The political wind has changed on tax avoidance

Bermuda © Getty Images
Bermuda: the fallout from the “Paradise Papers” will keep HMRC in clover for a while

Tax evasion is illegal. Tax avoidance is within the letter of the law but not the spirit. Tax relief is government-endorsed to encourage good behaviour. So tweeted Gemma Godfrey of Moola, the online investment service, this week.

This sounds very obvious, but given the general hysteria over Panorama’s “Paradise Papers” programme this week (on the subject of 13 million legal and financial documents from a Bermuda-based law firm) and the confusion it sparked between what is illegal, what is immoral but legal and what is both moral and legal, it rather needed saying.

Some of the things revealed in the Paradise Papers do look like they should fall under anti-avoidance regulation, so that will keep HM Revenue & Customs in clover for a while. Some of the papers released indicate that there is more to be done in regulating some jurisdictions and that our politicians probably need to put more effort into dealing with extreme avoidance by the extremely rich.

But a lot of the revelations are no more than the long-term result of over-complicated taxation systems and the endless loopholes they generate. The hysteria over them also misses the point that many funds are set up offshore for perfectly straightforward reasons. The structure means they can be sold into lots of jurisdictions, but also that their investors can pay the right taxes in their country of residence without being caught in someone else’s tax system (and admin hell) along the way. Nothing wrong with that.

There is more room for hysteria over the behaviour of the world’s big companies and their impressive tax-avoiding expertise. However, they are doing things that are not so much illegal as really irritating. It is also worth remembering that governments and voters are on to them: there are all sorts of schemes afoot to bring them into line and get them to pay whatever sovereign states reckon is their fair share.

That won’t happen overnight, but it will happen. According to the OECD, legal tax avoidance strategies such as the ones used by Apple, Nike and the like cost governments some $240bn a year. They could do with the cash.

In the meantime, if I were in charge, I would amuse myself by forcing all companies operating in the UK to list in their annual report how much tax they would pay in the UK if they were to simply subtract their UK-based expenses from their UK-earned revenues (no allowances and no profit shifting included) and how much they actually pay. It’s a small thing – but, rather like forcing publication of pay ratios and gender ratios, it might concentrate minds.

However, while the papers and the coverage around them should be seen mostly as an unnecessary distraction from the discussions the UK needs to have about properly important things, they still matter. That’s because they are a clear signal – to those who still needed it – that the political wind has changed.

Evasion was always out. Now, avoidance (as defined above) is too. If you are evading tax, today is the time to come clean: you do not want to be an enemy of state in this environment. The new Common Reporting Standard (CRS) now allows information on you and your money to flow freely all over the world. That means it is only a matter of time until you are caught.

Under the UK’s Requirement to Correct (RTC) legislation, anyone who thinks they might have tax to pay has until September next year to get sorted. If you don’t, assume you’ll be paying 200% of the liability in fines.

If you have made your tax affairs complicated with a view to avoiding tax legally, you might want to rethink your strategy as well. Schemes are constantly being challenged, and unwinding a failed one is very expensive, as too many near-bankrupt footballers now know to their financial and reputational cost. If in doubt, check HMRC’s spotlight list of dodgy schemes.

If you are evading or avoiding, don’t for a second comfort yourself with the thought that no one will ever know. If the Paradise Papers tell us anything at all, it is that they probably will know: your financial privacy is gone for good. We live in a new world in which everyone’s personal affairs are considered fair game. Assume yours are too.

On a happier note, the UK still offers excellent tax reliefs to investors (reliefs are still OK). You can put £20,000 into an Isa every year and be reasonably sure that it can grow and be withdrawn tax-free. The British love their Isas so much that it is hard to imagine a politician stupid enough to fiddle with them.

Your pension allowances have been falling, but still being able to put £40,000 a year in and have a total of £1m on retirement is better than a kick in the teeth. Your pension tax relief is in more danger than your Isa relief – it is hard to understand, very expensive to provide and numbers such as £40,000 and £1m sound very high to anyone who isn’t in tune with the misery of modern annuity rates (you’d be pushed to get an inflation-linked pension of £30,000 on £1m). All of this makes it much easier to slash.

Theresa May’s government is probably too weak to offer a very radical Budget, but whether it happens at Philip Hammond’s outing this month or with whoever makes the one after that, at some point pension reliefs will fall dramatically. Use what you have now, soon. Expect top-rate relief to go and a flat rate of some kind to be introduced.

Also look at Venture Capital Trusts, Enterprise Investment Schemes, and Seed Enterprise Investment Schemes. All offer haven-style tax optimisation possibilities (with accompanying investment risks, of course).

And finally, don’t forget that there are tax advantages in holding perfectly ordinary investment vehicles too. Buy an investment trust and any gains on the assets that the manager buys and sells will roll up free of capital gains tax (CGT). Had you bought the assets directly you would be paying CGT on every successful sale. This way you do not pay until you sell the entire fund – a nice optimisation possibility (assuming you have a manager who makes you capital gains, of course).

The world of legal and socially acceptable tax avoidance really isn’t that bad at all. It’s also reputationally safe. Use it.

