in a relationship. I think the state has problems intervening here: money is too fluid to ascribe in a relationship.I don’t encourage such behaviour – and don;t subscribe to such behaviour – but have problems seeing how it can be addressed
That is not true of more tangible assets or assets such as shares. The latter especially when relating to work. Here I think shifting can be an issue. It is only avoidance – and no one usually claims it is aggressive – but there are exceptions to that (split residence arrangements, for example, that exploit such rules) and there are also clear cases – like those IR35 envisaged where shifting occurs. I think substance has to be looked at here. It’s not always easy – for example I often wonder whether my wife is underpaid from Tax Research LLP although the total tax would not change is she were allocated a different ratio – but the need to look at substance clearly exists and if there is a mismatch between substance and form then there is undoubted avoidance. Documentation as to intent and evidence as to fact is needed – but I think there is a case for looking at the use of the settlements legislation here. There is also a clear case for a need for a higher tax rate on investment income of more than say £5,000 a year.
10. Transferring shares to your spouse so that the some of the gain can be sheltered by their annual exemption as well as your own.
I think this avoidance and would have a law saying the original owner was liable for two years after transfer
11. Deferring dividends or bonuses until after the tax rate falls from 50% to 45%.
Clearly avoidance
12. Carrying on a trade as a sole trader or partnership rather than through a company so avoiding significant amounts of employers’ national insurance.
No limited liability is the price paid – not avoidance
13. Paying off the mortgage on your home in preference to paying off a buy to let mortgage as tax relief is available on the latter but not the former. What if the individual does not pay off the buy to let mortgage in preference to paying off the mortgage on their home?
Potentially avoidance – but candidly, way beyond the ability to legislate. I think within the limits of commercial substance justification
14. Claiming PPR in respect of the gain on the disposal of your home.
The law allows it – fine
15. Flipping PPR between several properties to reduce the tax payable on any gains on the eventual disposal of those properties.
Facts determine – was it ever really a main home? That’s the issue. Substance v form again
Thank you. Would point 12 change if the partnership were an LLP?
Personally, I don’t have a problem with 13 as I think that is just very simple tax planning given two equally rational and commercial choices. So I would see it as no different to some of other examples that have been cited as being acceptable.
To me that is the difficulty with the moral question. It is likely that there will be a good level of concensus at the extremes and may be that’s good enough. However, it is far from clear cut for the cases in the middle – and especially so if you are not an expert – so a good level of consensus just wouldn’t be forthcoming. The recent press on furore on tax aviodance and scrapped changes to limit charitable donations is a case in point.
I think you’re overstating the lack of consensus: for a start you choose arrangements that I very much doubt any GAntiP would attack
A very interesting set of choices. I await with interest Richard’s views on the remaining numbers. I have one choice to add. This is one that puzzles me. It is a choice made by thousands and thousands of employees, some are members of trade unions others are not.
An employee enters into a salary sacrifice arrangement. The salary is reduced and the employee pays more into the pension scheme on behalf of the employee. The employee pays less NIC, the employer pays less NIC as a result of the choice to enter into the salary sacrifice arrangement therefore the amount of “tax” (assuming NIC is a form of tax) collected by the Treasury is reduced. The employee’s pension fund is enhanced.
Such a salary sacrifice is not like an ISA. It is not legislated for by any part of the tax code unlike an ISA. An employee and the employee’s employer benefits from the reduction in NIC (and the Treasury looses out).
Such a salary sacrifice arrangement is taking advantage of the nature of the UK tax code, any tax code because it is selective in what is taxed (or subjects to NIC) is incomplete. A popular word for this incompleteness is a “loophole”. A salary sacrifice arrangement takes advantage of a “loophole” in the tax code. HMRC do not seek to close the loophole. Employees and employers benefit from it at the cost of the Treasury (the State/society).
Simple question that puzzles me, are all the employees that make such a choice making a morally appropriate choice, yes or no?
I accept this is a loophole – but the economic consequence – paying for a pension has happened – and NIC relief is available on pension contributions of this sort – so whilst this is avoidance it is very non aggressive – and even needs to be ratified
Thank you for your prompt response, I am aware that you are very busy.
