I had a Twitter debate yesterday with two people on tax avoidance. One was Peter Watt, the former general secretary of the Labour Party. The other was Mark Rowney, who describes himself on Twitter as "Former Lawyer at Clifford Chance. Now resigned to make the world a better place. Vice Chair of @BatterseaLabour". He worked on international finance, including tax structuring, at Clifford Chance.
Watt argued that tax avoidance embraces such things as paying money into an ISA or pension. Rowney went further. His argument was as follows:
Imagine you're broke (not hard I'm sure). You've got a small amount of cash and you have to choose between food and clothes. You choose food. Guess what, you've engaged in tax avoidance! Sure you were thinking that you can carry on wearing your knackered jeans but can't go for much longer without food. However at the same time you've structured your spending activities in such a way as to reduce the amount of VAT you pay. You weren't consciously thinking of it but that is the effective result. Budgeting can have the unintended consequence of tax avoidance. I use this example to make the point that the act itself of tax avoidance (the actus reus to use legal parlance) is not immoral in itself.
I differed with them on Twitter, saying both arguments are simply wrong. My argument is that tax avoidance is seeking to get round the law. In my view tax avoidance is not and cannot be about doing things that are very clearly legally permitted, and even encouraged by parliament. So paying money into a pension or an ISA is not tax avoidance. Parliament specifically grants tax relief for both of them and you can't be avoiding tax if you do what parliament intends. But Rowney and Watt disagreed. Indeed, Rowney tweeted in response to such a suggestion:
Sadly, for a lawyer, he's way of mark. As Lord Nolan said in the House of Lords in 1997:
Tax avoidance .... is a course of action designed to conflict with or defeat the evident intention of Parliament.
I think that's pretty definitive. As a result, beyond a shadow of a doubt, paying into an ISA or a pension is not tax avoidance. Rowney and Watt and all who argue that way are just wrong. Legally wrong, even.
But what's interesting in that case is to speculate on why people like Watt and Rowney - and their friends from the far right like Mark Littlewood at the Institute of Economic Affairs - say such things. Well let's go back to Watt to get the answer to this one. He said in his article (and remember, it's a former general secretary of the Labour Party saying this):
It is right that we clamp down on so called “contrived” avoidance schemes and the planned general anti-abuse rule should be welcomed.
But we also need to be honest that tax avoidance per-se is not wrong, morally or otherwise. And that the line between “good” and “bad” avoidance is not always clear. We should state clearly that while government must collect taxes so that it can deliver the services and protections that we expect them to, we understand that tax is a necessary evil and that people have the right to try and legally minimise the amount that they pay. Furthermore, any government should have a duty to minimise the amount that people and companies have to pay in tax and to spend the tax that it does collect wisely.
That's astonishing stuff, and explanation for why every sane person must still have some reasonable worries about what a Labour government might, or might not do. What he's saying - what a former senior Labour official is saying - is that tax is a 'necessary evil'. It clearly follows that he thinks that state services fall into the same category. After all, they're paid for with tax. That means he obviously health, education, law and order, defence, and the whole infrastructure of the state that make life possible in this country is to be despised. And wealth redistribution, and the correction of market failures, which are other major reasons for taxing, are also evil. And that's obviously why he thinks people should have the right to get out of paying for them - knowing, as I'm sure he does, that the option in question is only available to the rich, who'll subvert the social justice Labour should stand for but for which these two people clearly do not, at every opportunity.
Deep in a part of Labour is a hatred for much that is very good in this country - and for the people who provide the essential services on which we all depend. And that same part believes - like the far right - that only the private sector and the greed that motivates it provides the answers to well being.
No wonder people don't vote Labour. I would never vote for a candidate with such views - whatever the party label.
Ed Miliband has a long way to go to prove his party can be trusted with people like this in his party.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
That’s the sort of argument that is used by someone Krugman would call a very serious person. Pretend to care about the impact a particular issue has but come up with some pretend reason as to why you can’t really do anything about it.
Probably the sort of person who would also say we need to propose policies that can get bi-partisan support. Basically there a block to anything we want whilst pretending to be otherwise.
Spot on
I don’t understand. These are *Labour* politicos opposing fair taxation? I must have missed something.
Lord Nolan said: “Tax avoidance …. is a course of action designed to conflict with or defeat the evident intention of Parliament.”
Peter Watt said: “You’ve got a small amount of cash and you have to choose between food and clothes. You choose food.”
Many would say the evident intention of this parliament is to ensure many more people are forced into exactly those decisions; yet another nail in the coffin for Watt’s argument…
This is a seriously thin argument from you today…..