This article was first published in the Financial Times

  • 4-caster

    This is a very balanced article, neither complacent nor fear-mongering, just pragmatic.
    Most of us have to pay VAT and road tax on our private cars, and excise duty and VAT on the fuel they burn. So it rather sticks in the craw to learn that, for example, footballers, pop and film stars and chief executives can buy and run private jets without paying VAT or fuel duty, by using tax havens. The Queen is a different matter. She is head of state of several of those territories.

  • Malcolm Edwards

    I haven’t detected any hysteria regarding the disclosures and am getting a bit fed up with hearing that there is.
    I am also getting a bit fed up with being condescendingly told “tax avoidance is totally legal you know”. Yes, I know it is.
    “We all use tax avoidance measures you know”. Yes, I know we do.
    “ISAs are a tax avoidance measure, do you realise”. Yes, yes I do realise that.

    The fact, which most of us realise, is that there is a world of difference between people investing money in certain investments vehicles in order to minimise CGT and, for example, someone setting up an offshore shell company, having their salary paid into that company and having that cash loaned back as in interest free loan in order to “avoid” taxation.
    This is the kind of practice that people are calmly but firmly objecting to, on the whole, and would like lawmakers to sit up, take notice and do something about it.

    And yes, the best answer to all of this is to simplify the tax system.

    • Chris

      Agreed that the only hysteria here is the one drummed up by the media folk who wish to smokescreen over their illegally obtained information (not a leak, theft) – hiding behind the “law” that protects their sources. I get my moles to dig out details about all customers at say, Barclays in the Channel Islands. I go after the UK residents whose details are revealed. I then offer to give any collateral personal info obtained to tax authorities in other places to share the theft, and lessen concerns over state-sponsored illegality. That’s what the germans did in Liechtenstein. There’s no hysteria about any of that, or now about panama/paradise documents because the press authorised it trying to make themselves relevant in a post media world, control the narrative. The benefit of offshore jurisdictions is keeping taxing authorities in check who would otherwise tax us to death like the french (read also OECD and FATF, too which are de facto french institutions). That won’t change; it will only morph around the latest wheeze of the tax competing jurisdictions to track down their non-residents money. Modern tax avoidance advice started with kings trying to take subjects’ money (henry viii’s statute of uses), and the sharpest minds in the country now as then will continue to fashion ways round government raiding of our piggybanks. and don’t talk about hospitals and roads – that’s a con job by HM gov

  • Kevin King

    Yes this is all interesting but why does the UK allow anyone in the world to form a UK company with Companies House and provide NO ID, NO passport NO verification then those companies set up a bogus website and disappear with the cash as they are untraceable, people in glass houses etc

  • Andrew Crow

    Ultimately the tax avoiders suffer because by undermining the economies which support them they cut their own throats.

    As Theresa May said recently there is nothing wrong with properly regulated ‘free markets’ (except for the linguistic case that it’s an oxymoron). But when are we likely to see some of this regulation?

    That the UK should encourage and subsidise tax havens around the world is what mystifies me.

    It is difficult to regard the massive under-staffing of HMRC as anything other than government complicity in rendering the entire tax system ineffective.

    Probably time to scrap the entire tax rule-book and institute a taxation system based on land values. You can’t shift that offshore. (Though one gets the impression that some of the keener Brexiteers would tow the British Isles into the Mid Atlantic were it possible to do so)

    • Chris

      No need to tow. All genuine brexiteers should avail of the opportunities that the empty lands in the Falklands provide, and demonstrate their wonderful trading skills with the world. They would still be on british soil, keep out garlic eating foreigners and waive the flag every decade or so whenever the latest royal yacht stops in for a cuppa

  • Jack Worth

    All a bit of a storm in a teacup. I often avoid paying tax by not buying something because it is too expensive mainly because of extra tax!!! When I told a purple faced pal in the pub he was a tax avoider he became apoplectic until I pointed out his pensions and isas were Government sponsored tax avoidence.
    The issues of taming greedy and profligate governments and educating the non earning under class enabling them to wean themselves off our hard earned and ending handouts to needy third world countries relying on aid are the real problems.
    I find it strange that the 40 -50% who effectively pay no tax are so critical of those who fund them trying to pay a bit less and it is rather difficult to explain that if you took all Bill Gates (for instance) cash and gave it to Africa they would have around £50 each – and it would soon find its way into a very few pockets again.

  • Malcolm Dixon

    I preferred the old definitions where evasion was illegal and avoidance legal. I think that the Gov’t and others have caused unnecessary confusion by referring to aggressive tax avoidance as being improper. If they don’t like something, they should make it illegal, and then it would be evasion. I am an enthusiastic avoider of tax, but I use only schemes put in place by the Gov’t (ISAs SIPPs, VCTs) to encourage certain behaviours, and I rather resent the apparent ‘tarring with the same brush’ effect when these schemes are bracketed with other dodgy schemes not put in place by the Gov’t.

  • smspf

    Articles in MW are sometimes better than Beanos. This one particularly made me LOL.