Why it's not OK to avoid tax

I have had an email from a long-term reader about my editor's letter last week. He is disappointed. He had, he says, hoped that after all the 'holier-than-thou' pronouncements from The Times and from Osborne, my leader in Moneyweek would have taken my "more usual" brave tack and "made a stand for the monstrously ripped-off taxpayer".

He's irritated that I'm irritated by tax avoidance. He thinks that I should actively support the rights of all taxpayers to do everything they can to stop themselves being taxpayers. He also thinks that and these are his words "The elephant in the room is the MONSTROUS mismanagement of the nation's finances by successive governments, the millions of scroungers, the vast MoD and NHS failed projects, the comedy pensions paid out to civil servants, the staggering interest payments on our vast debts"

Regular readers will know that we almost entirely agree on this bit. I have used thousands of words here raging against high tax rates; against pointless state spending; against the crowding out of the private sector; against the ludicrous shift of the state into parts of life that have nothing to do with the state; and against the current government's utter failure to so far -do anything about it. I have also endlessly written in favour of low taxes, flat taxes, land taxes and, most of all, simple taxes.

Start your trial 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

But I still can't agree that it is OK to go to extreme lengths to avoid paying tax. Those who think that it is have several arguments they keep returning to. They say that anything legal is by definition OK, that getting involved in convoluted film and loan schemes is no different to setting up a SIPP with Hargreaves Lansdown and that all thinking people should do all they can to avoid all tax.

In support of this argument they point to the 1929 ruling on tax avoidance and evasion that goes like this: "No man in this country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores.

"The Inland Revenue is not slow and quite rightly to take every advantage which is open to it under the taxing statutes for the purpose of depleting the taxpayer's pocket. And the taxpayer is, in like manner, entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Revenue."

Their next argument is the one put forward by my reader as above that the government spends money badly and that we are therefore under no moral obligation to give them any of our money to waste.

These are both utterly absurd arguments. Living in a liberal democracy comes, as ever, with responsibilities and rights. That means that we should all feel obliged to pay the taxes the government we have voted in intends us to pay. If a rich man can reduce his tax bill to a mere 1% of his income, I wonder who he thinks makes up the difference.

If he pays less (and avoidance by individuals now adds up to around £4.5bn a year), who pays more. Me? You? His children via debt repayments? I wonder too why those who refuse to pay tax think it is OK to live in and benefit from an infrastructure and legal system financed by people who mostly earn significantly less than them.

Why would anyone think it is OK for the rich and the powerful, alongside the doctors, the dentists, the editors, the actors and the comedians of the UK to effectively abdicate their responsibilities to society? And what if we all did it? The fact is that knowing that the government wastes money is not the same as agreeing that it is morally reasonable to go to extraordinary lengths to avoid helping to finance it.

The key to thinking about all this is the word "honestly" in the ruling above. If you interpret 'honest' as legal, you might think that it does indeed absolve you of all responsibility towards the state and your fellow UK subjects. But if you interpret it in the more traditional way ('uprightness of disposition'), you would think nothing of the sort. It seems to me that a better guidance as to how one should behave comes from last year's HMRC report on tax avoidance.

The relevant bit is as follows: "Tax avoidance represents a significant part of the UK tax gap. Unlike evasion, it is not in itself illegal, but it involves using the tax law to get a tax advantage that Parliament never intended. It frequently involves contrived, artificial transactions that serve little or no purpose other than to reduce tax liability. And it enables some taxpayers to gain an unfair advantage, undermining confidence in the tax system."

The key words? "To get a tax advantage that Parliament never intended." That's what makes an Isa different to a film partnership. And what makes it wrong.

Should we cut state spending? Yes. Should we massively simplify our tax system to close all loopholes, take out everything from duty free to VAT-free products and prevent avoidance? Yes. Should we be using our votes to try and make sure that happens? Yes. Should the government stop having a go at tax avoiders while promoting the UK as something of a tax haven? Yes. Should we have a General Anti Avoidance Rule (GAAR)in place? Yes. Is it reasonable to withhold your taxes until that happens? No.

It isn't much of a step from thinking loans from Jersey, K2 and dodgy film partnerships are OK to being a country in which only 30,000 people declare incomes of over €100,000 to being a failed state. And I don't imagine that the UK's tax avoiders want to live in one of those any more than the rest of us do.