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Nick Clegg, tax avoidance and good accountancy practice

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Thursday September 30, 2010 at 7:05pm
At the Liberal party conference Nick Clegg was the latest Government spokesman to talk about clamping down on tax avoidance. He even went on to talk about avoiding tax as being an ethical question. I’d say a bigger ethical question is how our taxes are spent by government. Indeed if people felt their taxes were being spent wisely and fairly they may have more time for the ethics of high taxation.

What’s all the fuss about?

It is probably worth looking at the distinction between evasion (illegal) and avoidance (legal). Tax avoidance involves a tax payer arranging their financial affairs in such a way that they minimise the amount of tax they pay. Indeed there is case law upholding the taxpayer’s right to do just that.

As accountants working with owner managed business we would have few clients if we didn’t help them arrange their finances to pay less tax. Remember it is all about the profits that you keep, not the profits that you earn.

Is it really fair that business owners take on the risks of business ownership and should they be successful risk losing half of the profit made to the tax man? The higher the tax rates climb the more valuable tax avoidance will become. One answer is to keep taxes and public spending low.

There are plenty of examples of perfectly legal tax avoidance from the very simple to the quite complex. Some of the simplest are salary sacrifice schemes (which are offered by many larger employers). Here the employee takes a slightly lower salary in exchange for the company making a contribution into a pension on their behalf. The tax avoidance bit is that there is no employers or employees national insurance deduction from company payments into the pension. Hence this benefit can be passed on to the employee in full, or shared between employee and employer.

More complex tax avoidance arises from conversion of income to capital and usually involves the sale of assets to an individual and utilisation of some form of Capital Gains Tax exemption. Even more complex is contributions into Employee Benefit Trusts but then these also produce some of the greatest tax savings.

Nick Clegg compared tax evaders to benefits cheats and I would whole heartedly agree with this. Tax evasion is fraud and is something we at Parker would never condone. It involves the manipulation of expenses, not declaring income and possibly falsifying documents. Several MP’s are facing prosecution for evasion over the expenses scandal.

But what is unethical about legally arranging your affairs to pay as little tax as possible? It is difficult to see that this has an economic consequence. Tax avoidance puts more money in the hands of the business owner who then chooses how that money is spent. The alternative, higher taxes, with politicians deciding how our money is spent. As far as economic growth is concerned the important bit is that the money is actually spent on goods and services.

Andy Parker
Chartered Accountant and expert tax avoider

Comments on this post: (1 comment)

Tax Warrior | Thursday September 30, 2010 at 10:28pm
Can't agree more, see Telegraph for more on this and tax saving http://www.telegraph.co.uk/finance/personalfinance/consumertips/tax/8023692/10-ways-to-beat-the-taxman-honestly.html...

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