I liked this exchange on the blog, and thought I'd share it.
Someone called Frank said, when commenting on my blog on the tax avoidance debate on Accountancy Age:
It's not about avoiders Richard, it's about the system that allows the avoidance in the first place. Unfortunately people seem more concerned about the symptoms than the cause.
I disagree, Frank. Whether a system allows avoidance or not, we are all moral agents, and we can all take decisions. No system covers every eventuality, and this is easily seen in families: when a child does something they know to be wrong they sometimes try the line “you didn't tell me not to do it”. It doesn't work: at least it doesn't work in my family. It is seen as cheek, and compounds the offence. That is because we expect children to generalise precisely because we cannot tell them what to do or not do in every circumstance. It is therefore rather strange to accept a defence which does not work for children over the age of about 5.
Such comments are why persisting with allowing comments on here can be worthwhile. Fiona's spot on. The whole tax avoidance industry, based as it is precisely on the logic of looking to do things that have not been previously banned is clear indication of an immature sense of assessment of right and wrong matched with an underdeveloped ability to extrapolate acceptable behaviour. Alternatively, as the child under 5 usually evidences, it comes from an exaggerated sense of self importance usually described as selfishness. All of which makes it so appealing.
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Its not an either or. They’re both right.
They may both be technically right but Frank’s argument is immature and could be arguably based on selfish self interest and contempt for for society. Fiona wins the intellectual argument.
I appreciate Fiona’s analogy, but it’s missing some context. As parents, the current situation is the equivalent of us giving our children a several thousand page-long rule book, and saying “these are the rules you need to follow”. It wouldn’t take long for the child to find the loopholes in the rule book that while still allowing them to technically follow the rules, means they can bend them to their absolute limit.
My argument therefore, actually tallies with Fiona’s – I think the entire tax system should be simplified to make avoidance more difficult, if not impossible, by making the rules as straightforward and clear-cut as possible, and getting rid of the many thousands of pages of tax legislation which is what has allowed the situation to arise in the first place. Much the same as a parent setting simple ground rules for their child teaches them to do the right thing, or be punished. That was the thinking behind my original comment.
On a related point, Richard, given your line of work, surely your obligation to your clients is or has been to minimise their tax obligations as much as possible? After all, nobody owes the state a penny more than they’re required to pay – something you yourself adhere to, given the way you structure your business. I ask because I’m struggling to reconcile how you can preach a certain mandate for others regarding avoidance, yet pursue exactly the same strategies yourself?
I don’t disagree with you doing this – it makes financial sense to limit your tax payments to only what is required – but to do this while saying that others don’t care about society for doing the same is somewhat hypocritical, IMHO.
FWIW, I am a full-time employee and pay PAYE. I support a wife and three children, and come from a very humble background. Just to give some context regarding the insinuations that I must not care about society because of my point of view on this issue.
a) We need a General Anti-Tax Avoidance Principle Bill
b) That does not stop the need for detailed legislation – the world is very complex – business NEEDS complex tax law to give it certainty
c) Nothing means complexity has to be abused
d) No accountant is required to minimise their client’s tax bill – or maximise their profits. I make sure my clients pay the tax that the law requires. I would never suggest anything that conflicted with the spirit of the law. They know that.
e) My own business does not minimise my tax bill – having a company and paying dividends would reduce my bill somewhat. I do not do that.
f) Your conclusions are wrong in other words
To complete the picture regarding (e). If you had a company and took salary your tax bill would be considerably higher than through an LLP. I’ve done the calculation for you.
I agree: you’re right
But then, I’m not an employee
I’m self employed, so why should I claim to be something I am not?
And I have argued for reform in this area to reflect economic reality before you start jumping up and down
You’re not a partnership either in the true sense of what is intended.
A very good analogy from Fiona, Richard,and one I’ll remember for future use. I wonder if you had a chance to use it in the debate with Herring?
But moving on to you own final comments, I’d query your conclusions here: ‘The whole tax avoidance industry, based as it is precisely on the logic of looking to do things that have not been previously banned is clear indication of an immature sense of assessment of right and wrong matched with an underdeveloped ability to extrapolate acceptable behaviour.’
Do you really believe it comes down to an ‘immature sense of assessment of right and wrong’ and ‘an underdeveloped ability to extrapolate acceptable behaviour.’?
Now you obviously meet (or have over the years) far more people than I do who happen to be involved in avoidance and evasion activities, but nevertheless, I find it difficult to believe that many of the very bright people who work in the finance and accountancy sector and who advise on these schemes are unable to accurately assess what’s right and wrong and have an underdeveloped sense of acceptable behaviour. I accept that it may be that some of the people they sell their services to – wealthy retirees and the like – may be suitably afflicted, but the finance directors and the like of major companies? And the Richard Herring’s of the world? Really!?
