HURRAH FOR TAX AVOIDANCE??

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HURRAH FOR TAX AVOIDANCE??

I am intrigued at the ambivalence the Press (and sometimes MPs – see Blog 136) seem to show towards tax avoidance.  Tax avoidance by the rich and large companies is wicked, anti-social and immoral.  Tax avoidance by the middle classes in contrast is a wholly reasonable activity which, far from attracting disdain, attracts sympathy for the avoider (or rather attempted avoider as most avoidance schemes are ultimately held to be defective) and often calls that it is unreasonable for the bully State to seek to collect the tax due from the would be avoider as he has used the tax money to enhance his standard of living and it would not be reasonable to expect him to pay to the State money that he has spent.

Curiously this suggestion that those who do not pay their tax because they have sought to avoid it should be let off, does not seem to extend to those who have not paid their tax because they have invested the tax money in their business or have not set money aside to meet a tax bill that they surely knew would arrive in 10 to 22 months’ time (the 31 January after the end of their accounting year).  The proposition seems to be that such people have only themselves to blame.  Not setting aside money to meet tax is unreasonable; paying someone to magically make the tax bill disappear and then spending the money in the hope that the magic works seems to be acceptable behaviour.

A good example is a recent article by Sam Meadows in the Sunday Telegraph last month.  Sam told his readers that successful IT consultant, John Simon, was introduced to a tax specialist who claimed to be able to significantly reduce his tax bill …  The scheme recommended to Mr Simon was perfectly legal – or so he was told.  It involved setting up a company and drawing income in the form of loans, with repayment dates that would roll over.  That way, income tax could be largely avoided.  Did it sound far-fetched?  Not to Mr Simon (nor his real name) …  a Supreme Court ruling last year involving Rangers Football Club found in HMRC’s favour.  Now thousands of people who used the arrangements … face demands for huge, and in some cases unaffordable, sums.  The Simon family, for instance, need to find £300,000 within months – something that is likely to force the sale of their family home.  They have two children still at school.

There are some curiosities here.  Firstly, what does Mr Meadows mean by “or so he was told”?  If the scheme was not perfectly legal, shouldn’t Mr Simon be in jail?  Because if it wasn’t perfectly legal, it was a fraud on the tax system.  I do not know what tax scheme Mr Simon entered into.  The Rangers Football Club case involved an Employee Benefit Trust but Mr Meadows’ description of the scheme does not look like such an arrangement.  Does Mr Meadows know something to suggest that Mr Simon’s scheme was not perfectly legal?  If so, he should surely take it to the police!

I suspect the reality is that the scheme was indeed perfectly legal.  But there is all the difference in the world between something being legal and the arrangement achieving the end result that it was designed to achieve.  A couple of weeks ago, I bought a loaf of bread but for various reasons have not eaten much bread in the last fortnight and the bit I have left has gone mould so I can’t eat it.  That does not make the sale of the loaf to me illegal.  It simply means that my purchase has not achieved the objective that I anticipated when I bought it.

And how about “Did it sound far-fetched?  Not to Mr Simon”.  How naïve can one be?  No wonder Mr Simon does not want to reveal his name.  His friends would undoubtedly laugh at his almost unbelievable naivety.

As a successful IT consultant, surely he knew that there is a legal requirement to pay tax on one’s income.  HMRC constantly tell us in Spotlights (where they list on their website tax schemes that are on their radar to warn people off them) that “If it sounds too good to be true, it is probably not true”.  But most of us do not need HMRC to tell us that.  Commonsense tells us not necessarily that it is not true, but certainly that there is a significant risk that it is not true. 

So this is what Mr Meadows would have us believe.  A stranger is introduced to a successful IT consultant.  They converse:

Stranger:         I am a tax specialist

IT consultant:   I do not want to pay tax on my earnings

Stranger:         Why not?

IT consultant:   I think there are enough other people around to pay for the NHS, my defence, my children’s schools, and the other State-provided facilities that make for a civilised society, and that I should be able to keep and spend every penny I earn, not have to pay towards such things.

Stranger:         Simple, instead of earning money for your work, form a company, let it earn the money and you borrow the money from the company.

IT consultant:   That sounds too good to be true.

Stranger:         No we have discussed it with HMRC and they have told us they think it is a brilliant idea and they agree that anyone who uses it need pay no tax on their earnings.

IT consultant:   Thank you very much.  I did not realise that the government is so generous that it will allow me to have the use of the money in this way and not pay any tax.  Now you tell me, it seems to me such a reasonable approach for the government to have taken that I do not for one minute think it improbable.  It also sounds to me just the sort of reassurance that I would expect HMRC to give those who seek to avoid paying tax.

Another puzzling point is that if I borrow money, the lender expects me to repay it at some stage.  That does not mean that I can use the borrowing to increase my standard of living.  On the contrary, it normally means that I will need to restrict my standard of living as I have to set aside money to repay the loan.  So why can’t Mr Simon use his loan repayment monies to pay his tax bill?  After all, he owes this money to his own company so it will surely wait a bit longer for repayment.  I suspect that you are thinking that Mr Simon will not have a loan repayment fund as he never intended to repay the loan.  But that cannot be the case.  It would then not be a loan at all; it would be a pretend loan, and if it was only a pretend loan, Mr Simon could not reasonably have believed that it would have had the same tax effect as a real loan – and it would of course also have been fraud to pretend to HMRC that there was a real loan.

I have no sympathy for Mr Simon.  I don’t mind him having tried to avoid paying his fair share of tax.  He is entitled to do so.  However, I do object to him trying to pretend that it is not his fault that the government now wants the tax and he does not have the money to pay it.  Of course it is his fault.  In entering into a tax scheme he took a risk that the scheme might not work.  None of these schemes come with a guarantee of success.  I have no objection to his having taken that risk, but I think he acted wholly unreasonably in not setting aside funds to be able to cope with the tax should that risk materialise.  I am sorry for his wife and children.  They were probably unaware that Mr Simon was gambling their future in taking a chance of beating the government (and society).

The other fascinating point is that £300,000 is equal to tax on £750,000 at 40%.  Of course it will relate to a number of years, but not more than 6, which is £125,000 of earnings p.a.  I am intrigued that Mr Meadows thinks that such a level of earnings makes Mr Simon middle class.  Of course the £300,000 figure probably includes interest and the 2% National Insurance, but the 40% tax rate only applies to income in excess of around £42,000 p.a. so £125,000 is probably a ball-park figure of income.

ROBERT MAAS