Fairness Is A Taxing Issue
Opinion Piece by Stuart Watson, Director, Tax at Hall Morrice Chartered Accountants
To date, most of the discussion on how to reduce the country’s budget deficit has concentrated on cutting government spending.
However, in addition to minimising spending, attention has also turned to the revenue side of the balance sheet and how this can be maximised. With tax increases a difficult sell in the present climate, Chief Secretary to the Treasury Danny Alexander trained his sights recently on the "morally indefensible" practice of tax evasion.
“There are some people who seem to believe that not paying their fair share of tax is a lifestyle choice that is socially acceptable,” Mr Alexander said, before continuing: “We will be ruthless with those often wealthy people and businesses who think they can treat paying tax as an optional extra.”
In tougher times, it’s particularly important to be seen to be acting fairly and closing ‘loopholes’, clamping down on ‘cheats’ and being on the side of ‘fairness’ always makes for good headlines. Nonetheless, given that the ‘tax gap’ – the difference between what was collected by HMRC and what the Treasury estimates ought to have been collected – reached a whopping £42bn in 2008/09, it’s understandable that Ministers should look afresh at ways in which an increased share of this amount might be collected.
However, there’s a difference between the legitimate minimisation of tax liabilities and the wilful evasion of one’s responsibility to contribute towards the common good. Or, as former Chancellor Dennis Healy put it more pithily, the difference between tax avoidance and tax evasion is the “thickness of a prison wall.” But while we all disapprove of those who dishonestly evade their responsibilities, just who, or what exactly, would we recognise as a ‘tax cheat’?
It’s unlikely that a tradesman who does occasional work in exchange for some cash in hand, or indeed those paying them, would consider themselves to be tax cheats. Yet if the transaction goes undeclared, that’s exactly how they would be regarded in law.
All told, in the so-called ‘black economy’, HMRC estimates that £15.2bn went uncollected in VAT, while nearly £6bn could be accounted for by people either failing to register for income tax, not declaring second jobs or deliberately underestimating their income during self-assessment.
While the overall effect of this is of great significance, it’s unlikely that many of the individual examples which contribute towards this state of affairs would be at the forefront of anyone’s mind when considering the most egregious examples of tax evasion. Yet tax avoidance, in the sense that most of us would understand it, is a practice open to only a select group of taxpayers.
Whether at a corporate or individual level, it’s entirely understandable that HMRC should wish to get to grips with the issues of offshore tax havens, undeclared monies held overseas and with those who deliberately make incorrect claims. However, once the goalposts have shifted in this way, this same group has always succeeded in finding different ways within the scope of the rules to once again minimise their liabilities.
To try and boost compliance, Ministers want to see a fivefold increase in prosecutions for tax evasion. The extra enforcement necessary to achieve this will almost certainly have a financial cost on its own terms, not least in employing additional investigators. However, the recent example of PAYE miscalculations does leave a question mark as to how effective any more stringent investigatory regime might turn out to be in practice.
If taxpayers are to continue to comply willingly with the tax process, care needs to be taken not to penalise unduly those who already make considerable efforts to ensure that they remain within both the letter and the spirit of the rules. Ultimately, for people to have confidence in their tax system, it has to be seen as being fair, transparent, accurate and easy to comply with.
This has been one of the great successes of many of the former communist states in Eastern Europe, which have achieved high levels of tax compliance thanks to simplified personal and business tax codes. In an attempt to streamline our own system, the Chancellor in July launched his ‘Office of Tax Simplification’, to provide the Government with independent advice on simplifying the UK tax system.
It’s perhaps this initiative, as much as in the realms of enforcement, which holds the key to the improved levels of tax compliance which the Government seeks.
Stuart Watson is Head of the Tax Division at Hall Morrice Chartered Accountants, Aberdeen.