I am not suggesting that, as a nation, we are becoming more dishonest in our tax affairs and sinking to the depths of non-compliance witnessed in some other countries abroad. Despite the likes of Del Boy and Rodney operating with “no income tax, no VAT” in the black economy, the level of tax compliance in the UK has always been high thanks largely to the co-operation of the accounting profession and the law abiding nature of the UK public with its instinct for fair play. This is a very British characteristic and is something about which this country should rightly be proud.
Where I see the increasing dishonesty in the tax system is not amongst the taxpayers but worryingly amongst the upper echelons of HM Revenue & Customs advisers and amongst our legislators.
What form does this increasing dishonesty take? It is in the deliberate policy to blur the distinction between tax evasion and what is called tax avoidance. It is simply dishonest not to distinguish between these two categories and dishonesty is not the basis on which to build any public policy least of all our taxation system. To continue with this dishonesty will only bring the UK tax system into disrepute and quickly undermine the prospects of economic recovery.
Tax evasion and tax avoidance are not, by any stretch of the imagination, the same. They are definitely not two sides of the same coin. Yet repeatedly we have heard, both from the last government and from the present coalition, that they intend to be ruthless in their pursuit of those who avoid or evade paying tax and that, in the country’s present economic difficulties, they will attack those who think that paying extra taxes is an optional extra. This is all good populist sentiment. But no distinction is drawn between tax evasion, which is clearly illegal and can never be condoned, and tax avoidance, which is no more than the sensible management of an economic cost facing any consumer.
Governments of all political colours have long followed a carrot and stick approach and used the tax system to send economic messages to consumers either to persuade them to stop doing certain things or to encourage them to do more of something else. Hence governments have:
- increased ‘sin taxes’ to reduce levels of • smoking and drinking;
- racked up fuel taxes to persuade us to • cut down on the use of our cars; and
- introduced air passenger duty to make • us think twice about taking unnecessary flights.
At the same time those governments have sought to encourage consumers to undertake a range of activities which presumably they thought would have been ignored without those helpful tax breaks. So we have for example:
- Gift Aid to encourage businesses or individuals to make donations to charity;
- Enhanced capital allowances to make more attractive investment into certain types of plant and machinery;
- Generous tax relief under EIS to persuade individuals from outside to take equity stakes in small and medium-sized enterprises undertaking certain qualifying activities; and
- During the financial crisis the last government temporarily reduced the standard rate of VAT to 15% for 13 months in the hope of stimulating High Street sales.
It is this constant carrot and stick approach which has, in part, contributed to the excessive length of the UK tax code.
If successive governments have taught British consumers to respond to economic messages sent out directly through the tax system, why do they think that businesses and individuals operating in a free enterprise system should suddenly stop responding to certain economic stimuli? The whole wealth of the country is based on companies and individuals responding day in and day out to all kinds of economic stimuli. We all rely on companies and individuals being entrepreneurial.
If an entrepreneurial approach is followed, tax is simply a cost and, like any other cost, it needs to be managed. To seek to minimise your tax liability is merely a natural response and one to be expected, and actually encouraged, from an economically literate person. There is nothing illegal in following this approach providing you make full disclosure, as required, to the tax authorities and you stick to the rules laid down.
Nothing good is achieved by dishonestly confusing the sensible management of tax costs with illegal tax evasion. All that is achieved by following such a dishonest policy is to harm British business and British consumers by getting them to worry unnecessarily and refrain from responding naturally to economic circumstances.
In my view, the country would be much better served by reducing the complexities in our tax system, removing this dishonest association of tax management with tax evasion and allowing British business and British consumers to respond naturally to economic realities. That would bring some much needed honesty to our tax system.