Thursday, 5 January 2012

Avoiding the Real Problem

The comments about tax avoidance have started again. As always the word avoidance is bandied around so that it sounds like evasion.  In the 1936 case, IRC v Duke of Westminster([1936] 19 TC 490), with regard to the taxation affairs of the then Duke of Westminster, Lord Tomlin said "Every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be.” Thus it is perfectly legitimate for me to choose to use an ISA rather than any other savings vehicle; it avoids tax. I can choose to buy a book rather than the electronic version because it avoids paying VAT. So, when Nick Clegg says that people are angered by a "wealthy elite" who paid "an army of accountants" to avoid taxes, I don’t agree with him. I think it is the fault of what is purported to be the most complicated tax system in the world, a tax system that takes over 900 pages to detail. And who created this tax system, the very people who are complaining about it.
The solution is very simple and it starts by simplifying the tax system. It is not just me that is saying this; the Institute for Fiscal Studies is also calling for radical tax reform. In the online report Tax byDesign the conclusion includes the following statement (top of page 501):

One consequence of it, on which we have already commented, is the amount of taxpayers’ energy that goes into avoiding tax and governments’ energy that goes into combating avoidance. The more complex and inconsistent the tax base, the more avoidance will be possible and the more legislation will be required, so the more effort is put into shoring up tax revenues rather than into following a coherent strategy. Certainly, one of the central problems of dealing with tax avoidance in the UK has been the propensity of governments to tackle the symptom—by enacting ever more anti-avoidance provisions aimed at the particular avoidance scheme—rather than addressing its underlying cause—often the lack of clarity or consistency in the tax base. 
I suspect we are going to hear a lot more about avoidance and it will induce me to shout at the radio or television every time I hear it.

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