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.”
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?