John phrased his post in terms of moral: yes or no. On that basis and given my understanding of your views on the morality of tax avoidance i.e. you believe that any avoidance is immoral, am I safe in assuming that “very non aggressive” is the same as immoral but only mildly immoral?
Thanks for your time in anticipation.
Point 12 is back to front. People trade through companies rather than partnerships / sole traders because they pay less NIC operating through a company.
Sadly, you don’t really understand the issues here and I suspect you are too blinded by ideology to listen. What goes on is that transactions are recorded in ways that don’t really coincide with the commercial actuality. In addition transactions are recorded in places where the business does not happen. This is all smoke and mirrors but the gullible are always taken in by flashy conjurers!
Look at the stuff up in your list. If it is real, it’s probably fine. (15) is the most likely to be dodgy, beacuse you haven’t described a transaction.
James – you are an accountant of sound judgement
James, I think you make your posiition clear that only 15 is dodgy in your opinion. I don’t think I made any idelogical assertions in my post but simply asked Richard for his advice. Personally, I would have been less aggressive than you if that helps. Surely the purpose of these posts is to educate those who may understand less than you rather implying they are not bright enough to be capable of understanding the issues.
I was just interested in finding out where Richard thought the line was and, like GDM, I am still very interested in his views given his excellent blog.
On point 12 the comparison was between taking the same amout as salary out of a company versus as taking it as profit in a sole trader so am pretty confident NI is less in that situation.
James, I have one further thought on your post. If you accept — as you say you do – that share transfers between spouses are fine and also paying income to a lower taxed spouse is also fine, it must follow that Philip Green type planning is perfectly moral? Lots of people would disagree with you judging by the press comment. Using your analysis, that was a ‘real’ transaction that didn’t involve smoke and mirrors.
But with respect, you ask your lawyer and accountant to advise on the law. I have never heard a professional say “it’s legal, so it’s OK”. Nobody cares about their opinion on whether it is OK or not.
I once had an interview for a magic circle firm and suggested that lawyers could add extra value to clients by seeing the business from a distance and offering a moral perspective (exactly as you suggest) or even a perspective on how certain activities might be regarded by the public. I was put firmly in my place and not offered the job.
In the end, what is moral is a matter for individuals to decide, whereas what is legal is for the state to determine. You just hope that laws are effective and broadly represent a reasonable form of morality. Because what is regarded as moral is not always clear or fixed: a majority of the world’s population probably still believes that homosexuality is a sin, and I suspect a sizeable minority would regard blasphemy, apostasy or abortion as a greater moral evil than rape. And we don’t want to go down the moral police route of the Spanish Inquisition or the Iranian clerics.
Candidly, I completely disagree
Many people treat their accountant as something like a priest: they definietly ask moral questions
The starngest one I was ever asked as an accountant was “should I have an abortion”
I did not advise: I admit I just listened
On tax I advised
Just look at who provided $790m of finance to help with this tax evasion scheme
http://www.ft.com/cms/s/0/ac2cebf4-bc65-11e1-a836-00144feabdc0.html#axzz1ytvcqdei
If Barclays is lending $790m to such schemes without knowing their nature I would suggest that Board of Barclays are not fit to be doing their job – if they knew how it was to be used then I would like to hear thier explanation as to why this was proper behaviour for a UK bank.
Either way I would hope the FSA are asking some very hard questions.
John makes an excellent point as you do throughout your blog: high income and corporate taxes are blackboard theories that don’t work both for good and bad reasons. A more productive policy would probably involve a lower flat tax without exemptions (lets say 20%) and an exemption free VAT (lets say 15%). Should save not least on an army of tax inspectors.With your expertise Richard perhaps you could run through the numbers.
I have
It can’t work
I blogged this yesterday
Flat taxes are unfair by design
And they are meant to oppress the least well off
Fair enough.
And while we are demanding apologies, how about those civil servants and others paid out of the public purse making an apology for their tax avoidance activities; together with those government departments, local authorities, NHS Trusts and other taxpayer funded institutions that facilitated this avoidance.
Fine
But typical right wing nonsense to excuse your own abuse
Looks like Diamond and co will have to do a lot more than just apologise given today’s news. Bit of a double whammy I would say – in that it demonsrates that there isn’t much fit and proper about Barclays and what garbage the efficient markets hypothesis actually is.