So the choice to pay into an ISA rather than a taxable investment account is not avoidance, nor is paying into a Pension apparently because the Government gives you that choice despite the huge number of avoidance schemes with Pension payments at the centre.
How can paying dividends be avoidance then? Rather than salary, surely that is a choice given by Government as well?
Faced with the fact that many people see acceptable tax avoidance and unacceptable tax avoidance you have chosen to argue that some actions don’t count as avoidance at all. Now you must create a list of those actions that don’t count and when you do it will look stupid and upset people from either side of the argument……
And forget arguing that each event must be decided on its individual merits, in a democracy we like to know what is allowed before we act, not later using your get out of jail free GAAP.
You mean using the House of Lards explanation for what is, and is not, tax avoidance is a thin argument
I know you’re pro-tax abuse – but that’s just crass comment on your part
Note that small point – the will of parliament. The will of parliament is that employment should be taxed under PAYE, not as dividends. That’s why a disguised employment is tax avoidance.
Now stop wasting my time
Hang on a minute. Richard has a point. Many people, myself included buy gold and silver. When I buy silver, I have to pay VAT. When I buy gold I don’t. So, the obvious thing to do is buy gold, and I do so to maximise my investment, but at the same time I am avoiding tax, although this is not the intention. Is that Immoral?
I am certain the government has not sanctioned “VAT Free Gold” to get people to buy it, as they have ISAs.
Wrong I think
Gold is considered currency and so VAT free
Silver is not
So in fact the VAT treatment is to recognise the fact that gold is a savings medium
In fact – exactly consistent with the ISA logic
“Note that small point — the will of parliament. The will of parliament is that employment should be taxed under PAYE, not as dividends. That’s why a disguised employment is tax avoidance.”
What is your view then on a single person company that has a large capital component. Lets say for instance I set up a company which buys a MRI machine for £1m and then contract to a single hospital and as an employee of the company I operate the machine. If I then pay out a salary and dividends, would you view those dividends as avoiding tax or as a justified return on the capital invested?
You’re in business taking risk
So if you pay dividends I have no problem
Although I would introduce an investment income charge on investment income over £5,000 a year to effectively charge NIC on this – pensions excluded…
No employee buts their own MRI scanner
Look at economic substance and then these things really aren’t very hard
It sounds very much like Mr Watt is not so much a Labourite as a disappointed Conservative. He buys all the ideology but doesn’t share the hope that a Hayekian utopia can be realised. ‘Alas,’ he sighs ‘tax is a necessary evil.’ Presumably he concludes that people are too feckless and stupid to achieve the ideal — but the ideal remains hallowed and beatific.
A real Labourite would recognise, contrariwise, that the ideal is thoroughly dystopian and that the realisation of it could only be worse still.
I doubt many people feel particularly overjoyed when they pay their taxes. But that doesn’t make taxes ‘evil’! They’re an integral part of social solidarity — something that Labour doesn’t have too much to say about these days, sadly.
Some and mirrors by the right wing. I can’t help but feel that it’s dishonest and it’s intentional.
I’ve signed up to New Wilberforce Alliance in the hope that the ideals they espouse http://www.newwilberforce.co.uk. In the hope this small snowball will turn into an avalanche for change to build a better world for our children, our children’s children and their children.
I’ve just signed up too….
Just had a look at whose behind it, aims, etc and have signed up too.
Richard,
What do you make of the article “A Baker’s Dozen” in yesterday’s edition of Taxation magazine, exploring terms to apply to different types of taxpayer behaviour? It’s slightly tongue-in-cheek, not entirely without bias (why a term for government attempts to blur the boundary between avoidance and evasion but none for right-wingers’ efforts to portray avoidance as benign?), and I am not entirely convinced that some of the distinctions made (tax mitigation vs tax planning; tax avoidance vs tax abuse) add much value, but I think it’s a pretty good attempt to clarify a spectrum that so many commentators, politicians and tax professionals seem to struggle with.
Zacchaeus
Well, I confess I haven’t seen it
Taxation is one I no longer take
“Imagine you’re broke (not hard I’m sure). You’ve got a small amount of cash and you have to choose between food and clothes. You choose food. Guess what, you’ve engaged in tax avoidance!”
– well that’s one of the dumbest things I’ve ever heard.
Sorry Richard
My computer crashed part way through my posting and should have read:-
Smoke and mirrors by the right wing. I can’t help but feel that it’s dishonest and it’s intentional.
