On the issue of taxation abuse, we need to move on from the oversimplified distinction between legal avoidance and illegal evasion.
At the moment some avoidance has shocked people, while other avoidance, such as my tax free savings, is not such an abuse. In order to sort out the difference between good and bad avoidance, I suggest people concern themselves with whether the avoidance was dishonest or not.
In the case of George Osborne’s complaint about a Labour donation, we need to ask, was John Mills dishonest in his method of avoiding tax in this donation? If he was, then Labour is in trouble, if he wasn’t then we are not. Mr Mills chose not to sell the £1.5m of shares and give the cash to Labour, as that would have been taxed as a capital gain. By giving Labour the shares, then Labour will be taxed on the dividends, but only liable to the capital gains if they are sold.
I have some of my savings in an ISA as a tax efficient method of building a pension. I can invest £11,250 per year in my ISA and this will be exempt from taxation both on the dividends and on the capital gains. The same applies to a donation I might give to charity that can be given with “Gift Aid” so that the tax paid amount is passed on to the charity. Is that dishonest? No.
This is quite different from the case of Jimmy Carr who passed his money to an Isle of Man, company who then provided him with same amount back but called it a loan. A loan isn’t taxable, so he avoided tax . Now, any sensible person would describe that as completely dishonest, but because tax law is based on a set of rules, he wasn’t prosecuted.
Criminal law is a different set of law and can take precedence if policy makers wish it to. If the authorities wished to prosecute him for fraud, they could have done so, but if they had, then they would probably have to prosecute everyone else who has done similar, and that is a prospect that can be frightening to the people who run this country.
Fraud is when someone does a dishonest act which makes a gain for himself, of a loss to another.
The other problem that exists with tax is that countries tend to have bilateral treaties with each other. We make an agreement with America not to prosecute their companies and they won’t hassle our companies. We then have a bilateral agreement with Ireland, France, Switzerland etc. At the time that these agreements were made, they worked, but these days, globalisation makes it possible for companies to move money about and operate within rules, but in a completely dishonest way.
Is it honest or dishonest for Starbucks to say that a £1.50 cup of coffee is made up of £1.40 in intellectual property and the other 10p is the cost of the raw materials. Taking into account that the £1.40p is paid to a company owed by Starbucks, it is fair to say that this is totally dishonest. However, the rules allow to happen because we have a rules based system.
When Ed Miliband was asked about the donation from John Mills, following his keynote speech the other day, he would have been wise to have answered using the distinction of honesty and dishonesty. There is no question of dishonesty in this example.
Philip Green paid a £1 billion dividend to his wife in Monaco. As a foreign national, she doesn’t pay tax in this country but may pay a tiny amount in Monaco. The entire business is in the UK, but she makes sure she only goes to the UK for 3 months of the year in order to qualify as a foreigner. Is that honest or dishonest? I’m not sure that it is dishonest to live elsewhere, but I’m sure it would be dishonest to claim that she is the sole beneficiary of the dividend, if they are married and in a relationship.
The current trend is for policy makers to be concerned with opening up tax havens to transparency, and the media have been exposing the abuse of multinationals. We should at some point move towards discussing a change in the system from rules-based to principle-based law.