#MakeTaxFair: What is tax avoidance and how can we prevent it?

Not a single penny of what the treasury loses from tax avoidance is accidental

Tax avoidance has rarely been the subject of as much attention as it is at present. That’s welcome. As a tax researcher and chartered accountant, I’ve estimated that it costs the UK at least £19bn a year in lost revenue. That’s important. It’s enough to pay for the NHS for one day a week.
We can wring our hands over this and pretend like there’s nothing we can do. But not a single penny of this loss is accidental. Every person who engages in tax avoidance is doing it deliberately, to deny the UK government the money it needs to provide the services that we all expect, including the tax avoiders.

So what is tax avoidance? Contrary to what some may say, it’s not paying money into am ISA, and nor is it claiming tax relief on your pension contribution. These two things are deliberately provided to you by law. We are all similarly entitled to a tax-free personal allowance, which reduces our tax bill. If that is considered tax avoidance, then the whole of life itself is a tax avoidance exercise, which is a ridiculous suggestion. Yet it is one used by many who try to avoid their own very serious tax avoidance.

In reality, tax avoidance is trying to use the law to reduce a tax bill in a way that was never intended. So, the whole basis for most of the film tax credit reliefs, which are now considered to have been widely abused for tax avoidance purposes (and by a number of celebrities), was that the person making the claim must have been trading in film making. Therefore, the claims made under this pretense fail, because there is little evidence that the vast majority of those involved were doing so.

Tax avoidance could also be a multinational company diverting as profits to a tax haven by claiming it has to pay for the right to use the company’s own name, which has been recorded for tax purposes in that offshore location. And while it’s not as consequential, tax avoidance could also be setting up a limited company to sell services that should really be subject to PAYE.

All these arrangements are artificial, and involve some degree of deception, because what is claimed for tax doesn’t really reflect what is going on in reality. That’s what tax avoidance is. And that’s why people are angry about it. No-one minds someone claiming an honest tax relief. We can, and should, all do that. That is what Parliament intends. But there is what might be politely called a “smell test” when it comes to tax avoidance which is hard to define, buy easy to identify because the stench of insincerity about the claim made is glaringly obvious to almost anyone who comes near it, including the person making it.

And now most of us have come nearer to tax avoidance than we expected to. So, what can we expect of any government that might be formed after May 7 on this issue?

Three things can beat tax avoidance. One is a broadly-based general anti-tax avoidance principle, written in law, which means that any arrangement that is artificial and entered into mainly for tax purposes can be struck down in law. The second is country-by-country reporting information from multinational companies that shows where they are trading, and where they report their taxes. Nothing will stop corporate tax avoidance better than that. Nobody wants to appear in front of Margaret Hodge. And finally, we need a tax authority that is well resourced because, until it is, it cannot recover this money.

These are the criteria that must be used to assess all political parties in the run-up to the general election. Any that does not commit to these issues could fall short on tax avoidance. And that means they will fail us all. Which is precisely why this is a key general election issue that everyone should have in the back of their minds when they get to vote on May 7.

The UK Gold, a new documentary on corporate tax avoidance, airs on London Live at 8pm Wednesday 25th March. Narrated by Dominic West, and featuring an original sound score by Thom Yorke (Radiohead), Robert Del Naja (Massive Attack) and Guy Garvey (Elbow).