Is it legal

[newwave]

Myself and others have posted items which detail tax avoidance and other money grabbing schemes, I am aware that people from all political parties (and none) do this.

The thing is that it appears to be only the Tories on this site that think this is ok because it is legal and nothing else matters. Others from the left seem to understand that it may be legal but is is also immoral/greedy/unfair etc.

Francis Maude is a prime example, he used the rules to aquire public money but how can anyone defend him as the Tory posters have done, what he did was within the "rules" but it was just plain greedy.

Still "we are all in it together" says "offshore Gideon Gekko"

Cinnabar - an interesting post - thanks. It's good to have someone with a professional understanding of tax on here. I'd also be interested in your opinion on Vodafone.

Hi, CinnabarRed - don't you mean tax evasion cases? Can you have a tax avoidance case, if tax avoidance is always legal? Or do you mean you get involved in requests to confirm the legality of proposed tax avoidance schemes prior to their application? And surely it's easier for large corporations to always stay within the letter of the law than small companies, because they get their lawyers to negotiate directly with the Revenue and ensure that they've got a piece of paper agreeing to what they've decided to do, which is generally something that a smaller company wouldn't be able to do? In other words, small companies get caught out because they try to be "clever" but don't actually understand the legislation that well, whereas large organisations are just as greedy, but can pay someone to ensure they are being legally greedy.

Otherwise translated as, I wasn't clear what sort of "case" you meant...

Would also like to second the view that having someone with a professional understanding of tax is most useful!!! Would also like to hear your views on Vodafone.

Oh, and, of course, the bigger and more powerful the organisation, the more influence it may have on the drafting of the legislation in the first place.

CinnabarRed are the children in bed yet? Looking forward to reading your next post. No pressure.

Meant to add in case you thought I was too pushy.

Rabbitstew - I'm going to address your points first because the Vodafone post is going to be looong!

Tax evasion is basically fraud, and is tried under the criminal code. Tax avoidance is legal so when there are disagreements between a taxpayer and the Revenue over how a particular transaction should be treated the case is heard through the civil system. Although tax evasion cases are generally more juicy, tax avoidance cases are more interesting from a professional perspective. (And to be fair a reasonable percentage of the civil cases arise because there is genuine uncertainty over how the law should apply - those cases are often characterised by having relatively small sums of tax involved.)

I thought it might be handy to give a practical example of the difference between genuine uncertainty, avoidance and evasion.

When DP and I bought our house, we realised that there was some uncertainty over a technical stamp duty point. It wasn't worth very much, but because of my job I wrote to the Revenue and outlined my interpretation of this one aspect of the law. As it happened, the Revenue wrote back agreeing with me in our unusual circumstances, but if they'd disagreed then it would have been because the application of the law to our facts was uncertain.

Our solicitor, realising we had an interest in tax, told us he could set up a stamp duty planning scheme. It would have saved us around £15k in duty, but involved setting up trusts and all kinds of other stuff. DP and I declined his offer; he was suggesting tax avoidance and although it met the letter of the law participating would have left both of us feeling grubby.

If we had told the Revenue that we only paid £100k for our house and forged documents to support our fraudulent claim then that would have been tax evasion!

In my experience, if small businesses do anything it's tax evasion. The cash in hand builder (to evade VAT), the small trader that makes up expenses he hasn't really incurred, the boss who treats himself from company assets without treating them as taxable. Small scale, but worth billions over so many non-compliant businesses. And although some are genuine errors, most people know exactly what they're doing. Just as immoral to my mind as benefit fraud, but loads of people still do it.

Large business is cleverer, and as you see will seek legal loopholes rather than criminal fraud. Not all large businesses, by the way. People in the business know exactly which ones have an appetite for aggressive schemes and which don't. Again, I think you'd be surprised at how view aggressive tax avoiders there are, and indeed who they are.

When it comes to making representations to lobby government over new legislation, then of course businesses do write from their own self-interested perspective. But the accountancy firms also send reps, as do the professional institutes and small taxpayer representatives. All of the latter have an interest in protecting their good name with the Revenue so don't tend to make self-interested representations.

Thanks, CinnabarRed, that's really helpful. You describe a tax avoidance example which would have left you (rightly) feeling grubby. Can you think of many tax avoidance examples, as opposed to tax law uncertainties, which wouldn't leave you feeling grubby, or do they mostly leave you feeling uncomfortable???