In my experience – which spans wide range of different work environments, including local government (not always a paragon of virtue) – the vast majority of people who make naff moral judgements are aware that’s the case, but accept – willingly or otherwise – that there was some countervailing reason that ‘forces’ them to make their choice. In the case of tax avoidance surely those countervailing forces are quite clear: profit and greed.
Ivan
I have to say many of the people I meet in high finance are extraordinarily naive, and remarkably unthinking about what they’re doing. That could be choice, of course. And it could be wilful turning of a blind eye. But equally they pay people to produce justifications for their behaviour and then believe those justifications are the truth. Sophistication of argument or analysis is not commonplace, I assure you. It will rarely go beyond the level that the average libertarian will produce in all its shocking naive egotistical simplicity.
Greed rules.
That’s pre-5 year old behaviour.
They just pay others to create the excuses and find willing guns for hire.
Richard
Ok, Richard, useful to know. Thanks.
If only life were that simple and we all agreed on what tax avoidance *bad behaviour” is.
David B
I think agreeing on what bad tax behaviour is will be a lot easier than preventing it.
I am mystified by this quarrelsome contention – maybe there’s a background about the protagonists not evident in the actual quotes and unknown to me – the quotes appear to be making what seem to me to be straightfowardly complementary points. Against unacceptable behaviours we invent and exrecise a range of sanctions – moral sanctions, legal sanctions, enforcement sanctions. Yes, we need more moral behaviour (Fiona?), yes we need better laws, (Richard, Frank), yes we need more inspectors, and more vigorous inspection (Richard). Why do people here seem to fighting their corners for mutually exclusive options As far as I can see Frank does not (in the quote) present a “defence” of bad behaviour, he talks about countering it. Where’s the infantilism? What’s the problem? Where’s the conflict? Is Frank under attack for pointing at “the system that allows the avoidance in the first place”? Neither do I see much use in analogies with managing the behaviour of 5 year old children. Their behaviour does not generally take place within the framework of applicable laws, whilst that of taxable adults does. Bit like comparing national economic management to family economic management. Dodgy.
If you don’t get Fiona’s point you may be part of the problem
Uncalled for, Richard, and uncharacteristically obtuse. Of course I understand Fiona’s argument, I’ve said she’s right, what’s your unpleasant accusation about? Frank as quoted is also right, and you keep saying so every time you ask for a General Anti-Tax Avoidance Principle Bill. I’m asking what’s going on here about Frank, and conclude there’s some hidden agenda being discussed here, everybody must knows sonething about Frank that I don’t. Why does John, for instance, agree he’s right, but “could be arguably based on selfish self interest and contempt for for society”. “Could”? “Arguably”? That sort of innuendo phraeology without back-up could put millions of us in the dock. An “Intellectual argument” ‘won’ by comparing tax avoiders to little children contesting issues with mummy? (In case I need to say so, that’s not an attack on Fiona, an enjoyable, valued and valuable contributor who is usually right, as here, that’s about John’s idea (yours?) of what constitutes an intellectual (as opposed to a rhetorical) argument.)
Look, I’m just asking, you know I’m a thoughtful and consistent supporter, I never expected to get flamed here of all places. The reason I’m participating in this string, and what I have tried to say before in other strings, is that I think it often needs said that morality and moral suasion on the one hand, and clear law with effective law enforcement on the other, are not choices, options, alternatives or rival approaches for your (our) and allied campaigns. They are hand in hand, hand in glove. I can’t believe you disagree, but If that really makes me ‘part of the problem’, I’d better get my hat.
I picked on Frank’s comment because it is a typical argument of those who seek to justify tax avoidance – replicated in another comment by him above – that there is a duty to minimise tax and it is all the fault of government that it provides opportunity to abuse the law.
I do not for a second think I misunderstood him
I do not think Fiona did either
I do think you either are doing so.
And I do think this lame argument – we abused because it was possible to do so is the nub of it – is morally corrupt and is used to support the corruption of the tax system, and with it markets, society, the economy and in the end democracy
I do not think that an exaggeration: it is what is happening – and yes, those who avoid do use exactly the line of argument that Frank used as if they are innocent parties with no choice in the matter; they’re abusing because they have to.
