Monthly Archives: April 2012

Mixing up ‘Loopholes’ with ‘Incentives’

Here’s the reason for this recent tax shit-storm: the morons have mixed up ‘tax loopholes’ with ‘tax incentives’.

It kicked-off with an innocuous story  “Millionare Tax Avoiders ‘Shock’ Chancellor”.     The Treasury team intended to show they’re tuned into the zeitgeist of public concern over ‘tax avoidance/evasion’ and sought the front-foot.  Instead, within a week their imbecilic approach pushed them firmly on the back-foot with everyone.   How did they manage such an ‘epic fail’?

Whilst ‘tax avoidance’ is legal, there is no escaping that in common speak the words are always used pejoratively.  So if the chancellor is saying he’s going to crack down on it, you imagine he’s going to be going gunning for those offshore ploys, those spurious salaries for director’s spouses, the deferred payment of bonuses in copper futures or whatever; basically all that ‘creative accounting’ malarkey.

Instead they deliberately allowed the ‘tax avoidance’ label to be linked to everything that properly reduces a bill.  I quote:  “HMRC found the main methods used by people to reduce their bills was writing off business losses, offsetting the cost of business mortgages and borrowing on buy-to-let properties – all against their income tax bills.  Others took advantage of tax relief on charitable donations”.   My lord.  If they’re shooting at that I’m surprised they didn’t lump in ‘paying into ISA’s or ‘making pension contributions’ with equal disdain.

It was Parliament’s intent that folk can offset their business losses against their income before calculating tax owed.  That encourages folk to invest in new business which may take time to grow, or may even fail.  It encourages folk to stick with loss-making businesses a little longer rather than wind them up and make people redundant.  It isn’t a dirty loophole.  It is an incentive to help the economy.

It was Parliament’s intent to allow the cost of securing finance (business mortgage interest) to be treated as a pre-profit expense.  That encourages people to get business finance, to get business going, to help the economy.  It isn’t a dirty loophole.  It is an incentive to help the economy.

It was Parliament’s intent that folk give to charity tax-free to encourage folk to give to charity.  It isn’t a dirty loophole.  It is an incentive to support charity.

The sniping at that last one has generated the most news-print.  Philanthropists are right to be outraged, the way the reportage has been framed I’m pretty sure that most UK tabloid readers now believe that their generous giving has been at no actual net cost to them, and they are all ‘tax dodgers’.

It hasn’t hit the news in the same way, yet, but I imagine the networks of ‘business angels’ who risk huge losses by supplying capital to start-ups, at a time when banks will not, are also feeling equally bruised.   Is George also going to cap or limit the amount of losses you can offset?   Applying the same logic as to the Charity issue that can’t be far away.

I say ‘logic’ but of course there is very little of that.   I really do want to believe that the government intended to target the ‘abuse of’ all of these tax incentives rather than the incentives themselves, but what a cack-handed way of doing it, and what a miss in the presentation if that was the real target.

If there is an issue with folk setting up bogus charities overseas and funnelling money to them then the way to deal with that is to treat it as what it is – criminal fraud.  The policy on the table is basically saying  “we’re going to let it carry on, but don’t worry we’ve allowed people to only use a quarter of their income for this fraud rather than all of it in future”.  That doesn’t sound great does it?  However it is dressed up they’re also limiting the legitimate donations and making sure that stench of ‘tax dodgers’ for legitimate donors remains.

There are cases to be made for scrapping tax relief for charity donations.  A socialist may think that it is the job of the state to do the stuff charities do, so folk should just pay more tax with no relief and let the state do what needs doing.   A Conservative may make the case that the state has no business whatever with this attempt to socially engineer through the tax system with all the unnecessary (and costly) complexity added to the self-assessment system.  You may disagree with either of these on the basis of philosophy but at least they are intellectually coherent.  The government’s current thinking is not.

One feature of this Government, usually described as a weakness but actually a strength, has been that when a U-turn has been necessary it has come very quickly.  Nudge politics is central to Cameron’s view of the proper relationship between the state and the individual, the role of charity is another.   A proposed policy that acts as counter to both is nuts.  He needs to speak to George about that U-turn.  And fast.

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Ken’s Taxing Problem

Imagine a Tory-boy type, essentially a freelancer, justifying his limited company tax arrangements to a journalist:  “I am in exactly the same position as everybody else who has a small business. I mean, I get loads of money, all from different sources, and I give it to an accountant and they manage it,” Ah, the Vodafone defence.

The journalist probes, how is income taken and taxed?  Words are very carefully chosen;  “You pay corporation tax. If you then take out spending yourself, you have to pay more.”  For clarity our sharp-suited, silver-tongued entrepreneur emphasises that he pays “the normal rate of tax on the money I take out for myself”.

