Let us start with a couple of definitions. Tax avoidance means taking action to avoid paying tax. For example, if you are passing through the duty free shop at an airport or port and you buy something, then you are engaged in tax avoidance because you could have bought the same item in a normal shop where VAT and other taxes would have been payable.
Tax evasion means dishonest conduct undertaken with the aim of not paying taxes, which is not the same thing as tax avoidance. It can also mean failing to declare income or capital gains when you should have declared them.
The point of this is that tax avoidance is a legal activity and also morally acceptable. No one would willingly walk into a big tax bill if they can help it, and they are entitled to order their affairs so as to reduce any tax payable. Politicians often talk as if tax avoidance and tax evasion were the same thing. They are not !
The authority of the State to collect taxes is based upon various Finance Acts and similar legislation. If the State exceeds its authority, then an aggrieved taxpayer has the right to complain before a judge and to challenge that authority. The judge, in looking at a Finance Act, is obliged to look at the text of the Act, and cannot second-guess the intentions behind that Act for the obvious reason that different Members of Parliament may have voted for that Act for different reasons, and there is no guarantee that these different reasons are not mutually contradictory.
Thinking back to when I was at school, I could not help but notice that the number of school rules always increased year on year. School rules were never repealed. There was never any clearout of pointless old rules. It’s just like this with the tax system. Things get steadily more complicated. The tax manual gets steadily thicker by the year. How on Earth did our ancestors manage with such a simple tax system?
Politicans do not get steadily cleverer, however, so we have the prospect of a vast mass of tax legislation which none of them understands, and as a consequence, the prospect of a tax system which is full of inconsistencies and so-called loopholes. They also vote for weird taxes like non-corporate distribution tax (now repealed) despite the fact that few of them could do basic calculations on how much NCDT is payable in a typical case.
Well, let’s make it clear that there is no such thing as a loophole in the law. There is simply The Law and that’s it. If the law is poorly drafted by the standards of normal perception, and it is then exploited by smart accountants and tax advisers, that’s just too bad. It is up to politicians to draft their laws properly to avoid stupidities like NCDT.
Let’s also remember that income tax began as a voluntary levy to fund the war against the tyrant Napoleon. These days, however, in order to collect income tax we have regimes such as the Construction Industry Scheme which is just the sort of scheme which Napoleon would have dreamed up. Some of us have long memories and can keep a sense of perspective.
If anyone still wants to moralise about tax collection, we will finish with a new rule. Let’s say we have a choice between reading a tax manual or reading the Bible. It is recommended that priority be given to the moral content of the thinner book.
David Porthouse & Co is a forward-looking firm of accountants based in Carlisle with a keen interest in new technology with the aim of speeding up accounts production and making accountancy more affordable for our clients. David Porthouse is also a specialist in company accounts and corporation tax.