I do like a good survey, and Taxation magazine has come up with a cracker about attitudes to tax avoidance and evasion. However, there is to my mind a fundamental problem with the survey, or more accurately its likely readership and responders, which it seems will consist largely of tax advisers.
If I am anything to go by, and I suspect I am, tax advisers are the most lily-white of taxpayers when it comes to complying with their tax obligations. I think there are 5 main reasons for this, apart from the fact that we are all wonderful human beings who are determined to pay every penny of our fair share of the UK tax burden.
- We know only too well what the potential penalties for tax evasion are.
- We know only too well that HMRC would throw the book at any tax adviser who transgressed in this area, and quite rightly too.
- If we are going to advise our clients to behave honestly toward HMRC, we had better be standing firmly on the moral high ground when we do so.
- We know that the tax system can only operate if taxpayers are honest with HMRC.
- If we want to retain a shred of credibility with HMRC, we need to be transparently honest about our tax affairs.
Thus the survey needs a wider audience, in order to achieve a wider range of replies from a cross-section of the UK taxpaying population, and thus make the responses more meaningful. It requires yes or no answers to 10 questions, and can either be sent to Taxation, Quadrant House, The Quadrant, Surbiton, Surrey SM2 5AS or completed online at bit.ly/TaxHowFar. So here it is, together with my answers (in bold):
- Instead of paying an admission fee each time you visit your favourite art gallery, you take out annual membership, giving unlimited admission for less than you currently spend. You gift aid the membership so that the gallery can recover basic rate tax. As a higher rate taxpayer, you are also entitled to reclaim the higher rate tax on the membership fee and keep it: would you do so?
I can honestly say no to this one, because Chester Zoo operates a similar system of offering admission in return for a Gift Aid donation. My concerns about the propriety of this approach mean that I have never claimed tax relief on such donations.
- A builder has just quoted £2,400 including VAT for some work, but says that he can ‘knock the £400 VAT off for cash”. You are clear that he intends not to declare it for VAT even though he should do, though you are satisfied he will still do a good job. Do you accept the reduced price and pay cash?
No. A tax adviser should never put himself in the position where he encourages a taxpayer to evade tax. But what if he told me that he had exceeded his overdraft limit, and that if he paid my cheque into the bank he might never see the money again, so could I pay him in cash? If there was no suggestion of a reduced price being on offer, I would accommodate him in that respect. Tricky questions, aren’t they?
- You are the builder in the previous question who has quoted £2,400 including VAT and have been asked whether you can do it cheaper, which you can’t afford to do if you declare it. Assuming you were sure that you would not be found out by the taxman, would you offer to ‘knock the VAT off for cash’ ad not declare the £2,000 as income?
No, I am not that big a hypocrite, and I like to be able to sleep at night.
- Your widowed mother has just died, leaving her large estate to you and making you the executor. There is already a significant inheritance tax bill to pay, but no one knows about £1 million in an offshore account to which you have access. Assuming that you were sure you would not be found out, would you keep quiet and not pay the £400,000 extra inheritance tax that is legally due?
No – see the answer to 3 above. The principle is more important than the amount at stake.
- You run a small business. Your accountant says if you operate through a company instead, you will save £2,000.Having asked him about it, you are satisfied that his advice is accurate, and that the law allows you to operate through a company if you want to. Would you follow your accountant’s advice?
Absolutely yes I would, and I offer clients similar advice on a regular basis. This is a choice between legitimate alternatives offered by the tax system, and as such perfectly acceptable tax planning.
- As you have formed a company, your accountant now says that, as you are married, if you transfer half the shares to your spouse you will be able to further reduce your tax bill, as half the income from the company can go to them, even though they do not work in the business. The Revenue lost a challenge on this in the courts some years ago, and you completely trust your spouse. Would you follow your accountant’s advice?
Yes – again this is the type of advice I regularly offer. As an investor in the business my spouse is entitled to a return on her investment; again this is legitimate tax planning, which, as the question implies, has been validated by the House of Lords in its capacity as the highest court in the land.
- You have a child who is about to go to university, who needs you to pay £3,000. This will be a struggle from your after tax income of £2,500 per month. Your employer has offered to reduce your gross salary by £3,000 a year and to pay this to your child, pretending that they are a part-time employee even though they would not be. You would save nearly £1,000 in tax. If the taxman finds out, it is your employer who will have to repay the tax. Assuming you trust your employer, but don’t care what happens to them if the taxman finds out, do you accept the offer?
No, the proposal involves dishonesty. I might be prepared to consider a salary sacrifice and a scholarship from my employer to my child, but only if the child was genuinely interested in working for my employer and my employer was genuinely interested in employing my child.
- You pay tax at the highest rate of 50% on the top £100,000 of your £250,000 a year income. Your accountant explains that he has found a tax loophole. If you buy some special investments one week and sell them the next for the same price, because of a mistake in the way the law has been written, your 50% tax liability will be artificially reduced to 20%, saving you £30,000. Do you go ahead with the scheme or do you refuse?
I refuse. This is not a legitimate choice between options offered by the tax system, but artificial exploitation of an inadvertent error in the law. I do not approve of such tax avoidance on moral grounds. I would also be concerned that HMRC would review the transaction with a fine toothcomb to identify any flaws to enable them to invalidate the scheme, but that would be side issue for me personally.
- You don’t normally get tips, but a customer is so pleased with the service you provide that they give you £50, which your employer does not know about. An accountant tells you (correctly) that this is strictly taxable, but that in practice most people would probably not declare it. You have to submit a tax return each year – will you include this £50 tip in your income and pay tax on it?
Again from practical experience – as an accountancy student I did a tax return for a friend of a friend who insisted on paying me a fee of £50, which I did not ask for. Despite the fact that this was unsolicited I declared it as income on my tax return and paid tax on it. So yes.
- You have just bought the pub where you had previously been working as a manager. The previous owner had reprogrammed the tills so that they showed takings 10% lower than they should have. Only the reduced figure is shown in the accounts, and the 10% is taken from the till in cash with no tax being paid. A previous Revenue inspection of the business records found nothing, and you are satisfied that it will never be discovered. Now that it is your business. Will you start declaring 100% of your takings?
Yes. Just because the previous owner was dishonest does not mean that I have to be. I wonder if he sold me the business on the basis of the accounts submitted to the Revenue, in which case I underpaid for it? Just a thought in passing. Incidentally, if I were a qualified tax adviser or accountant, advising my client the new pub owner in a professional capacity, I would be obliged to report the previous owner to the Serious and Organised Crime Agency under money laundering legislation. In view of the risk of him tipping off the previous owner, I would be well advised not to tell my client I was obliged to do this.
So go ahead, answer the questions honestly and submit your answers. If you are not a tax adviser you are not bound by the professional ethical standards hat constrain me, so do not necessarily be influenced by my answers.