Tax and Morality – what’s the solution?

Having miraculously returned from a great week in Ukraine not in a coffin, I swiftly discovered that this week’s media sensation is tax avoidance.  And a tax avoidance scheme aptly named after a mountain with a 25% death rate seems to have quickly killed off the career of Jimmy Carr.  But although the K2 offshore scheme is fairly easy to deride, there are surely areas of tax avoidance that are less easy to pin-point on a moral compass. 

Tax advisors like to use the term “tax planning” to essentially mean taking steps to minimise your tax bill, but in a less aggressive manner than the more ugly term “tax avoidance”.  It is certainly clear to me that trying not to pay too much tax is not morally wrong per se.  Here are a few examples, and maybe different people will draw the line in different places:

·         Putting your savings in an ISA so that the interest you earn is tax free;

·         Keeping track of the charity donations that you make and claiming the reduction in income tax allowed under the gift aid rules;

·         Giving money to your children every year in order to use the £3,000 annual exemption from inheritance tax;

·         Setting up a company to provide your services as a contractor, and deducting your work expenses from your tax bill;

·         Setting up your eBook business in Luxembourg so that you charge your customers only 3% VAT;

·         Flying your private jet out of the country at 23.45 and back in at 00.15 the next day, so that you’re not technically in the UK overnight for residence purposes;

·         Using the K2 tax avoidance scheme to only pay 1% income tax.

All of the above are / were technically legal (although some are challengeable), but obviously not all of them sit as comfortably with us as the others.  To simplify this in my mind I define tax planning as minimising your tax by doing something intended by the law (e.g. using an ISA which was intended to incentivise saving), whereas tax avoidance is minimising your tax by doing something not intended by the law (e.g. clearly income tax law was not written with the intention what some people would only pay 1%).  By defining and understanding this “purpose” we set a much clearer benchmark than a pure moral judgement which can change with the wind, a politician’s latest grab for headlines, or the media’s latest hunt for a sensation.

This is not new.  In Sweden, tax legislation is accompanied by interpreting provisions which define both the purpose of the law and guidance on how it should therefore be interpreted.  These interpretations are considered persuasive in the Swedish courts.

So maybe there is a simple answer to the complex question of defining a tax system which prevents abuse of rules.  New tax law should include a description of purpose, and this should be persuasive in court.  There are obviously a few hurdles in the way, but in an economic environment where every penny counts, knowing what you’re trying to achieve is surely a good starting point.