Mohammed Amin is Vice Chairman of the Conservative Muslim Forum. He is writing in a personal capacity.
As someone who has spent over 30 years helping taxpayers cope with tax law, I find the current debate about tax avoidance rather facile. As Macaulay wrote, “We know no spectacle so ridiculous as the British public in one of its periodical fits of morality.” It would help if practicing tax advisers participated in the debate, rather than being reluctant to raise their heads above the parapet.
As humans, we choose to band together for our wellbeing. On a small scale we form clubs, and on large scale we form states. Each such organisation requires payments into central funds as a price of membership; clubs call it a membership subscription, states call it taxation. Both exercise sanctions for non-payment, expulsion by the club, imprisonment by the state.
The obligation of the citizen is quite clear. It is to pay all the tax that the law requires. Furthermore, while the state makes the rules, it starts off not knowing your income, and you have a clear obligation to provide the information the state demands by filing a complete and correct tax return. Morality requires you to be truthful, but it is tax law that specifies what you must pay.
Once you have properly reported your finances and paid all of the tax that the law requires, you have no further obligations. If you wish to give the state more money than tax law requires, that is up to you. Some people really do make voluntary donations to HM Treasury, but not many!
Tax law is complicated
Our government has chosen to make tax law immensely complicated. Consequently, it is often possible to rearrange your affairs so that your tax liability is lower than it would have been had you not rearranged your affairs.
For example, one of Gordon Brown’s many poor quality tax changes was to introduce in 2002 a zero starting rate for corporation tax on the first £10,000 of profits each year. Accordingly, an unincorporated small business earning say £9,000 per year could incorporate and pay no tax, and then pay out tax free dividends to its owner. Unsurprisingly, thousands of small business incorporated. To protect tax revenues in 2004 the government introduced a special tax rate on dividends paid from profits which had not borne corporation tax.
Whether a small business should incorporate to take advantage of the corporation tax zero starting rate was a practical question regarding the extra costs of running a limited company. Nobody has ever argued that those small business owners who chose to incorporate were being immoral.
Tax avoidance or tax planning?
When someone (for example the small business owner above) is accused of “tax avoidance”, a common response is to deny it and to respond that they are only engaging in “tax planning.”
Such playing with words arises from unwillingness to be intellectually honest. “Planning” is regarded as a good word, while “avoidance” is regarded as a bad word. The reality is that anything that you do which causes your tax liability to be lower than it would otherwise have been is an action that enables you to avoid tax. The only problem comes if you allow others to make you feel embarrassed about it.
The legal position is crystal clear, and was set out by the House of Lords in 1936 in the case Duke of Westminster v Commissioners of Inland Revenue. To quote Lord Tomlin, “Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow tax-payers may be of his ingenuity, he cannot be compelled to pay an increased tax.”
Some commentators talk about tax avoidance and tax evasion as if they were essentially the same thing. They have nothing in common. Evasion is the unlawful falsification of your tax reporting, and it is a criminal offense. Tax avoidance is a legal activity, however much some may dislike it.
A common saying in the tax profession: “What is the difference between tax avoidance and tax evasion? The thickness of a prison wall.”
Confusing tax and charity
In my view those who complain that tax avoidance is immoral are confusing tax and charity.
Tax is something you have to pay because the law requires it. The tax you owe depends upon your facts, and different facts (for example, incorporation or non-incorporation, above) give rise to different tax liabilities. Complaining that you (or your advisers) know the tax law well and have therefore been able to arrange your affairs to pay less tax than would otherwise have been the case is irrelevant carping.
Charity is something your religious or moral views lead you to give, voluntarily, as a matter of personal choice. If someone has adequate means but chooses not to give to charity, you can indeed question his or her morality.