Beyond Napoleon: Tax simplification should be every Chancellor’s aim
The enactment of income tax as a temporary measure to deal with Napoleon is still with us — but we need to move on.
In The Times this week (June 16), Charlie Elphicke, MP, a former tax barrister, was reported as proposing prosecution for tax advisers who promote abusive tax avoidance arrangements that have “no business, social or other purpose other than the obtaining of a tax advantage”. He suggests that anyone found to have promoted such an arrangement would be subject to prosecution and a fine.
Despite being a poacher turned gamekeeper, Mr Elphicke’s belief in mixing morality with taxation is misguided. Defining tax abuse as being an arrangement devoid of a business or social purpose means that most of the behaviour that he is trying to condemn would slip through the net, as the vestige of purpose inherent in a tax incentive would always cling to an artificial arrangement.
Taxation is an arbitrary construct of law. There is no moral obligation of taxation that the state places on its citizens. But the complexity of the laws creates a spectrum of judgement. At one end of the spectrum, for example, we all make decisions to avoid tax every time we pay into a pension scheme, ISA or similar government approved tax-avoidance arrangement. At the other end, arrangements such as K2 or Icebreaker are perceived to be abusive and therefore immoral. Charlie Elphicke may be hard-pressed to legislate a dividing line within the spectrum.
Why is it so difficult to determine what is acceptable tax avoidance and what is abusive? The first issue is that the UK’s tax system is unnecessarily complicated. The enactment of income tax as a temporary measure to deal with Napoleon is still with us. It is effectively renewed annually, and this has an impact on the subconscious of chancellors, leading them to think that annual meddling with the law is a good idea — with the result that our tax system has a stratigraphy of layers on layers. Tax simplification should be every chancellor’s aim.
Secondly, our tax system mixes high taxation rates tempered by allowances, deductions and reliefs. This means that the actual effective rate of tax is less. But where there are reliefs there will always be those willing to try to exploit them. Arrangements such as Icebreaker attempted to claim relief for losses that could then be applied to other sources of income. Low headline rates of tax with fewer reliefs would give wealthier taxpayers less incentive and opportunity to seek to avoid taxes. Bashing the wealthy is effective as a populist idea but will not help with long-term wealth creation in the UK, as the French are finding to their cost.
I have had experience of working in a tax jurisdiction where the headline rate of tax was low and the law had an impressive anti-abuse rule to impose tax wherever the director considered that tax had been avoided. Trying to avoid tax was almost unheard of and the anti-abuse rule led to a system of pre-clearance. In practice this meant that anything that could be perceived to be abusive could be checked and approved in advance. HMRC would be better served in placing the enormous machinery of investigators and litigators on course to approve arrangements in advance, giving taxpayers certainty that their arrangement would not be challenged and in converse, that the absence of approval and the certainty of litigation would dissuade taxpayers from participating in abusive arrangements.
Mark Davies is the Managing Director of Mark Davies & Associates and is a Chartered Tax Adviser
Read the full article in The Times here.