Time to duck: ‘government by headline’ is back

Ah, government by headline. Isn't it marvellous?

David Cameron gets caught doing something perfectly legal and actually as far as I can see the same as what lots of investors in unit trusts/Oeics do all the time.

But he completely screws up the PR response. And so now the fun begins.

Try 6 free issues of MoneyWeek today

Get unparalleled financial insight, analysis and expert opinion you can profit from.

Start your trial

Sign up for MoneyWeek’s free twice-daily newsletter.

Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.

Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.

Sign up

David Cameron has really messed this one up

Rather than just fess up and admit straight away that he'd held £12,000 or so in his dad's offshore fund, which had turned into around £31,000 by the time he took it out in 2010, he spent a week denying and obfuscating.

Why the "cover-up"? I have no special insight. But I suspect two things lie behind it.

Firstly, £30,000 is absolute peanuts to someone like Cameron. He's rich. And I don't mean that in a chippy way. It's just an observation of fact. So chances are he didn't regard is as that significant.

Secondly, he knew this would be the reaction. So rather than try to explain the details to voters, he went straight into denial mode.

So it doesn't matter anymore that he didn't do anything wrong. He certainly hasn't evaded and hasn't even avoided any tax on this holding (he and his wife's capital gains tax allowances covered the profit made on the investment when they crystallised it).

Now we're at the point where "something must be done!" Which usually means "someone else is going to pay for this mistake!"

For a start, according to the Financial Times, Cameron is going to "promise to create a new criminal offence for companies that fail to stop their staff assisting in tax evasion".

Now, this might sound good. But how will it be implemented? Britain already has pretty tight money-laundering regulations. All sorts of companies whose business is only tangentially related to high finance have to make sure their employees are aware of how to spot suspicious transactions.

So how is this new criminal offence going to work? I don't know yet, but I imagine it'll mean a whole load more paperwork for a majority of companies that are already strictly law-abiding, while the dodgy customers will keep doing their dodgy stuff because that's what they do.

In short, Cameron has messed up his response to something that should have been a storm in a teacup. And now a whole swathe of law-abiding companies and individuals are about to have their jobs and lives made more difficult as a result.

What's tax avoidance? And what's just taking the mickey?

My colleague Merryn Somerset Webb has mentioned many times that global multinationals were going to have to wake up to the fact that shopping around for more hospitable tax regimes was not a permanent inexhaustible benefit, even in an apparently globalised world.

Governments need money. Multinationals have it. So their exotic tax avoidance schemes are going to be a thing of the past. That's going to hurt the earnings of such companies, which will be bad news for anyone holding too many "expensive defensives".

I'm not going to shed too many tears. Let's define our terms here. Tax avoidance is legal and morally acceptable we're talking about things like putting money in an individual savings account (Isa) here.

Tax evasion on the other hand is illegal. There's no grey area it's flat out criminal.

"Aggressive" tax avoidance is where we get into the grey area. It's where you are technically doing something legal, but in fact, you're really taking the mickey. You do things like creating artificial losses, or lend money to yourself (in effect) in order to make it look as though you have less taxable wealth or income than you really have.

The difficulty is that one person's "aggressive" avoidance can be another's "acceptable tax planning". For example, David Cameron's mum gave him £200,000. (You can see why £30,000 might have slipped his mind.) The papers of course are all over that. That £200,000 will be free of inheritance tax assuming his mother lives for seven years beyond the date of the gift.

Is that acceptable tax planning? Or "aggressive" avoidance? That'll depend on which paper you read.

My own view is that it's acceptable tax planning. The real problem is that inheritance tax is a mess.

I don't really think that it's fair that a tax can be avoided due to: having better information (because of access to advisors or simply taking an interest); pure luck (in terms of longevity); and having sufficient liquidity to distribute your wealth in a canny manner (as opposed to it all being tied up in something like property).

If that's the way the system is set up, then you should make sure that you are in a position to deal with it (we've just written a report on one key way to avoid inheritance tax that's completely legal and ethical if you subscribe to MoneyWeek, you can read it right away). But the problem in this case lies very much with the system and its poor construction, rather than the actions of individuals.

This over-complexity is not going to be addressed by panicky politicians trying to change tomorrow's Daily Mail headline. It's only going to get worse. Expect to see a lot of collateral damage.