Evasive behaviour
In the wake of the HSBC scandal, there is a new focus on how we pay tax, and the fine distinction between tax evasion and avoidance. Should moral or legal considerations hold precedence?
“Everybody does tax avoidance,” Lord Fink, the former Conservative Party Treasurer, told the London Evening Standard in February. “The expression ‘tax avoidance’ is so wide that everyone does tax avoidance at some level.” However, Lord Fink is out of tune with public sentiment.
In recent years, beginning with the banking crisis and the UK’s slide into recession, feelings about tax avoidance have changed. Using a tax avoidance scheme may be legal, until HM Revenue & Customs (HMRC) decides otherwise, but in the opinion of the great British public, it is no longer considered morally acceptable.
Until the last decade, the distinction between tax evasion and avoidance was quite clear. Evasion is illegal, and those caught evading tax face hefty fines and spells in prison. Avoidance is legal, and getting one over the taxman in a legitimate way used to be considered perfectly acceptable – and still is, by some.
In 2010, Danny Alexander, then Chief Secretary to the Treasury for the Coalition Government, put tax avoidance and evasion in the same insalubrious group.
Tax dodgesAnnouncing plans to attack offshore tax havens and other ‘tax dodges’, he said: “There are some people who believe that not paying their fair share of tax is a lifestyle choice that is socially acceptable. Just like the benefit cheats, they take the resources from those who need them most. Tax avoidance and evasion are unacceptable in the best of times but in today’s times, this is morally indefensible.”
Chancellor George Osborne used his 2012 Budget speech to describe aggressive tax avoidance as “morally repugnant”, and began closing tax loopholes to stop individual tax dodgers legally avoiding paying their fair share.
"The expression ‘tax avoidance’ is so wide that everyone does tax avoidance at some level"
Since then, celebrities ranging from comedian Jimmy Carr to Take That band members Gary Barlow, Howard Donald and Mark Owen have been publicly pilloried after investing in arrangements that were later identified by HMRC as tax avoidance schemes. Even donors who were receiving tax relief for giving large amounts of money to charity have been dragged into the argument.
No matter how much individuals had contributed to the economy or society, if they had made use of tax avoidance schemes, they were still vulnerable to criticism.
As one Guardian columnist recently put it: “To avoid tax is to scrounge off the state.”
The most recent example of this newfound public outrage occurred in February, when leaked documents revealed that HSBC’s Swiss subsidiary had been complicit in tax evasion and aggressive tax avoidance.
The revelations related to actions taken nearly a decade ago in a country famous for enabling the rich to reduce their tax liabilities, but they still caused uproar, and threw HSBC into crisis.
Flat fee for non-domsThe effect of the ‘non-domicile’ regime is to remove overseas income and capital gains from the scope of UK tax; that is, non-dom residents must earn and spend their incomes abroad. Any earnings made in the UK are taxed as normal. For the first seven years a ‘non-dom’ lives in the UK, they can benefit from this regime quite freely. Thereafter, they can either elect to pay tax or they must pay a flat fee of £30,000 in the UK on their overseas income and capital gains; after 12 years, the fee increases to £60,000, and after 17 years, £90,000.
Nimesh Shah, a partner with accountants Blick Rothenberg, says: “A non-dom paying the flat fee of £60,000 would comfortably put themselves in the top proportion in terms of tax contribution.” George Bull, a partner with accountants Baker Tilly, agrees that it is about time the non-dom tax rules were brought up to date, but adds: “I don’t think any [non-dom] is breaking the law. The UK has a unique feature in its tax system that is working exactly the way Parliament intended.” Although much has been made of the 115,000 people with non-dom status, Bull says that, according to HMRC figures, only about 5,000 of those would actually pay tax on earnings made outside the UK if and when non-dom status is scrapped.
“The vast majority only earn income in the UK,” says Bull. “These include cleaners, hospital workers, people working in the food trade, people from all walks of life. They are not all fat cats abusing the system.”
Detailed consultationShah believes Labour’s use of non-dom tax status in its election campaign is a good example of why taxation should not be determined by the media, politics or public opinion. “Tax policy, like any other government policy, should be considered, acutely assessing the economic impacts,” he says. “Where a fundamental change to tax policy is proposed, it should be subject to detailed consultation with input from the professional bodies, so that the implications are considered and any legislation meets the overall objectives.
“The impact on bottom-line tax revenue and the wider economic implications of such a measure [as abolishing non-dom status] have to be carefully considered and, at this stage, it is apparent that neither have.” So if politicians, the media and the general public are not to be trusted with changing tax law, who – or what – should be?
Richard Murphy, a chartered accountant and tax researcher who founded the Tax Justice Network, suggests the foundation of an Office of Tax Responsibility, a new independent body to monitor the effectiveness of the tax system. He says: “There are plenty of ways that tax loopholes that are completely legal could be effectively addressed. But so far, the political tax debate is not grown-up enough to achieve this.”
The original version of this article was published in the June 2015 print edition of the Review.