IT IS difficult to think of an issue that has generated more self-righteous moralising by politicians of all parties than the recent furore over “abusive” tax avoidance. Some of the pronouncements emanating from Westminster would lead one to believe that tax avoidance is one of the great crimes of our age. Except it’s not a crime.
What has been overlooked in the din of the debate is that tax avoidance is perfectly legal and, one might say, mandatory. Is the company director who fails to take all legal steps to minimise the company’s tax liabilities really doing his best as a custodian of the company’s assets?
However, the question has become: is tax avoidance moral? With the economy and public finances in bad shape, is it right for individual taxpayers to seek to minimise their liabilities? Surely, the moralists argue, it is incumbent on each and every one of us to pay our fair share?
The current explosion of comment comes as no surprise. It suits the government very well to promote and foster a view that tax avoiders are bad and their activities are damaging to the country. Attacking tax avoiders reinforces the government’s mantra that “we’re all in it together”.
To further shape the debate, the government has deliberately blurred the distinction between avoidance and evasion by tacking the word “abusive” onto the former. Exchequer secretary to the Treasury David Gauke was recently quoted as saying: “Aggressive tax avoidance is anti-business and businesses should pay their full tax”. Previous announcements have referred frequently to taxpayers paying the “right” amount of tax, while George Osborne has repeatedly expressed his outrage at the activities of those taxpayers who follow the advice of the Lord Justice General, Lord Clyde, who famously said: “No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in his stores.”
Is the government seriously suggesting that taxpayers should look at their income and gains and decide what tax bill it would be fair to pay? There-in lies anarchy.
The problem here is that, despite the government’s efforts to redefine the English language, there is no such thing as the “right amount” of tax and, if there were, it would not be for HMRC or, still less, taxpayers to define what it is.
But more crucially, if the government wants us to behave in this utopian way, it has an obligation to do likewise. Should it not also only claim the “right amount” of tax?
In a recent VAT case, heard on 22 February in the first-tier tribunal, Hung On Chan, a restaurateur, had for many years deliberately overpaid VAT so that he could be absolutely sure that he would not be penalised for underpaying. These are unusual circumstances, but those are the facts.
His accountant subsequently pointed out to him that this was unnecessary, so he adjusted later his VAT returns to recover what he had overpaid. Sensible? Law-abiding? Not in the eyes of HMRC.
Because the “error” was deliberate, he should have used a different method for reclaiming the overpayment. Instead of adjusting future returns, he should have made a voluntary disclosure. The financial effect would have been identical, but the process different. But because he used the wrong procedure, he lost his case and wasn’t allowed to reclaim the VAT that everyone agreed he had overpaid.
So did Chan pay the right amount of tax? Did HMRC rely on an accurate, but unfair, reading of the legislation to maximise its position? Does any of this sound familiar?
Tax liabilities should be assessed in accordance with laws made by parliament. If gaps and loopholes appear, then it’s quite right and proper that laws should be amended to correct the situation. But to suggest that taxpayers should somehow be the arbiters of what is the right amount of tax is arrant nonsense and a complete abrogation of responsibility.
This is not a moral question any more than it is a moral question for drivers to decide on the right speed limit for a particular stretch of road.
But if the government insists on taxing us in accordance with some sort of moral code, shouldn’t it instruct HMRC to do exactly the same?
Andy White is a tax partner at Carter Backer Winter.