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Letters to MoneyWeek: What does tax avoidance mean today?

A selection of letters sent in to the MoneyWeek office, and their replies.

You write that "this week's leak of the Paradise Papers revealed tax avoidance on a massive scale by some of the world's wealthiest individuals and companies" (MoneyWeek 870). Please will you and all your journalists and contributors realise the difference between tax evasion (which is the illegal evasion of paying taxes) and tax avoidance (which is the avoidance of paying taxes by legal means, and for the most part with the active encouragement of a government such as by making pension contributions and/or by saving into an individual savings account).

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Increasingly, politicians and journalists on quality newspapers are muddling these terms up and labelling tax avoidance as evil and hence condemning most of the population who are obliged to make a work-based pension contribution or save into an Isa account.

As "Britain's best-selling financial magazine", please make this distinction between tax avoidance and tax evasion clear in your magazine and perhaps others might understand the difference.

PD

Our choice of the term "tax avoidance" in this case was deliberate. Much of what was revealed in the Paradise Papers appear to be legal if sometimes contrived arrangements for avoiding tax, rather than outright illegal tax evasion.

That said, the distinction between tax avoidance and tax evasion that you mention and which MoneyWeek has always been careful to emphasise has been eroded in recent years. The introduction of the general anti-abuse rule (GAAR) in 2013 has given HM Revenue & Customs much greater scope to go after tax arrangements that may technically have fallen within the letter of the law, but where authorities take the view that they "cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions, having regard to all the circumstances".

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This has already affected a number of arrangements that might previously have been viewed as permissible avoidance.It's also important to keep in mind that public opinion draws little distinction between tax avoidance and tax evasion and is increasingly hostile to both. This will almost undoubtedly result in tougher measures against anything that looks like an abuse of the rules.

Hence the more useful distinction today is between the kinds of arrangements being criticised and those opportunities deliberately designed by the government to offer tax relief such as pensions and Isas, as you mention. Few would consider these options to constitute tax avoidance, since they are explicitly permitted by legislation rather than being the consequence of hunting out loopholes within the rules.

The cost of public-sector pensions

Simon Wilson covered the issues between the public sector and private sector ("Are public-sector workers badly paid", MoneyWeek 868) in a balanced manner. Yes, there are worrying shortfalls in specialists within the public sector and lack of money in some areas, but for me the overriding issue is the pensions gap. I accept not everybody survives until retirement, but if they do, people, unless they have been a highly paid executive in the private sector, will more likely have a far better deal in the public sector.

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Under the public sector there is a certainty of income related to salary and service, which is not the case in the private sector where miserly annuity rates rule. People do not have to take an annuity, but it is no use taking all the cash and then three years later having nothing left. Yes, more people are in private-sector schemesthan ten years ago, but this is largely due to auto-enrolment where the contributions are minimal. In turn, benefits from these schemes will be modest at best, and so the "pensions apartheid" will not go away.

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The public need to be educated and those in average private-sector employment will become increasingly annoyed that their council taxes over the years have funded generous pensions for their public-sector contemporaries. Governments and employers have got away with this issue over the years because pensions is an obscure and complicated issue.

DR

The long-term health of our public-sector pension system is a problem in itself, due to the unfunded nature of the promises that have been made. Spending on public-sector pensions is expected to be around £41.1bn in 2017-2018, only partly offset by contributions of £29bn, leaving a deficit of £12.1bn, according to the Office for Budget Responsibility.

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This deficit will grow in the years ahead as more workers retire and begin drawing on the benefits they have been promised: the total value of accrued public-sector pension liabilities is around £1.5trn, the National Audit Office estimated last year. However, the divide between this and the entirely inadequate provision being made by many private-sector workers makes it an even more difficult political issue, as you note.

Successive governments have failed to address the fundamental problems with our pensions system, instead choosing to tinker. Some of these changes are sensible: the pension reforms introduced in 2015 give savers much better options for managing their money in retirement. However, a pension fund that is far too small to offer a decent retirement will not miraculously become adequate if it's used to provide an income through drawdown rather than purchasing an annuity. Other changes such as the continual cuts in the lifetime allowance simply add complexity or put people off saving.

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Fixing this will be difficult. The introduction of auto-enrolment is a step in the right direction, but contributions will need to be significantly higher and more people brought into the system for this to make much difference to the numbers who are not putting aside enough for retirement. Unfortunately this is not a political priority forcing people to save more is something an unpopular government will be keen to avoid so we will probably have to wait until the pending crisis is far more evident before anything is done.

Writing to MoneyWeek

MoneyWeek welcomes letters and emails from readers, but unfortunately we are not able to publish or reply to all of them. We may edit letters prior to publication. All responses are for information only and should not be relied upon in making investment decisions.

Our staff are unable to respond to personal investment queries, as MoneyWeek is not authorised to provide individual investment advice. Please email us at editor@moneyweek.com, or write to us at Editor, MoneyWeek, 31-32 Alfred Place, London, WC1E 7DP.

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