I’ve signed up to New Wilberforce Alliance http://www.newwilberforce.co.uk. in the hope that this small snowball will turn into an avalanche for change to build a better world for our children, our children’s children and their children.
I can see though you did make sense of it.
All the best.
I consider that buying food instead of clothes may be some definition of tax avoidance, but only if the money was available for both. And then only if the purchase of clothing was avoided so as to not pay tax on that purchase.
Saying that a person should be well-dressed and hungry so as to pay tax is well on-the-way to insanity.
I must admit that it seems, to date, that Labour is still hoping to get elected by wearing blue.
I also am a member of Unite.
Hi Richard,
The problem with an ISA is you need to act to move your money to avoid the tax that would otherwise be taken. You need to do this by a certain date or you lose the tax advantage. So to avoid tax on your savings you need to act, to move your money to do so. The state doesn’t do this for you. If you don’t move the money in time, you don’t save the tax. Surely The State should step in to make the banks move such savings to ISAs for those who are incapable of making such observations or savings themselves.
Noel
Seems to me that the arguments which try to suggest we are all engaged in tax avoidance are a bit desperate. But it is part of the wider enterprise which has been so successful: to take the nasty attitudes of a few and pretend that they are an inevitable part of human nature. I suspect it makes those who really are against the notion of a social contract feel better about themselves. Maybe we are all a little apt to judge others by our own behaviour.
We had a saying in my family: ” I love paying tax: they can’t take it off you if you haven’t got it”
That is at least a strong a strand in “human nature” as the other
Think its worth remembering that for most of these guys lab/con/lib is only a label, what matters is power !
Personally, I couldn’t trust anyone who thinks of tax as “a necessary evil”. The NHS essentially gave me my first son, he would never have survived at 26 weeks without NHS intensive care.
Every day the NHS, the teaching profession, the police & the ambulancemen (sorry persons), do things that massively change lives for the better.
It is sad that many people don’t want to pay into that.
It is criminal that the Govt have decided they don’t want to make them pay into that.
The 100m & the “black swan” theory
The market is great at perfecting what has already happened. Its no good at predicting what might happen because it is, simply, the weight of many expectations. Sometimes you need a philosopher NOT an economist. Don’t get Hayek get Bertrand Russell.
Anyway, to get back to the Olympics. We all know what you need, innit, bout 6′ tall, built, powerful – gotta be succesful.
Until Usain turns up, 6’5, rangy, better as a fast-bowler, the guy don’t look like a sprinter & the market is, reasonably, unenthusiastic.
So, the markets always right ! Let’s see tomorrow.
Tom
I’m just shocked by your comment.
“Lets say for instance I set up a company which buys a MRI machine for £1m and then contract to a single hospital and as an employee of the company I operate the machine. ”
Does this really happen ? How can it be considered acceptable ?
A patient comes in with concussion, walks out after an MRI scan & falls dead. Afterwards it transpires the MRI m/c wasn’t properly maintained. How can private sector suppliers possibly be responsible for holding & maintaining NHS equipment ? Surely that is well short of ethical ?
Your selective and redacted quote from Nolan is either highly disingenuous or somewhat ignorant.
Perhaps you could explain why you decided to deliberately omit the words “within the meaning of section 741..”.
I made clear I had omitted words
They are relevant to the context of the case but not, I think, to the opinion of Lord Nolan on what avoidance is
It is your comment that is disingenuous by seeking to limit the application of what was said, inappropriately
Well then lets add a bit more of what Lord Nolan said:
“Tax avoidance was to be distinguished from tax mitigation. The hallmark of tax avoidance is that the taxpayer reduces his liability to tax without incurring the economic consequences that Parliament intended to be suffered by any taxpayer qualifying for such reduction in his tax liability. The hallmark of tax mitigation, on the other hand, is that the taxpayer takes advantage of a fiscally attractive option afforded to him by the tax legislation, and genuinely suffers the economic consequences that Parliament intended to be suffered by those taking advantage of the option.’
Exactly as I argue
Yes
And exactly and completely consistent with what I quoted
Glad you now agree
And exactly why ISAs’ and pensions are not tax avoidance
What are you trying to prove?
You tend to regard tax mitigation as taking advantage of tax benefits specifically provided in legislation, your most common example is that of an ISA.
What Lord Nolan indicates (in going far beyond your ISA example) in this judgment is that it is not tax avoidance to choose the least heavily taxed of different forms of investment or to choose the most tax efficient of various courses of action.
He says form has to follow substance
And his indication of that is following the intention of parliament