WHEN IS TAX AVOIDANCE ACCEPTABLE?

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WHEN IS TAX AVOIDANCE ACCEPTABLE?

Last March the Treasury published a document headed, “Tackling tax avoidance, evasion, and other forms of non-compliance”.  It starts:

“The vast majority of taxpayers, from individuals and the smallest businesses to the largest companies, already pay their fair share toward our vital public services.  This government recognises its duty to that compliant majority to build a fair tax system, and through that system to make sure that those who try to cheat the Exchequer, through whatever means, are caught and forced to pay what they owe”.  It goes on a few paragraphs later:

“But the government must also stop those who try to hide from their obligations.  There remains a minority who try to break the rules, or enter into avoidance schemes …  This government has shown that it will act against this”.

Of course, that was Theresa May’s government, not Boris Johnson’s. 

It was David Cameron’s government that cut the pension annual allowance to £40,000 (and from 2016/17, £10,000 for a 45% taxpayer).  This limitation does not prevent higher sums being paid into the pension scheme but the excess of the contributions over the £40,000 (or £10,000) figure is taxed on the employee at 40% or 45% as if it were income of his.  With a defined benefit pension scheme, i.e. one where the employee is guaranteed a pension of a specified percentage of his final salary, the amount taxed on the employee is the amount by which the value of his pension rights increase in the tax year above the £40,000 or £10,000 figure.

Many people have grumbled about this but, as far as I am aware, very few have stopped working as a result of this tax charge.  A £40,000 pension contribution each year still produces a pension that is greater than most people’s annual salaries.  Not so hospital consultants apparently.  What is good enough for other people is not good enough for them.  They are apparently refusing in droves to work overtime.  The Department of Health and Social Care estimates that one in three family doctors and consultants are turning down extra work in case it increases their pension pots by so much that it leads to a large tax bill.

So the NHS has been trying to come up with a way to avoid this tax charge.  After a number of attempts to placate its staff, it has now said that a doctor can ask the NHS pension scheme to reimburse him or her for the tax bill if it exceeds £2,000 and that the NHS will make a “contractually binding commitment” to make up the lost pension on retirement, i.e. to pay the pension that would have been due had the funds not been depleted by reimbursing the doctor for the income tax charge.

To many people that sounds like tax avoidance.  So how do the government square absolving one privileged section of the populace from the effect of the tax laws with that “duty to that compliant majority to build a fair system”?  They don’t even try to.  Matt Hancock, the Secretary of State for Health and Social Care, has apparently admitted that this “could constitute tax avoidance” but that it is in “the wider public interest” for the State to pay doctors’ tax bills in this way.

Most people would question that.  How can it be in the public interest to relieve a small group of people from their responsibilities to the State?  If it is in the wider public interest to insulate a few people – all of which are likely to be in the top 5% of earners – from a tax charge that Parliament in its wisdom felt fit to impose, why wasn’t it in the wider public interest to give a slug of money to Thomas Cooke and Mothercare and British Home Stores to save the thousands of jobs for less well-off citizens?

Of course if the pension charge is damaging productivity, it should be scrapped.  Parliament should have recognised that it was ill-conceived and bound to reduce productivity.

The £10,000 cap was introduced by clause 23 of the F(No 2)A 2015.  Introducing it to MPs on the Finance Bill Committee the then Minister, David Gauke, explained, “Clause 23 and Schedule 4 ensure that the cost of pensions tax relief is fair, manageable and affordable.  These changes will restrict the benefit of pensions tax relief for the highest earners …  These provisions … are focused on the wealthiest pension savers, to ensure that the benefit they receive is not disproportionate to that of other pension savers” (Hansard 13.10.2015).

Rob Morris for Labour responded, “I have to say that I am delighted by the clause” and later, “I urge my hon Friends enthusiastically to support the clause”.  They duly did!  The debate lasted around 5 minutes with none of the other 28 members of the Committee suggesting that the clause might have any undesirable side effects.

I have nothing against rich doctors.  They work very hard and deserve what they earn.  But so do rich lawyers and industrialists and bankers – and even accountants.  Why is it not in the public interest for such people to be excused tax too?  That is a rhetorical question.  It is fairly clear that, with a general election approaching, the last thing that a Minister hungry for re-election wants is for the NHS to be seen by the public as unable to function.  Who cares whether businesses function?  Not many in the electorate!  What a way to run a tax system!

ROBERT MAAS