And what do you think of globalisation and its effect on "local" taxation?... Is it possible to have a taxation system which is both fair on the local population which is stuck here and competitive in a global environment?

Fascinating, CinnabarRed! Thanks.

OK. Vodafone. What happened is this:

In 2000 Vodafone bought the German Mannesmann group. I forget the sums involved but they were huge. Can we use £50bn for the purposes of this thread without anyone wrongly assuming it to be the correct sum?

Vodafone borrowed the money in the UK. It had to because the banks required it to secure the borrowing over its profitable worldwide businesses. Vodafone then incorporated a Luxembourg subsidiary. The Lux sub had £50bn of equity but no debt. The Lux sub incorporated a German sub, and lent the German sub £50bn. The German sub bought Mannesmann.

So what were the implications? The German sub had interest expense that it had to pay to its Lux parent, that it could relieve against the German profits of Mannesmann. I don't have any issue with that because it's a good example of source taxation - a German expense incurred to buy profitable German businesses.

The Lux sub had interest income paid to it from the German sub, and no expenses. But Luxembourg is the tax haven of Europe. Its tax authorities agreed a ridiculously low tax rate on the interest as an incentive to Vodafone to include Lux in the deal at all (not that it's specific to Vodafone - the Lux authorities offer the same deal to anyone who asks. They rationalise that they'd rather collect 8% on something than 37% on nothing). Now frankly, that's Luxembourg's business, not the UK's.

In the UK, there was interest expense on the borrowing from the bank and no immediate income. Because one of the fundamental differences of holding shares (in the case in Lux sub) rather than lending debt is that the return on shares in the form of dividends is discretionary whereas debt interest has to be paid.

The Revenue wasn't happy about Lux. There are specific anti-avoidance provisions that say that if a UK company has a foreign sub, and that sub pays a materially lower amount of tax than an equivalent UK company would then the profits of the foreign sub are taxed on the UK company as if it had earned the profits itself. So the Revenue said to Vodafone that it should pay UK tax on the Lux interest income.

What the Revenue hadn't reckoned on was that way back when the UK joined the European Union it signed the Treaty of Rome. And among all the other stuff that's in there are clauses that say that all companies within the EU are entitled to establish their businesses anywhere within the EU without being discriminated against due to where they're based). Vodafone argued that it was being discriminated against because it was entitled to have subs anywhere the hell it liked in Europe without the UK tax system penalising it for the European locations it chose. And Vodafone won.

That's not a loophole, which might be defined as creating an unexpected outcome from the legislation- it's an unambiguous and inevitable outcome of the UK signing the TreatyIVodafone'st not Vodafone's fault that the UK government wasn't smart enough to realise all the implications of what it had signed up for.

The aspect of this that Vodafone really took advantage of was the fact that there's a fundamental difference in the UK tax treatment of debt and equity invested in a (in this case Lux) subsidiary. If the UK was stupid enough to try to treat equity like debt and compute an interest like return to the parent then at a stroke it would make itself the harshest parent company regime in the world. No-one does it. And that's because economically debt and equity are fundamentally different.

The other thing to bear in mind is to speculate over what Vodafone might have done if it didn't use the Lux structure to buy Mannesmann. The simplest thing would have been to borrow in the UK and have the UK buy Mannesmann direct. The problem then would have been that the interest expense wouldn't have been matched against the German income, so the source taxation principle wouldn't have been met. Plus the UK would still suffer exactly the same stinking great interest expenses, so there was no tax lost to the Exchequer.

Finally, at the time of the deal, Vodafone would have expected to pay UK tax when it started to receive dividend income from Mannesmann. Dividends are now exempt from tax, a deliberate policy decision by the previous government to make the UK an attractive location for US businesses to use to invest into Europe.

BTW, when I say Vodafone won the argument, I meant with the Revenue - it did go through some of the lower courts, which found in favour of Vodafone, but didn't make it to the Supreme Court. In my view if it had done then Vodafone would have won. The Revenue did bloody well to get £1.1bn out of them - I think Vodafone probably bottled it a bit!

Um, most tax avoidance schemes are grubby to be honest. There are two categories that I find less offensive.