There is no such obligation to abuse
And I’m candid, those using this argument are seeking to justify actions that have no moral foundation
Fiona pointed that out and said a five year old should be capable of understanding that
I agree with her
I am amazed you cannot see that
And like it or not – morality is always going to be part of tax – even if backed up as I would wish by law and penalties to ensure those who do not wish to act appropriately know the penalty of not doing so
And those people who don’t do so are the sort who use the type of argument Frank offered
Richard, I think you have jumped the gun. Nowhere have I tried to “justify tax avoidance”. My comments have been about the fact that it happens, because it can happen. I don’t think it’s appropriate that the UK tax rules allow the likes of Amazon or Starbucks to avoid paying much tax here, but I’ll be damned if I will blame those companies for it, and here’s why: trying to arbitrate based on morality is not possible because morality is constantly in flux – it varies across the social spectrum and across the ages. It would be lovely if we could all expect everyone to do the right thing and for that to actually happen, but we’re all grown-ups here, and if there is a way for us to save money, individually or collectively, we will try to do so.
Taking an example, and with reference “that there is a duty to minimise tax” – can you explain why anyone, anywhere should pay more tax than they are obligated to? I’m on PAYE, but I have a pension which entitles me to tax relief. Perhaps I should contact HMRC and say “that’s okay, just tax me on my pension”. Or maybe I bought something from Jersey and didn’t pay VAT on it – by rights I ought to go back through my purchases and write a cheque out to HMRC for all that avoiding tax? After all, I’ve been minimising my tax obligation by using legitimately available avoidance schemes – just like the Amazons and Starbucks of this world, only on a smaller scale.
This is where I believe your argument falls down – in theory it’s lovely to think that everyone should pay a “fair” amount of tax, but the fact is that “fairness” is arbitrary depending on your point of view. Consequently the only way to enforce the proper payment of tax is not through moral oneupmanship and disparaging remarks about the morals of those who don’t agree with you, but through appropriate regulation.
Doubtless you will rebut with the fact that nobody in their right mind would chastise a person for having a pension scheme, or for not paying VAT where they don’t have to, but as another poster mentioned, where is the line drawn? It seems to be focused on big business or those who have high revenues/profit margins. So there must be some point on this arbitrary morality scale where it goes from “yeah, that’s okay” to “oh now you can’t do that”. And that’s what I have a problem with, and why I believe that – unfortunately, I must add – morality cannot be used as a yardstick for measuring what is appropriate when it comes to taxation.
It’s a nice idea, it just doesn’t fly in the real world. In terms of your General Anti Tax Avoidance Bill – fantastic idea in my opinion. Additionally though I continue to believe that the UK can’t remain an attractive place for external investment if it continues to operate in a vacuum when it comes to the way its tax rules work. If there isn’t, there ought to be someone, somewhere looking at other nations and working out what makes them more attractive than the UK for investment, and shamelessly stealing their approaches to put us back in the game. If we don’t we’re going to reach a tipping point where the private sector can simply no longer support the ever-burgeoning public sector.
I remain completely baffled Frank
Morality is and will always be a yardstick when it comes to measuring behaviour
We use it, those enforcing regulation use it and so do tribunals and courts use it
Of course we need regulation to back it – and clear principles – such as economic substance tests to guide us – but nothing replaces morality as the arbiter for the 99.999% of cases that will never go to court
And not am I focussed solely on big business – although that is where complex avoidance occurs
Nor am I blaming consumers – I am blaming those who abused
And the sting is in your tail – that you clearly believe in tax competition – which is why I am quite sure I interpreted you correctly. This is a corrupt logic since its corollary is the failed state. Is that what you wish for? That’s where the tax haven route you seem to aspire us will lead to – and that’s not just wrong, it’s immoral
Thank you for a balanced response James. My comment above expands on my position. I’ve never posted on this site before so I have no agenda with any of the contributors.
James
I think the problem may be that several issues are being addressed at once.
I”m sure “Frank” is right that the tax laws, as they stand, are excessively complex &that HMRC don’t police them particularly well, if at all.
That doesn’t really affect the responsibility of the individual does it ?
If someone told me that the local constabulary had gone on strike & there was, effecitvely, no law & order, I wouldn’t go into Morrisons & start helping myself to bottles of wine & choice steaks.
I, as a human being, can make that moral choice. Hence, I think, the point Fiona was making.
The tax system is rackety & inadequate, but if you make a choice that you will pay a level of tax on your income greatly lower than that Parliament intended then you are cheating the system & you KNOW you are doing wrong. You don’t need no copy of the Taxes Acts, no copy of HRA, no list of European tax cases. You need your f~~~~ng conscience & that’s that!
