The government is laughably hypocritical about tax avoidance

Allister Heath

TAX avoidance is the root of all evil, a shameful practice to be stamped out – unless the government promotes it, in which case it is a very good thing and the answer to all of the UK’s problems. That, it seems, is the coalition government’s ridiculously inconsistent and muddled line, made worse by the fact that almost all tax avoidance, the officially approved sort as well as the kind deemed objectionable, arises from loopholes in the law which the government could close if it really wanted to.

This debate is breathtakingly hypocritical and it is sickening to see MPs who could vote to change the law endlessly jumping on moral high horses, decrying companies that are following the rules as laid down by parliament.

Take an announcement on Monday, which epitomises the nonsense. The Treasury confirmed that it plans to allow individuals to use their Isas to invest in small and medium sized companies that are listed on the Alternative Investment Market (Aim).

Isas are free of income tax on any dividends or interest they pay out and are exempt from capital gains tax; with almost £400bn invested in them (of which just over half are in cash), they are a giant, legal tax avoidance scheme, and one which I would encourage all readers to take part in.

Now, because Aim-listed companies are free of inheritance tax, the new rules means that Isa investors who reallocate their assets into such firms will be able to pass on their assets tax free to their children. For today’s hard-pressed taxpayers, the move is excellent news, but it makes a mockery of the government’s supposed war on tax avoidance and its endless misplaced moralising.

Don’t get me wrong. Inheritance tax is an appalling levy, a form of double-taxation of already taxed assets and should be abolished immediately. I also loathe the fact that the tax system is so complex, so riddled with loopholes and that economically identical streams of income are taxed in such different ways, for almost arbitrary reasons.

In some cases, a pound generated by capital or labour ends up being taxed so many times that it is almost entirely confiscated by the state; in other, much rarer cases, the tax levied is far lighter. This makes no sense, and we need a tax revolution which sees the current system swept away and replaced by a simple, clear tax code where all income is taxed just once at a single, flat rate, with as little opportunity for avoidance as humanly possible.

Most critics of tax avoidance actually quite like high taxes, and want to wring out as much money from the economy as possible. I disagree: I want to slash tax avoidance, but at the same time I want the overall tax burden to be reduced as much as possible.

What grates with the current “debate” is the government’s inconsistency. For every loophole that it shuts, it opens another. Why is tax avoidance good when individuals make use of some government created provisions in the tax system, and why is it bad when they make use of others that merely happens not to be flavour of the month?

Another flagrant instance of such double standards can be seen with the patent box, which enables companies to pay a lower rate of corporation tax of just 10 per cent on profits from patented inventions and certain other innovations. To widespread cheers, George Osborne is promoting his scheme – a blatant tax avoidance device – as a key tool to attract investment and business to the UK.

Yet when Luxembourg or other low-tax jurisdictions tout for business in similar ways, it’s deemed a scandal. Why is it OK for Big Pharma to pay much less tax, but not for water companies to do so, or Google or Starbucks? Why are some companies being treated better than others? Why the inconsistency?

Our kafkaesque tax system is bonkers and broken. We need to tear it up and start again.
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