Tax dodging is wrong, whatever its name

There's no difference between tax avoidance and tax evasion. It is a middle-class delusion to think otherwise

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So far as tax avoidance is concerned - or tax evasion, is there really a difference? - I may be even more puritanical than the Chancellor of the Exchequer, Gordon Brown. For the dress rehearsals of Wednesday's Budget statement indicate a reluctance to attack tax dodgers head-on. Such hesitation I can understand in the case of a Conservative Chancellor, but why should Gordon Brown pause?

So far as tax avoidance is concerned - or tax evasion, is there really a difference? - I may be even more puritanical than the Chancellor of the Exchequer, Gordon Brown. For the dress rehearsals of Wednesday's Budget statement indicate a reluctance to attack tax dodgers head-on. Such hesitation I can understand in the case of a Conservative Chancellor, but why should Gordon Brown pause?

Here is the story. Confronted with a complex tax code, described in thousands of pages of legislation, companies and individuals habitually look to see if they can find anomalies. They use these to recast their income- generating activities in ways that mean they are no longer liable for tax.

If I am a wealthy individual, perhaps I can offset losses on investments over here against profits over there. Or perhaps, with professional advice, I can refine this system so that I offset merely the appearance of losses against the reality of profits.

Or let us take the case of a department store. It notices that legitimate card-handling fees are exempt from Value Added Tax. Suppose that shoppers are asked to sign receipts asking that credit handling fees be paid by the store. Then - hey presto! - the store could reduce its VAT liability by the same amount.

Oh, and then there is the nuisance of having to pay national insurance on earnings from employment. Suppose part of the remuneration package comprises luxury goods. Cases of fine wine, or precious metals, would fit the bill exactly because they can be easily sold on by the recipients. In such ways salaries are transmuted through, say, bottles of Chateau Latour, into untaxed cash.

These are real examples. Technically they may be classified as tax avoidance. Their intent, however, is tax evasion. There is no meritorious difference. Dishonesty darkens them both. It is a middle-class delusion to think otherwise.

Traditionally, the British government's response has been slow and lumbering. Where it finds that the obvious sense of the relevant tax legislation is being distorted, it levies the tax and waits to be challenged in court. If it wins the case, all well and good, If it doesn't, or believes it would lose, then it brings forward legislation to close the gap. Every Budget statement announces changes for this purpose. By these means perhaps £400m a year is saved. Yet no sooner has one escape hatch been closed, than another is opened.

For tax avoidance/evasion is an industry in its own right. Every sizeable accountancy practice does work in this area. It has been estimated that providing advice on reducing tax bills, by fair means or foul, is the second largest source of fees. It even becomes a sort of wholesale business. Tax avoidance/evasion schemes are devised and then sold hard to companies and rich individuals.

There are many varieties to fit differing circumstances. Naturally they find a ready market. Who can resist when a respectable firm of accountants rings up to say that we have found a way of reducing the tax that you pay? Some scams - sorry, schemes - even become an industry norm. As a result, many billions of pounds, perhaps £10bn annually, are diverted from the public purse. Then a few years later, after a particular avoidance technique has been used dozens of times, the Inland Revenue begins to notice an obnoxious pattern and heaves itself into position to defend the tax base.

Now, praise be, the Treasury is taking the fight to the enemy. On Thursday evening the four big accounting firms were called in to be told that the manufacture of aggressive and unacceptable tax avoidance schemes was going too far. They were left in little doubt that new measures to counter the practice would be incorporated in the Budget statement.

By way of precedent, there is the Australian method or the American method. In Australia the tax authorities can block schemes the minute they are discovered. The objection is that this means that companies can find their tax position changed overnight. So what? It will teach the lesson not to engage in tax dodging.

However, pre-Budget leaks - which I hope are wrong - suggest that Mr Brown will follow the softer American example. This requires accountants and lawyers to seek the approval of the tax authorities for schemes they intend to market to their clients. It is said that this way of proceeding has the merit of putting pressure directly on advisers rather than on taxpayers. It is better to quarrel with, say, Price Waterhouse, than, for instance, News International. I find this a distinction without merit. Clever finance directors can devise schemes just as well as partners in big accounting firms.

What could be the objections to a general anti-avoidance measure, whether on Australian or American lines? Red tape, says a spokesman for the Confederation of British Industry: "Any transaction potentially caught by the rule would have to go for professional advice." Oh dear! Let me then give the CBI some free advice. Don't do it, then there will be no red tape.

Taking another tack, the head of tax at a leading accounting firm argues that a general anti-avoidance rule would send out a very negative signal to business: if the Treasury wants to create a compact between business and government, "then a general anti-avoidance rule is the wrong way to go about it".

This line would be laughable if it wasn't seriously meant. The implication is that business would be quite prepared to go on co-operating with the Government just so long as it could continue exploiting loopholes in the tax code. Or that enterprise and tax dodging are inseparable; you can't have one without the other. Then, to cap it all, the partner of a London practice declares piously that his firm is not involved in tax evasion even though its American practice has just been fined for selling illegitimate schemes. After Enron and similar scandals, it is no use accountants declaring that they are as white as the driven snow. That no longer persuades.

On Thursday a Treasury official summed up the situation in this manner: "Tax avoidance was an urgent and escalating problem in terms of the scale, aggression and speed at which schemes are being marketed." The Treasury was particularly concerned that the big accounting firms had marketed schemes they knew were about to fall foul of legislation. And he added: "We are also concerned the integrity of the accounting profession is not undermined by involvement in these kinds of practices".

What is being described here is institutional rot, the process by which an entire activity can sink into unhealthy practices without any of the participants being really being aware that their actions are inappropriate.

The Chancellor has an opportunity to outlaw such practices in his Budget statement on Wednesday. I hope he will take the sternest options that his advisors have proposed. For not only would he save many billions of pounds of lost tax revenues, but he would also preserve a once respectable profession from its own worst instincts.

Go on, Mr Brown, be a spoilsport. You were brought up in a manse, I in an vicarage. Be as puritanical as we both know how to be.

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