GEORGE Osborne will stand up today and announce a major clampdown on tax avoidance. Despite what some would have us believe, this should not target Ken Livingstone or people like him.
I’ll be clear from the outset – I have no affection for Livingstone. I disagree with his policies, his personal views and the relationships he cultivates with repressive regimes. But the recent accusations of tax avoidance levied against him have led me to argue against my best beliefs and come to his defence.
Since he left office in 2008, Livingstone has developed what many refer to as a portfolio career, with speaking and consulting engagements for a wide variety of clients. By channelling the proceeds of these engagements into a private company that he established, he has incurred the wrath of journalists for tax avoidance. The journalists are wrong.
By every intent and design of the law in this country, we encourage those who, like Livingstone, have a wide portfolio of professional earnings, to put their affairs in order by setting up a business. Why do we do that?
So their expenses and their costs can be offset by their revenues and so that if they have multiple employees they can be incorporated into the PAYE scheme. It makes HMRC happy because it’s organised as intended.
Journalists are incorrect to say that the act of someone setting themselves up as a business is a form of tax avoidance. Livingstone has been misconstrued and misrepresented as only paying 20 per cent small company corporation tax instead of the 50 per cent he would owe if he were paying income tax.
If you set up a business, the corporation pays tax on its profits and then, if you draw dividends, the most tax-efficient means of taking money from a small business, you pay tax on that – probably at 32.5 per cent. Thus, the total amount of tax you pay is 46 per cent.
Sure, it’s less than the 50 per cent that he might otherwise be liable to pay, but the difference is a few percentage points – and that does not make headlines. By not highlighting how small the gap is, the newspapers lead people to the impression that Livingstone pays 30 per cent less tax than he should, rather than the truthful four per cent.
This is deeply misleading and it suggests that he is engaging in tax avoidance when he is actually doing the things he should do and the things that HMRC encourages him to do. I would expect no less or more of anybody else who has multiple clients and therefore finds themself in a position of starting a business.
If you are self-employed and you have multiple customers you have an affirmative obligation to act as a business. This is not tax avoidance, this is tax compliance.
When Livingstone said that he just handed his finances over to his accountant, it was one of the rare moments in my life when I actually believed him. Because that’s exactly what you’re supposed to do.
Affections can be fickle and the media has certainly proved this – but for once journalists should restrain their personal passions and argue with their heads. Though I would prefer that he never again gains a position of power, even Livingstone is entitled to set up a small business when he gets kicked out of office.
Doug Richard is the founder of School for Startups.