We're All Morally Repugnant

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ntil very recently the sardonic, Bob Monkhousian Jimmy Carr didn't pay any tax. This happy state of affairs for Mr Carr would no doubt have continued but for our very own Prime Minister's heroic* intervention when on telly, visibly outraged, he lambasted Mr Carr as 'morally repugnant' for paying less tax than a toilet attendant.** It worked a treat, as the next day (possibly the day after), Mr Carr surfaced from his King Midas-like opulence with his countenance markedly transformed: earnestness had replaced sardonicism. Quite the transformation. So full of contrition was Mr Carr that he announced that he had made an 'error of judgement', offered to slip his father a few quid for allowing him  free bed and board in his impecunious early days as a comedian and, most dramatically of all, promised to exit K2*** (the tax scheme, not the second highest mountain on Earth). We'll probably never know for certain why Mr Carr voluntarily agreed to become a 50% (soon to be 45%) income tax payer, but someone with a placid mind, like myself, might conclude that the unwanted, negative publicity – exposing Mr Carr as a horrible hypocrite – might impact detrimentally upon his gig sales and television appearances. Cynical, perhaps even sardonic of me, I know.

Now clearly Jimmy Carr's behaviour is not particularly edifying, but neither was the Prime Minister's, in naming Jimmy Carr individually nor in forgetting his father's own dabbling in tax avoidance in his use of offshore companies (not quite on the K2 tax avoidance scale admittedly). In fact the whole furore about tax avoidance triggered by the Prime Minster's comments is hypocritical, devoid of any understanding of the complexities of the UK tax system or how to limit its worst excesses.

Let's start with hypocrisy first. Most people with a few quid embark on tax mitigation when they can. At the most basic level this starts with using up the annual ISA allowance in cash or shares and contributing to a pension. I freely admit to practising both and might even take the racy step in future years by embarking upon an offset mortgage, thereby short-changing the Exchequer by a few extra quid in lost tax on interest earned. Perhaps the most widespread type of tax avoidance among the middle classes is inheritance tax avoidance – hence the reason that it generates a tiny proportion of UK tax receipts – with parents, most of whom are anxious to pass some of their assets on to their children, taking the simple step of gifting some of these assets more than seven years before their death. Unless you extend the gifting period to twenty years before death (totally unrealistic), and can re-wire human beings so they do not want to provide for their offspring, then inheritance tax will continue to generate virtually nothing. Indeed, some champagne socialists – Ed Miliband and Tony Benn – have even been parties to inheritance tax planning around their expensive London homes. Note that Tony Benn, whose favourite historic event is the Peasants' Revolt, whilst renouncing his title, did not renounce his family wealth nor his pad in Kensington.

At its most complex tax mitigation involves the use of elaborate company or trust structures and upping sticks to a tax haven: The Turks & Caicos Islands, Monaco and Guernsey to name a few. Elaborate tax mitigation involves employing an army of accountants and lawyers who obviously don't come cheap. Still, it is considerably cheaper than handing half of your income (actually more than half with national insurance contributions etc.) to Her Majesty's Revenue and Customs (HMRC). Understandably, most people would not welcome losing half of their income in tax, particularly to see it in some part squandered by an inherently wasteful state. Realistically, most people paying tax at this rate would seek to explore ways of minimising the amount they pay.

Secondly, the public opprobrium around tax avoidance reveals a complete lack of understanding as to the complexity of the UK tax system. The first reaction to a scheme like K2 by the mass media is always one of gross governmental incompetence: 'How can such a scheme be legal? Legislation must be enacted'. Of course politicians, who must be seen by the public to be doing something, usually react by introducing legislation to make such schemes illegal. This process has happened again, and again and again, resulting in countless numbers of Finance and Tax Acts, Extra Statutory Concessions and Tolley's Tax Manuals that are on a par with the Encyclopedia Britannica in length, leaving the UK tax system virtually incomprehensible and incredibly difficult and expensive to administer. To fully understand the tax system, which you must to introduce meaningful legislation that makes aggressive, contrived tax schemes illegal without introducing detrimental unintended consequences, requires a first-class mind. Unfortunately for the government, such minds are few and far between and certainly are not found in HMRC. Instead they are found in the top law and accountancy firms where their intellectual prowess is well remunerated. So the government struggles to introduce meaningful legislation that clamps down on such schemes and any legislation introduced is neatly sidestepped by the more agile minds with their new whizzy tax mitigation schemes.