I do agree
I would like to say that if my post came across as an attack on Frank that was not my intention at all. I merely wished to address the argument that the problem is systemic, which, as others have noted, is often put forward as a justification for what people do to avoid tax.
Certainly we must have sanctions when people do not behave well: that is also true in families, but we do not present a list to children and feel ourselves bound by that list if they find a loophole: we quite properly reject that approach because it is silly; and because it is an failure of the responsibility of a parent.
I was interested in the parallel drawn with those analyses which equate a national economy with a household: those types of argument are quite obviously wrong because a national economy is not like a household economy. But to suggest my argument makes a similar error is not correct: because a person IS like a person. Decisions are taken by people, and not by any other entity.
Nor does the alleged complexity impress me: and that is because all of these apparently insurmountable problems turn out not to be insurmountable if you look at the other end of the state finances: they are all pretty much dealt with in the benefits system where there are quite draconian measures to ensure that such “loopholes” don’t work. As a recent example, some benefits claimants were allegedly “exploiting the system” by coming off benefits for a short time and thus avoiding sanctions for the longer term claimant. This was unequivocally called “gaming the system”, though it was perfectly legal. The response has been to change the rules, certainly. But before that there was no problem in highlighting what is really quite a small problem, and tarring those who used it as “cheats”. Similarly, the benefits system has no difficulty in dealing with those who divest themselves of capital for the purpose of claiming benefits:they just pretend you still have the money, as I have mentioned before. That is an example of a general rule akin to a general anti avoidance law, such as Richard and others have advocated: it sits beside detailed rules quite happily, so far as I can see (for the avoidance of doubt, I do not hold the benefits system up as a good one: I am merely trying to point out that if you see the group as “scroungers” you can do things about that:and if you don’t you are suddenly paralysed, apparently. The difference is the underlying attitude: and who you see as “us” not “them”)
If we were serious about tax avoidance we need look no further than the benefits system for ideas on how to deal with it: there are lots of things in place which are “unthinkable”: but only when applied to tax.
The point which nobody seems ever to address (presumably because it cuts to the heart of the matter and nobody wants to actually deal with it) is where acceptable use of statutory reliefs veers into immoral tax avoidance. I have used this example before and nobody has ever been able to answer the question in this scenario:
1. I own several businesses in a uk limited company (say 3 separate businesses)
2. I want to sell one of them
I sell the business as a trade and asset sale and pay corporation tax on the gain at 24%
alternatively I incorporate a new uk subsidiary company transfer the trade down to it and sell the company (instead of the trade and assets) – NO UK corporation tax due, because of a statutory relief.
are we saying that step of reorganising your affairs to fall within a relief is immoral? if i had done nothing i would have paid tax
I think its quite easy to start extrapolating more complex “reorganisations” than the one described above and at some point you get to a position where people go “hang on a minute, thats incredibly artificial” – the issue for everyone, regardless of position on anti-avoidance is where that “immoral point” is ?
That’s a relief allowed in law
I can’t object to that
I would however want the relief withdrawn, but that’s a different issue
Respectfully though – that’s hardly a difficult one
And where to draw the line is usually really not hard – most people can do it with ease
And transferring assets to your wife is a relief allowed by law. So why is Phil Green different to the example above?
Oh hang on….the question there was not a transfer of assets, not least because there wasn’t one according to Green
So he didn’t even have to rely on a relief. We also don’t tax non-residents on dividends and that is intended by the law. You accept in relation to your own affairs (above) that there’s no compulsion to maximise taxes. Why is Green different?
Are you sure it’s not just the amounts involved and the fact that he is loaded that sways your analysis.
I think you’re ignoring a very great deal about the Green structure – as I think you also well know
Respectfully, you have no way of knowing that, and your claim is simply wrong
But isn’t this the heart of the matter. Most of these schemes are reorganizing affairs to fall within a statutory exemption that would otherwise not be available. The moral objection comes when the reorg is highly artificial. Nobody (including you) has ever been able to articulate at what point on the scale immorality kicks in (because it’s a purely personal judgement). Which would tend to support the theory that morality has a limited place in tax law.
I have always been entirely quite clear. I expect tax compliance
Tax compliance is seeking to pay the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes.
That is clear to all but the wilfully blind
Anthony
were you to transfer the business then the recipient could, for example, claim Capital Allowances on the machinery. They might even be able, although I doubt it, to claim relief for any losses brought forward. If you sold the Co as a going concern then they wouldn’t. Put simply, the vendor would always rather sell a Company, the buyer would always rather buy a business.
