For the record, tax evasion is an illegal, criminal activity which can carry a prison sentence. Tax avoidance is - or at least was - a way of reducing one's tax liabilities within the perameters of the law. Sometimes by following Government-inspired schemes, such as the various PEPs, ISAs, and TESSAs savings initiatives. Sometimes by opting out of high tax activities, for example not smoking. Sometimes by taking the advice of clever tax lawyers who earned their high-maintenance living by finding and exploiting loop-holes in the law, which eventually HMRC cottoned on to and the Government then legislated against.
Then came the association that 'tax avoidance' was basically the same as evasion and needed to be stamped out. (See: When a tax 'avoider' becomes a tax 'evader'- Shout99, March 2004)
The same association has continued under the Coalition Government - but now a new term has entered the tax dictionary, that of 'aggressive avoidance'. The danger is that in a taxation world it helps everyone if things as as black and white as possible, but the Government has a introducted another shade of grey - albeit a darker shade.
Aggressive tax avoidance doesn't have a definition as such, - although we know it is 'morally repugnant' but for general guidance the Government's briefing to new HMRC employees (if one were to exist) could read something like:
- Tax evasion: illegal, banged to rights, doing 'porridge';
- Tax avoidance: Not illegal, but we really don't like it and would prefer they didn't do it;
- Aggressive tax avoidance: Not illegal, but we really, really don't like it and think they are seriously dodgy geezers, who we wouldn't have as a dinner guest.
The term 'aggressive tax avoidance' first gained prominence in the Budget when Chancellor George Osborne said: “I regard tax evasion and – indeed – aggressive tax avoidance – as morally repugnant." No doubt, this was meant to be a precursor to the General Anti-Avoidance Rule, which were in the pipeline.
The issue gained further prominence this week when Prime Minister David Cameron and Radio Four Today Programme veteran John Humphreys clashed over who or what was agressive tax avoidance.
The underlying reason was that John Humphreys was trying to get Mr Cameron to admit that his sometime advisor and retailing supremo, Sir Philip Green fell into the 'morally repugnant aggressive tax avoidance' category for organising his significant financial dealings via off-shore arrangements and transfers to his Monanco-based wife. Mr Cameron was reluctant to discuss the affairs of an individual tax-payer despite being pushed as to whether or not this was the sort of person he would like at his dinner table.
Mr Humphreys repeated attempts to drag it back to the question of Sir Philip almost killed off the more interesting response by Mr Cameron as he tried to give his own definition of what he would regard as aggressive tax avoidance.
Mr Cameron tried to explain that there were activities whereby one could decrease one's tax liabilities, which seemed to be OK in his eyes, such as pension schemes or investing in Enterprise Investment start-ups which didn't count as aggressive tax avoidance.
And then, in order to contrast 'good' tax avoidance with 'nasty' aggressive tax avoidance, he had to come up with another example which was......... "And then there's the type of tax avoidance....." a pause as the listening audience wondered which odious action he would refer to, he continued......"and there is that sort of tax avoidance where people are almost specifically setting up a company in order to avoid tax rather than actually wanting to invest in start-ups and the rest of it."
So there we have it. Someone who sets up a company for tax purposes is a morally repugnant aggressive tax avoider. And that's the problem with using emotive language in an area where factual definition is required. Do they mean reasons for setting up a company or do they mean the way that company subsquently operates? If the former, how do you determine it? If the latter, what's IR35 for if not this?
This example would be triggered, at least in part, with the recent bad publicity about senior Government workers who arranged their remuneration through limited companies for the sole purpose, it was reported, of reducing their tax and national insurance bills. The Government has been under pressure to clamp down on these activities and announced measures in the Budget which would target those individuals to pay tax and NICS at source if they were integral to an organisation.
But once again there is no mention that for more than 10 years there has been a piece of legislation on the Statute books which is capable of tackling this 'morally repugnant aggressive tax avoidance'. The purpose of IR35 is to prevent people operating as a company when they are, in reality, an employee, and introduce the company layer solely to mitigate their tax and NI bills.
So either, IR35 could be used across the board to deal with this - or there should be an admission that it is 'not fit for purpose'.
In the meantime, this is the only clear example of what the Government means when they consider the question of 'morally repugnant agressive tax avoidance'.
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Susie Hughes © Shout99 2012