The complexity of the British taxation laws is to blame for the recent crop of tax avoidance stories, says Matthew Sinclair.
For a long time Anglo-Saxons have had a stereotype of the feckless southern European who doesn’t pay his taxes. But with fresh stories of British tax avoidance cropping up almost every day, how long before those jokes start to sound hollow?
This week we have seen three different examples of tax avoidance: Jimmy Carr was benefiting from a scheme called K2 based on loans from an offshore trust . Take That singer Gary Barlow was using a music investment scheme which a tax adviser claimed was a big tax avoidance opportunity . And investors are reported to have been exploiting special reliefs put in place to help the British film industry.
Our dysfunctional tax code encourages this sort of behaviour. There are plenty of loopholes that crafty accountants and expensive lawyers can find for fortunate clients. And when HMRC are working so hard just to administer all those rules, that means they can’t focus their time and attention on catching those who break them.
The complexity of our tax system shouldn’t be a surprise. It is the natural result of politicians straining the taxable capacity of the economy. As they try to raise more and more money with higher and higher taxes, they create a range of problems. In order to address those problems, they apply lots of sticking plasters that add up over time. Before you know it the tax code stretches to 17,000 pages and the whole system is breaking down under the weight of its incoherence. That is what made the scandals this week possible.
Jimmy Carr’s behaviour is particularly egregious, because he must have known he was avoiding tax himself when he made a clip for the TV show Ten O’Clock Live making fun of the low rate that Barclays (LSE: BARC.L - news) appeared to be paying.
Ironically the story about Barclays was largely nonsense. Their global profits were being compared with their British taxes. Essential features of the tax system were being ignored, like allowances so that they can restructure without creating a huge tax bill, or to ensure that a £100 gain one year and a £100 loss the next is taxed as the overall income of £0 it really is. At least according to the Treasury, Barclays do seem to have been avoiding some taxes, but nothing like the amount that some of the headlines suggested.
In reality, most people and businesses pay their taxes without fuss or funny business. They pay their Income Tax and National Insurance through PAYE and, apart from occasional small jobs paid cash in hand, the Exchequer gets its pound of flesh. The HMRC estimate of tax avoidance and evasion is about £40 billion, compared to the nearly £600 billion raised each year in tax, and most of that £40 billion is inaccurate self-assessment returns and avoiding VAT, not grand conspiracies.
Unfortunately the more stories of outrageous tax avoidance that surface, the more people will think that everyone is at it, and behave accordingly. They’ll see benefit fraud at the bottom of the income distribution, and tax dodging at the top, and think it is only natural to do what they can to minimise their own tax bill. Even our privacy will be at stake, as more and more people from the Prime Minister down are compelled to publish their tax returns.
It is essential to reform the tax system, not only because it can be more economically efficient. We need a simpler system, so that we can trust that everyone else is paying their fair share. There needs to be a single tax on income at a single rate, whether it is a dividend being paid to a shareholder or a wage being paid to an employee. The Single Income Tax recommended by the 2020 Tax Commission recently launched by the TaxPayers’ Alliance and Institute of Directors could achieve that. Otherwise Britain will keep on slowly sliding towards the kind of social breakdown that is currently creating such a tragedy in Greece.
Matthew Sinclair is the director of the TaxPayer's Alliance