That ‘take out spending yourself’ line may be a cute way for our man to own-up he takes income in dividends rather than salary.   The ‘tax’ difference of doing this is actually pretty marginal, but you do save a chunk of change on National Insurance (there’s a nice table on that here). This company set-up also allows you to drip-feed your money out years after it is actually earned keeping yourself in the lower-tax-bands.

The folk who get most wound up by these things – UK Uncut, Guardian columnists and people who tent-squat at cathedrals would be foaming at the mouth at all this word-play.  Instinctively, some keywords above would trigger their Pavlovian attack dogs to bark about ‘ethics’, ‘tax dodging’ and how if we just stopped this kind of thing the ‘deficit would disappear’.   This anger would morph into apoplexy if David Cameron then dismissed concerns with a blithe statement that our man “has paid every pound of tax he is required to by law.”

You’ll have guessed that in real life these quotes are not from some ‘Tory boy’ and David Cameron.  They are of course, word for word, Ken Livingstone and Ed Milliband.  (Sources here and here).

In the playground of that little part of cyber-space filled with political bores this spat has caused a curious role-reversal.  The usual suspects are offering Ken, if not full support, then at least a frustrated, restrained, benefit-of-the-doubt understanding.  Meanwhile, the Boris camp are wetting themselves with a full-on cry of ‘Tax Dodger’!  You just need to read some Guido or Andrew Gilligan to get the gist.

The people who yell loudest about the ethics of taking accounting advice usually moan; “I can’t afford a flash accountant.  I pay every penny of my tax”.   What they tend to mean is that all their tax affairs are simple and done through PAYE by their employer and they haven’t actually a clue if they have paid every penny or not, nor if their employer is using clever tax reduction strategies on their behalf.  Do you have a salary sacrifice mechanism in your pension contributions?  Yes?  You tax dodger.  It comes as a shock if their employer gets it wrong and it turns out they haven’t, as they thought, paid every penny of income tax at all.  Several million people found this out to their cost last year when they got unwelcome letters from HMRC.

For small business owners, (like Ken?), it is very easy to get in the same situation through no malevolent intent.  Most of us have accountants not just because we can afford them, nor because we’re desperate to find loop-holes to save a quid or two.  It’s rather because we cannot afford not to.

Once your turnover crosses a certain level and you employ someone the complexity of the UK tax system is crushing.   Without an accountant you end up dedicating hours a week to trying to get the PAYE and VAT right, in fear of inevitable fines if you get it even slightly wrong.  That’s before you can even begin to think about getting your annual return in good order.  In my first year I tried to go without an accountant.  It was a year too long.  When I took the plunge and got one the first conversation we had was the same that 99% of people,  probably including Ken, have;  “Listen, I want to pay every penny of tax I owe, but I don’t want to pay any more. I don’t want you doing anything out of the ordinary on my behalf.  I just want to get money from the business in the most sensible way.”

And it will be that set of instructions that has got Ken in this mess, and it’s why on this one point at least I have sympathy for him.  His accountants have set him up in ‘a sensible way’.  Yet by following their honest advice he may now still find himself inadvertently on the wrong side of the tax-man.   No dodgy intent is required.   It’s just that our tax system is all so wonderfully complex it catches out even the accounting folk whose lives are dedicated to navigating it.  Is the money Ken pays his wife reasonable for the type of work she does?  Did the donation he declared to the Electoral Commission (an in-kind donation of around £19k) get declared in his accounts?  If so, was it treated as a deductible or non-deductible expense?  And so on.  He’s paid a professional to get the administration of these things right.  They may not have.   And there my sympathy for Ken ends.

It’s as inconvenient for him as the rest of us that if his accountants have messed up he is liable– you can delegate responsibility for managing your tax affairs, but you cannot delegate your accountability for them.

There are two charges being aimed at Ken:  hypocrite and tax dodger. ‘Hypocrite’ is a home-run.   For me the ‘tax dodger’ charge has got mixed and confused.  Half the people shouting it (like me) do so with knowing irony, their point is if Tory Boy was set up like Ken then ‘tax dodger’ is what Ken would say.  The other half seem to be shouting it with literal application, they genuinely think that Ken’s crossed the avoidance/evasion line.  I think the latter is over-reach, but whether ironic or literal, neither shout is going to be helpful to his Mayoral campaign.

Whether you call it tax dodging or avoidance or tax planning or mitigation it all only exists because our system is too complex.  The simpler our tax code, the less scope for ‘avoidance’, the easier to be clear what is ‘evasion’ and the less work for the accountants.  What is not to like about shooting for all that?   And whoever would have dreamed that it could be Ken Livingstone who could, albeit inadvertently, best make that very Conservative point?

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