Friday, July 06, 2012


BLOG 130



IF TAX IS UNFAIR, WHY SHOULD WE WORRY ABOUT MORALITY?


George Osborne and David Cameron are on dangerous ground in trying to label tax avoidance as a moral issue.  Law and morals are uneasy bedfellows. 

What is moral seems to me to be a very personal decision.  For example, I do not claim gift aid relief for the donations that I make to my church as I do not think it moral to expect members of other religions, or of none, to contribute to the maintenance of my church.  However I do not question the morals of my fellow parishioners who do use gift aid, or of my church which exhorts me to do so.  We all have different perceptions of what is moral.  I should surely be free to live my life by reference to my own perceptions of morality, not those of Mr Osborne and Mr Cameron.  Similarly my clients should be free to manage their tax affairs according to their own morals; I am not entitled to impose my own morals on them and do not think they should care about Mr Osborne’s and Mr Cameron’s morals either.

Why should someone consider tax avoidance to be morally acceptable?  Probably because he perceives the tax system to be unfair and feels that if there is a legal opportunity to make its outcome fairer (in his perception) he should take advantage of that opportunity.

My secretary said to me the other day that she did not understand the fuss about tax avoidance.  If she was given a choice between paying tax at 3% or at 50%, she would choose 3%.  Who wouldn’t?  Presumably George Osborne, David Cameron, Margaret Hodge and the Times reporters who have set the tax avoidance hare running on this occasion wouldn’t, unless they are hypocrites.  I certainly would opt for 3% myself.

So who has presented taxpayers with this choice?  Why, Parliament!  Of course, it may not have realised that it was doing so, but so what?  It has done so – and in my view it has done so because it passes reams and reams of legislation which few MPs understand and even fewer question.  If MPs don’t care what laws they enact, why shouldn’t people abide by those laws, not some vague concept of what those MPs might think fair or moral?

When it comes to contrived tax avoidance schemes, the courts scrutinise them closely and tend to try to interpret the facts in accordance with what they perceive to be the purpose of the legislation.  However the convention is that they discern such purpose from the wording of the legislation.  For example, whether a “loan” that is interest-free and in practice will never become repayable is in fact a loan or something else is the sort of question that the courts are adapt as answering.  If they say it is not a loan, there is no tax avoidance; there is only attempted avoidance, and as the taxpayer will then pay the tax with interest and probably also HMRC’s costs, what is so immoral about that?

It surely follows that artificial tax avoidance is something where parliament has made such a mess of the law that, however hard the courts try, that cannot interpret the facts and the legislation in such a way as to thwart it.  That is not wholly right.  It is also where the government has so denuded HMRC of resources that they do not recognise and challenge avoidance within the six years that the law allows them.

If Parliament and the government are happy to operate such a system, I find it hard to see why anyone else shouldn’t try to take advantage of it.

Which brings me back to morality and fairness.  Personally I think that one is a function of the other; it is moral to comply with what is fair but also moral to seek to arrange one’s affairs so as to achieve fairness if you perceive the effect of not doing so will be to create unfairness.

Let me give an example.  Suppose that I want to give my 10-year old goddaughter £6,000 a year until she is 18 so that she has a fund to pay her way through university (Sorry, Melanie, I don’t; it’s just an example).  There are several ways that I can do this.  The most sensible one is to create a little trust for her with her parents as trustees and pay the £6,000 a year into it.  She can’t spend the money, if I die she is not dependant on my executors to pass it to her, she is sure to get it.  Other options are to give her the money and risk her spending it, to give her parents the money and risk them spending it, or, probably the worst option, to put the money into an ISA in my name and hope that I live long enough to be able to hand the accumulated fund over when she reaches 18.

So what does the tax system say?  If I adopt the sensible alternative, it wants 28% tax on the gain made by investing the funds.  This is the same as is payable by a multi-millionaire, even though my goddaughter may have no money and her parents may be basic rate taxpayers.  Furthermore, the trust only gets half the CGT annual allowance that would have applied had I given my goddaughter the money direct.  If I give it to her direct, not only will she get a bigger annual allowance but the gain will be taxed at only 18%.  If I put the money into an ISA, the gain will be tax-free.  So we have a tax system that says that if I adopt the sensible course, the government wants 28% tax, but there is no tax if I adopt the worst option.  Is that a fair system?  Not in my view.  I know a way to put the money into trust and reduce the tax rate on the gain to 18% (and double the annual allowance).  Is it immoral to use it?  It is clearly tax avoidance, but it is to avoid a tax that is equally clearly unfair!  I don’t perceive it as immoral.  I also rather doubt that if you asked each of the MPs who created the unfairness whether they did it deliberately or simply didn’t realise what the effect of their law would be on my goddaughter’s university fund, I suspect that most of them would admit that in passing the law they did not even consider the likelihood of her situation occurring.

I generally try to read (OK, glance through if I am honest) the Finance Bill debates.  This year MPs spent over 1¼ hours discussing a one-page clause to grant tax exemption for foreign football teams coming to the UK for the 2013 Champions League Final.  We have to grant such an exemption as a condition of holding the final here.  Accordingly there was no tax at all involved.  But it gave MPs the chance to give a soundcheck to their local football team (or if they did not have one, their local cricket or rugby team) in the hope that their local paper would pick it up.  It also gave some of them the opportunity to demand that the government should stand up to Europe and call UEFA’s bluff.  Let them take the final elsewhere; if they won’t pay UK tax, we don’t want the massive economic benefit of hosting the final either! They also spent the best part of an hour discussing the 25¼  pages of legislation on the “patent box”, a proposal to give £960million a year of tax relief to “up to 5,000” companies out of the roughly 3.9million businesses in the UK.  The Minister proudly said that one UK company that had been planning to do its research outside the UK in order to avoid UK tax had as a result of this proposal decided to do it in the UK.  No one questioned the morality of a UK company wanting to carry out its research out of the scope of UK tax.

Sadly that’s how Parliament works.  If it can choose to consider important legislation or spend its time on trivia that might get the MP mentioned in his local paper, it goes for trivia every time.  So if it simply rubber-stamps what HMRC asks it to do, do we end up with a fair system?  In my view, “No”.  I could give lots more examples of where it is unfair.

But if we have an unfair tax system, what is so immoral about a person seeking to use it to satisfy his own perception of what is fair in his particular circumstances?  And if concepts of morality involve a value judgement, why is it immoral for Jimmy Carr to reduce his tax bill as the law allows him to do (if the scheme he entered into is found to work, that is) but it is not immoral for, say, Lewis Hamilton to avoid UK tax completely (except on UK earnings) by choosing to live in Monaco while retaining both his UK citizenship and the adulation of the UK press?  The double standards that arise when morality is put on the table are surely a very good reason for keeping it off the national table and concentrating only on the law.


ROBERT MAAS