In fairness, the Coalition seems to understand the futility of this process and is about to introduce a general anti-avoidance rule, known as GAAR to those in the know. In a nutshell GAAR gives power to the State to retrospectively determine whether a particular tax avoidance scheme is illegal irrespective of whether it was deemed legal at the time it was entered into. Practically, this should make people more wary of entering into aggressive tax avoidance schemes, so it should reduce the number of K2-like schemes in practice. However, such legislation is quite worrying as it stamps on basic individual legal rights and established  legal principles.  For example, if I had happily picked my nose for years, which at the time was perfectly legal, but was then fined or banged up for all those years of nose picking when it was subsequently deemed illegal, one might say that this was rather unfair. Indeed, for a government short of money (as all indebted democratic governments will be forevermore, bar Norway with its sovereign wealth fund), it might be tempting to use GAAR with impunity to raid pension funds (actually Gordon Brown raided pension funds when he was Chancellor) and clamp down on tax avoidance that is not particularly aggressive and actually beneficial to society in encouraging people to save for their retirement and in making charitable donations.

It will also be interesting to see how GAAR functions given HMRC's limited resources. Currently HMRC has a backlog of approximately 20,000 cases and its limited resources mean that if you ever write to HMRC you might, if you're lucky, receive a response in three months or, as I have experienced on a not-infrequent basis, none at all. GAAR's introduction might very well have the unintended consequence of putting the brakes on the economy as transactions and re-structurings are postponed or abandoned because of a lack of certainty over the tax position due to delays in dealing with HMRC. Hardly a proposal to put 'petrol into the tank' of the UK economy is it?

Tax in the UK is labyrinthine, impractical and too high. Advocates of the Laffer Curve principle (I am one of them) know that the most effective way of rooting out sharp tax avoidance is to reduce the level of tax for high earners so that they would be less likely to use aggressive tax avoidance schemes. Equally, the tax system should be simplified with all tax rates aligned as much as possible so that there is not a vast disparity between top level income tax rates and corporation tax rates as there is at present, allowing people to structure their affairs to take advantage of the lower corporation tax rates. Certain taxes like Stamp Duty Land Tax, Inheritance Tax and Capital Gains Tax should be dispensed with altogether and replaced by a Wealth Tax. Nevertheless, none of this will happen because of short-term political decision-making and the perceived need by politicians to play to the gallery and excite the bulk of society's deep, ingrained bitterness and envy against the successful and wealthy. Indeed, the Office of Tax Simplification (set up in 2010) in two years has proposed diddly-squat. Even the uncontroversial policy of removing Agricultural Property Relief – working farms would still benefit from Business Property Relief – appears to have been shelved.

I am by no means a fan of the very wealthy paying next to nothing in tax. I am a firm proponent of Warren Buffet's (he's my hero along with Arsene Wenger) belief that the very wealthy should feel obliged to give something back to the society which allowed them to amass their fortunes. This does, however, need to be tempered with pragmatism, as the very wealthy can effectively choose how much tax they pay by moving to states with benign tax regimes, which will continue unless there is an international agreement on tax rates and, of course, an international agreement on taxation won't happen as long as nation states still exist.

If people are really that outraged by tax avoidance and want to mitigate it they should firstly not practice it themselves; secondly, try to understand that the UK tax system is hideously complex; and finally, accept that taxation should be principally about maximising revenue to pay for public services, not a senseless exercise in attempting and failing to squeeze the wealthy.

* Just to be clear I am being sarcastic in the use of the word 'heroic'. The Prime Minister saw bashing the wealthy as an easy vote-grabbing opportunity.

** Actually the Prime Minister didn't use the toilet attendant comparison.  Moreover, I don't think that there is a designated job position or title as a toilet attendant, and, even if there is, a toilet attendant may very well pay no income tax, falling within the income tax personal allowance threshold.  I made the toilet attendant comparison in a bid to give my piece some 'welly'.

*** If the K2 tax scheme allows you to pay no tax, imagine how good the K1 tax scheme must be. Certainly merits a shufty.