Basically, the problem is that business people will always, quite reasonably, structure deals in different ways. Having done so, they may find the tax take is much greater than would’ve been the case. Hence, they lobby HMRC to “make allowances” to build into a relatively simple structure complex clauses. HMRC tends to do so because it is pressurised by HMT.
Those clauses are, immediately, seized upon by the tax avoidance industry who seek to create situations where, say,in your example, the vendor is treated as selling a Company but the buyer is treated as buying a business.
You are probably right to say that the only response to tax avoidance is a v simple system (NOTE this doesn’t, at all, require flat tax) where every business, incorporated or not, files accounts & HMRC taxes it on the profits shown on those accounts.
To be clear William, the availability of carried forward tax losses will likely be the same in either scenario. Asset sale the losses will be streamed, share sale they can be used unless you change the trade
The big difference will be amortisation of goodwill which may be minimal depending on the type of business.
I’m quite happy to accept that the Green structure was deliberately created to avoid tax. In fact I think it almost certainly was. But the problem is that if you legislate to close the loopholes that allow that structure to exist, you could end up reintroducing unfair tax laws that we have been gradually reforming. For example, married women in the 19th century fought long and hard for their right to own property. And much more recently, we introduced separate taxation of the incomes of husbands and wives, so that married women had the right to be taxed on their own earned income without regard to their husband’s income. I don’t think these are laws we would wish to overturn simply because of the bad behaviour of one high-profile couple, are they?
First – separate taxation has now gone. Osborne has achieved that this year without anyone seeming to notice
Second, the tax avoidance in the Green structure was not because the ownership was with Mrs or Lady Green: it wasn’t. The use of offshore, trusts and tax haven residence was what was objected to, and that is very different and far removed from issues of gender equality
And just like you are not an employee (above) although you could be if you wanted to, Green is not the shareholder although he could be. It’s held offshore and we don’t tax non-residents on dividends. Why are the cases so different?
Note my comment on tax compliance
Separate taxation was fatally undermined when Tax Credits were introduced. Osborne just put the final nail in the coffin.
I agree with you that the real issue is the complex structure. But much of the rhetoric that I have heard has been about Lady Green’s ownership. That is what I was addressing.
That has never been the issue. No one worries about her owing the assets. It’s the fact that the structure is offshore and is designed to ensure that in effect no tax was due on dividend income streams that has always been the issue
@anthony. The problem with your plan is that there would be a degrouping charge on the sale of the new subsidiary (and so all goodwill etc would be taxable in any event). You would be in the same position as a straight sale. Perhaps avoidance is harder than popular belief. No need to campaign on this one Richard.
Damn: I should have noted that! Well spotted
you should trust your first reaction RM – Barry is wrong there is no degrouping in this circumstance (hasnt been for a while)
SSE always kills a 179 (degrouping) charge, para 15A of schedule 7AC TCGA specifically provides for the scenario i described to be tax free.
Well, I should have gone and looked it up….
I admit it’s something I’ve never done
If you removed speed limits from our roads, a high proportion of drivers would still drive at sensible speeds in built up areas because of the realisation that speeding puts the lives of predestrians at risk. But some drivers would drive faster than they currently do, without realising the potential danger to predestrians, and some would drive a lot faster through either ignorance or recklessness.
Sometimes you can’t leave moral decisions in the hands of the general public, and I believe this is firmly the case when it come to tax.
Of course we can’t rely on the public alone
That’s why we need a law – a General Anti-Tax Avoidance Principle Bill – to ensure that those who don’t understand morality comply to the standards that those who do understand want upheld
Anth
thanks. You have now gone far beyond my tax knowledge/ TBBH you might as well be talking Igbo or serbo-croat, for all the sense I can glean.
Clever Guys like you probably can understand the system, but, realistically, we should have a tax system ANYONE can understand.
If you are exceptionally intelligent you should be composing concertos, playing chess, writing philosophy, or trying to find a cure for HIV. If exceptionally clever people are bothering themselves with tax then that, in itself, shows our system is v badly wrong.
Thanks William. Tax law is necessarily complex although to be honest I’m still waiting for tangible results from the tax law rewrite project which was supposed to make it easier to understand!
As demonstrated by the calibre of hmrc staff, there is more financial reward in being a tax advisor than doing those other things unfortunately
I agree
Tax law is necessarily complex
Unless we want bigger loopholes
I would add that The Law is complex, which is why you have to prove intellectual ability to study it at university.
I see that some of Barclay’s staff applied for anonymity in a civil damages case arising from the LIBOR manipulation. It occurred to me that there are very few people who are allowed to remain anonymous in court cases: but one group granted that privilege are children….