Tag Archives: tax relief

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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