Last month Charlie Elphicke MP tabled an amendment to the Finance Bill to criminalise lawyers and accountants who promote aggressive tax avoidance schemes. Mr Elphicke claims to be encouraging a debate around morality and tax avoidance, satirising the one-dimensional tax adviser who ought to be snubbed by fellow dinner guests for helping his clients save money.
However, in my view this former tax barrister should not be debating morality per se, but rather the arbitrary dividing line between acceptable and abusive tax avoidance.
Contrary to all the populist rhetoric, tax avoidance is legal. In 1936 the Duke of Westminster decided to save tax by paying his gardener an annuity instead of wages. HMRC contended that in substance the annuity was wages but the court held that it was an annuity and enshrined in law the taxpayers’ right to arrange their affairs to pay the least amount of tax. We all exercise this right when we invest in an ISA and not a bank account.
At the other end of the spectrum are abusive arrangements like K2 which seek to circumvent the law by paying consultants by way of tax-free loans. I suspect that if the duke’s case was heard today there would be a different result handed down. In the current moral climate people are expected to pay the most that they can. In my view the tax system needs to be simplified so that arbitrary moral judgment is replaced by unambiguous tax law.
Income tax was brought in as a temporary measure to fund the Napoleonic wars over 200 years ago, yet it retains vestiges of concepts dating back to its inception. Due to its temporary nature income tax is effectively re-imposed every year yet it is never modernised. Annual tampering leads to layers of legislation leaving gaps for smart tax advisers to seek tax planning opportunities. The answer to poor legislation is not a patch but a new operating system.
The UK tax system works on the principle of high tax rates, reduced by reliefs and allowances which together equate to a lower effective rate of tax. Tax advisers may exploit tax planning opportunities using such reliefs in a manner not envisaged by Parliament.
One such arrangement was the Icebreaker LLP where taxpayers sought to relieve losses in the partnership against the taxpayers’ other sources of income. Rather than vilify those who use or design such a scheme, an alternative approach would be to remove many of the reliefs, allowances and reduce the headline rates of tax.
Jurisdictions such as Hong Kong, Singapore, Jersey or Guernsey all manage with a flat rate of income tax and these tax systems are simple to administer and there is little incentive to avoid tax.
Adopting similar principles may give the UK a competitive advantage as well as collect more tax. The law abiding, democratic and tolerant society of the UK is considered to be a high prize to many foreigners. But the UK competes with many other jurisdictions for ‘economic citizenship’.
The UK’s tax treatment of non-doms has been particularly successful in attracting wealthy entrepreneurs. In my view, as many jurisdictions will keep high taxation for many years to come, wealthy foreigners will chose to vote with their feet and move to a lower tax jurisdiction.
In Classical Athens wealthy citizens paid their taxes by outfitting a warship or funding the production of a play. These people were recognised and their contribution was tangible. Rather than naming and shaming tax avoiders perhaps we should honour and fete those that create wealth and employment.
Mark Davies is the managing director of Mark Davies & Associates and a chartered tax adviser specialising in advising non-domiciliaries