Taxing the Carr

“Good grief!” said the blog reader. “A post from Quizzical Eyebrow! I thought he was after the record for the World’s Most Dormant Blog.”

OK, “nearly six months” is a long time. But I’m sure all of the people who showed up to read about a couple of footballers are still around somewhere¸ now I’m confused about tax avoidance.

Ever since I’ve been interested in these things (which admittedly was a lot earlier in life than most normal humans), the mantra has been “tax avoidance is not the same as tax evasion”. The former, we were told, is a noble pursuit, the duty of every citizen, involving the minimization of tax liability using every loophole available. The latter is an altogether more disgraceful affair, not bothering with the niceties of loopholes and going straight to the minimization.

Wikipedia tells us that the USA defines evasion as knowingly and intentionally doing something to avoid paying an unpaid tax liability. The logical conclusion from this is surely that if one is not guilty of evasion, then there was no liability in the first place.

This means, to my mind, that there is no such thing as “avoidance”. It can be compared to, let’s say, approaching a roundabout and jumping the queue in the “left turn” lane by taking the empty “right turn” one and going all the way round, 270 degrees, to end up where you would have been if you’d turned left. It’s against the spirit of the long queue in the “left turn” lane, but it’s not illegal and will attract no penalty, other than perhaps a grumble for those who stayed in the queue.

The financial journalist Paul Lewis has coined the word “evoidance”, which he defines variously as

meaning to pay less tax than everyone thinks you really should whether legal, not, or maybe.

and

designing a structure or taking action which has no purpose except tax cutting.

I think his underlying point is that perhaps some of the things that the industry calls “avoidance” might in fact be “evasion” that a court hasn’t ruled on yet.

In the last 18 months or so, tax “dodging” by wealthy companies and individuals has been higher up the national agenda, hoofed there by direct action from UK Uncut and a feeling that the phrase “we’re all in this together” was more spin than policy. And this week, comedian Jimmy Carr was revealed as the biggest client of a scheme designed to shelter millions of pounds annually from the clutches of HM Revenue & Customs.

The instinctive reaction to this is to roll one’s eyes and criticise Carr as yet another example of a rich bloke taking the mickey out of the rest of us, and out of his country. This is a similar attitude to that displayed towards sportsmen and musicians who move to Monte Carlo or Montreux. The sportsmen at least have the excuse of claiming it’s for the training climate.

And the Prime Minister understands this instinct. He described schemes such as the “K2” scheme used by Carr’s accountants as “morally wrong”, and that phrase is leading the reports. But in the next sentence he goes on to hint at some possible double standards, by saying that individual tax planning such as pension contributions is fine. Which got me on to thinking about ISAs.

Because what is an ISA other than a legal device to shield money from tax that would otherwise be due? OK, it is money that has probably already been taxed as income, and the further tax avoided is only on the interest, but the fact remains that HM Government have drafted a law to allow people who would otherwise be taxpayers to “avoid” a bit of their liability – or, put another way, to remove the liability.

All of the articles on the K2 scheme include quotes from HMRC to the effect that they do not believe it will succeed in sheltering the money from the tax liability, and that they are planning to challenge it, as they are presently doing with other similar schemes (including the one that has been at least 50% of Rangers FC’s current problems). I assume that for HMRC to launch a challenge, they must at least have a reasonable expectation that a court might find in their favour – meaning that the scheme was illegal, and all the noise about “aggressive but legal” over the last couple of days was, at best, uninformed.

Indeed, on 23rd August last year, HMRC issued a “Spotlights” guidance note which specifically states:

Arrangements may involve payments passing through a series of companies, loans from a third party or an offshore alleged employer, a deed of covenant, secondments from one employer company to another or claims of self employment, etc. In HMRC’s opinion these arrangements do not succeed in avoiding the tax and NICs due. HMRC will challenge these arrangements and litigate where necessary to recover unpaid tax and NICs.

To litigate means to take a claim to a court of law, which would be an odd course of action for a scheme that is apparently accepted to be “aggressive but legal”.

Is Jimmy Carr “morally wrong”? Well, that depends on your morality. If you have an ISA, or pay a plumber cash, then I would suggest that it’s very difficult for you to argue with Carr’s scheme if it is ultimately found to be legal. The many good arguments about funding public services should, in that case, surely be directed against the laws that allow such scheming, rather than those who benefit from them.

But WILL it ultimately be found to be legal? Given the HMRC statements, I suspect a court may ultimately have more involvement with that question than today’s news reporting would have us believe.

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