Tax avoidance and the dinner party test
If you thought we had talked about tax quite enough for one year, you may find this blog post a tad disappointing. Tax and the implications of this year’s budget is yet again (or potentially still) on the agenda.
Ask anyone whether they approve of benefit fraud and the answer is universally no. Ask if they approve of tax avoidance and the answer is usually a touch more complicated.
Because avoidance is the murky grey area where tax lawyers and accountants excel. It isn’t outright criminal but it might not be right either.
At the darker end of the spectrum it includes setting up a company offshore to avoid 5% stamp duty. It would of course also include setting up a charity in [insert country of your choice without a rigorous Charity Commission], paying in £100,000, allowing the tax to be claimed back by aforementioned charity, and then ensuring the £100,000 plus any reclaimed tax end up in your own bank account (minus the lawyers’ and accountants’ fees for setting the whole thing up).
If asked, I suspect most people would disapprove of both of these; no one likes to feel that they are playing by the rules while other people are getting away with something. This natural inclination is obvious to the extent that it barely needs restating, and it is for this reason that all political parties feel comfortable in ‘getting tough’ on this type of tax avoidance. Which is why the Treasury tried to get rid of both of these types of tax avoidance in the last budget. The former it managed relatively quietly – and in theory at least, successfully – the latter however has proved more contentious.
To stop wealthy earners from achieving this particular tax dodge, the government has proposed that donations of over £50,000 will no longer be exempt from tax.
To the average man on the street this might sound inherently reasonable, as at £50,000 the level has been set at twice the average salary. But for a top earner the picture is slightly different. Let’s take the average FTSE 100 CEO, who last year took home a total package of £4.2m. If they gave £50,000 to charity this would be just £1.1% of their yearly earnings.
Surely you would argue that the individuals who have such wealth should be encouraged to give it away, and indeed that is what the tax exemption was designed to do. It was the equivalent of the government saying: if you think this charity is worth supporting enough to give your own money, we’ll match fund it. Much as the current cycle to work scheme operates. So the problem with taking the exemption away is that it implicitly says: we no longer want to encourage this sort of behaviour. A little tricky to swallow for those wealthy enough to give at this level, particularly when the government has spent the last two years imploring them to give; to fill the holes left by a retreating state.
Should the government back down? It is a relatively moot point; those from left or right could argue it either way. It is right to say that we should use the tax system to encourage and discourage behaviour; it is also right that charities feel they have been thrown a curve ball, as even if all donors still gave the same amount, the charity would receive less. Yet equally we can argue that this money which has not gone to charities will go to other causes, via the state, and that the very richest don’t need a tax incentive to give. But as universities, charities, businessmen and wealthy donors (those who give to charities also give to political parties) are on one side and Cameron is on the other, the time is ripe for a u-turn. Here Cameron would be well advised to crack down on (so-called) bogus charities and the lawyers and accountants that create them, rather than cracking down on giving.
The problem is that this is all a side argument that has distracted us from the real issue. Because the tax dodging at the dark end is in the minority; it is the much paler shade of grey in the middle that we should all be paying attention to. Here we are talking about the very popular practice of being listed as a company and paying yourself dividends to avoid PAYE (a practice learnt in the city and sadly now transferring itself into the public sector), or domiciling your wife in Monaco to avoid tax on your dividend (as per Sir Phillip Green), or indeed off-shoring your company’s tax liabilities (as we have read is being done by companies such as Amazon).
On all of these issues, the government – and indeed the opposition – has been sadly quiet. Because it is easy to crack down on something that is universally unpopular, and much harder to tackle vested interests and the increasing acceptability of some forms of avoidance.
Can this change? I would say yes – but it would take a concerted effort on the part of the government and the opposition. A sea change is needed that would see tax avoidance go the way of drink driving. So perhaps the real challenge we should be looking at is: how do you make tax avoidance something you are ashamed to admit to at a dinner party?
Zoe Gannon is Head of Research at the High Pay Centre.