The morality of tax - Business Works
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The morality of tax

Mike Fleming, Tax Director, Straughans Chartered Accountants M oral judgements about tax have been flying around the media like a virus this year - even more so in recent weeks. Here, Mike Fleming, Tax Director at Straughans Chartered Accountants, discusses both the morality and common sense of tax regulation.

David Cameron’s condemnation of Jimmy Carr’s tax arrangements as 'morally wrong' made headlines. Carr’s public apology, after withdrawing from the avoidance scheme in question, added to the moral overtone. Further moral questions were posed over the payment arrangements at the BBC when it was revealed that up to 300 key figures are paid through private service companies.

The moral compass was sent swinging out of control once more as David Gauke’s comments about the 'immorality' of paying tradespeople in cash hit the media. As a tax professional I am ever cautious about casting knee-jerk moral judgements on tax arrangements and was especially surprised to hear such comments coming from Mr Gauke. As former Director of Ivobank, which specialised in financing the notoriously cash-rich betting industry (reliant on the arrangement that the proceeds of gambling do not incur a tax liability) I did think that Gauke might have removed the plank from his own eye before he started commenting on specks in the eyes of others.

Never has the relationship between an individual’s tax code and moral code been more widely conflated. Moral pronouncements of 'right and wrong' sit uneasily within an objective system. Clearly we should all pay a correct share of tax but this needs to be achieved through the introduction of watertight legislation, rather than politicians attempting to take the moral high ground, a position that in my view they are ill suited too. Have we all forgotten the outrageous expenses claims of some MPs?

The government does have plans to combat tax avoidance through the introduction of a General Anti-Abuse Rule (GAAR). Unfortunately, the very generality of the rule means that it’s more of a blunderbuss than a sniper’s rifle. The government requires tax avoidance legislation that will operate with the precision of a surgical scalpel, allowing them to excise tax avoidance schemes which are aggressively abusive, without compromising businesses and individuals engaged in legitimate strategic tax planning.

Sadly, a GAAR could actually be more detrimental to smaller businesses and sole traders than to the 'big fish' it was 'designed' to catch. The application of the GAAR hinges around one word – 'reasonable' – and a judge’s perception of what it constitutes. So, common business tax planning behaviour which has been endorsed – and even encouraged – for generations could suddenly be held up under the microscope with uncertain and unexpected results.

If an individual owned a garage, for instance, and wanted to take their 21 year old son / daughter into the business, it would make sense in terms of tax to make them a partner. A sole trader may well be a higher-rate taxpayer, but by introducing a partner the income could be allocated in a tax efficient way with each partner pay tax at a lower rate. This sort of simple tax planning supports business growth, especially for SMEs and also promotes family business which is an area of particular strength in the UK. Under the GAAR such a business could well find themselves caught and fined for engaging in activity where 'it was reasonable to conclude that the obtaining of a tax advantage was the main purpose of the arrangements'. Isn’t that the case for many legitimate business arrangements?

Another commonly used business tax strategy is to introduce your spouse into the business either as a partner or by splitting the shareholdings in your family company.

Due to 'spousal exemption' it’s possible for one spouse, who may be actively involved and running the company (the settlor), to gift shares (and the resulting rights) to a spouse who does not draw a salary from the business, or necessarily have any active involvement. It is well known that you can maximise net income by splitting the shareholding and consequently the sharing of dividend payments with your spouse. If you draw a minimum salary, you thereby maximise corporate profit and potential dividend payments. As long as your spouse is earning below the HRT threshold, it’s possible to take advantage of their unused personal allowance and basic rate band and therefore pay lower-rate tax on a substantial proportion of the income from the business.

As HMRC has had a beady eye on the activities of businesses where one spouse is much more involved than the other – for example in the much publicised case of Arctic Systems Ltd in which HMRC attempted (and failed) to tax Geoff Jones on dividends paid to his wife – it’s worth being aware of the pitfalls, although questions of the morality or otherwise of such tax planning strategies should safely be left to armchair philosophers.

It’s likely that the GAAR will harden HMRC’s attitude, bringing many long-established tax-planning practices under the microscope to examine how 'reasonable' they are. The 'catch all' premise of the GAAR sets it up to create casualties where the government should be building areas of strength – in SMEs and family business. HMRC has declined even to provide a clearance process - whereby conscientious individuals could submit their tax arrangements to the Revenue for approval – so increasing the likelihood that unsuspecting members of the public will be hit.

Whatever assurances HMRC have given, and they are few, we should not forget the 2007 Income shifting Legislation they were keen to introduce. In my view this gives a strong indication as to how HMRC were thinking at the time, have things changed? In second guessing how HMRC may seek to apply the GAAR, it would be as well to remember that their brief is to collect £24 billion more tax this year than last and there is no reason to believe that targets will be lowered in the future.

To come back to morality, if anything’s immoral it’s the government’s presentation of the GAAR as something which will promote fairness and equality. In fact it is likely to favour those who can afford to engage in lengthy law suits hinging on the definition of what is 'reasonable'. It’s no coincidence that the GAAR draft legislation follows the suggestions of a committee chaired by a lawyer. One wonders who will be involved in arguing the meaning of the word 'reasonable'. At the very least, we deserve certainty when dealing with the state in terms of tax. The government plans to introduce a scheme which will undermine this. Where’s the morality or common sense in that?

To contact Mike Fleming or for more information, please visit:

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