The first is where taxpayers are simply taking advantage of a predictable and widely predicted outcome of new legislation. An example would be when Gordon Brown introduced the 0% tax rate for the first £10k of company profits, and then acted all surprised when shedloads of sole traders incorporated their businesses. The Revenue and Brown both tried to label that as avoidance; I call it government stupidity.

The second is where the Revenue changes its interpretation of a particular piece of legislation that's been knocking around for ages and that everyone thought they understood. An example would be the rules that allow married couples (and civil partners) to transfer assets between themselves free of tax. That rule has been around forever. There was a case involving a husband who ran a small company and owned all of the shares. He transferred half the shares to his wife, tax free, and then the company paid equal dividends to each. He was a higher rate taxpayer but she was a basic rate taxpayer, so as a couple they saved the difference between the higher and basic tax rates on her dividends. The Revenue suddenly decided this was abusive, but the courts gave them short shrift. But the Revenue has the last laugh because they've now rewritten the legislation.

I do think you can write fair and competitive globally. There was a lot of concern 5 years ago about "the race to the bottom" - the concept that "good" regimes would have to lower themselves to the level of "bad" regimes to compete. But that's not what happened in practice. Instead there's an emerging international consensus about the features a reputable tax regime should have, and intense pressure on non-compliant regimes to fall onto line.

Oh - there's a third category of avoidance I can stomach - when the taxpayer has fallen foul of anti-avoidance legislation that was never intended to catch that situation, but is nevertheless caught. I don't have moral issues with planning to get the taxpayer out of that particular hole PROVIDED that the effect of the planning is merely to get the taxpayer back to a position where the tax result follows the genuine economic and commercial reality. You don't see this kind very often at all, because the Revenue can generally see it's only fair too and wouldn't take it through the civil courts.

Enough from me!

Cinnabar - Thanks again. I now know twice as much about tax as I did this morning .

You explain things well and clearly - have you considered writing a blog?

Very enlightening. I've recommended you on another thread. Many thanks.

Thanks, CinnabarRed. I think you should give us all daily tutorials on subjects of current interest in the world of taxation...
eg any ideas how much more (or less) tax the Revenue might be able to collect if it weren't so prone to basic calculation errors itself?

This is a tax-illiterate thread

You can only clamp down on something if it is illegal. So the law actually matters.

It is perfectly legal to manage your own tax affairs efficiently. For example, to make full use of your ISA allowances, to transfer assets (and income) to lower-tax-rate paying spouses, to sort out your pension contributions etc.

So the statement 'Others from the left seem to understand that it may be legal but is is also immoral/greedy/unfair etc.' literally has no meaning in a tax context. The country makes laws and enforces them. Your particular view of morality would have no sway in a court of law.

To be honest, threads like this make me want to go and bang my head against a brick wall. How utterly unworldly and dimwitted can people be?

Quattrocento - have you read the whole thread?

IMO - there are some very literate and intelligent posts and rather interesting discussions on how significant a role we can reasonably expect a 'sense of morality' to play in personal taxation.

I've certainly found it informative.

Quattrocento - can you not tell the difference between tax illiteracy and tax being morally illiterate?

Mellowfruitfulness ! Which thread? Will take a look.

CinnabarRed it's Tax avoidance - not just footballers, in Politics.

And on Radio 4 today I heard how Barclays Bank managed to avoid paying more than 3%(?) Corporation Tax. I think that's right - was busy at the time and only listening with half an ear, but thought of your posts.

2.4% of its global annual profit. But that is a global profit, so there is probably more to it than the headline figure. Still, it does seem low.

www.bbc.co.uk/news/business-12511912

Great posts, CinnarbarRed. Look forward to more great tax analysis.

Hello Mellowfruitfulness - thank you for pointing me here, yes very interesting.

Thanks from me too CinnabarRed. It is great to have the inside story.

It does seem to be one of the problems that the vast majority of the people who really understand this stuff are the same ones who stand to lose by closing tax loopholes.

Much as I support the UKuncut campaigns I have been aware that Vodafone are not necessarily villains. However I do think that Philip Green is a villain even though he has done nothing illegal. And as for Barclays - £113m tax on £11.6bn profits. It is obscene, however legal.

CinnabarRed: I have heard talk of the idea of a 'generalised' tax avoidance rule that just says if you move money around and the primary reason is to avoid tax then, well sorry but we will have the tax anyway. Is that feasible do you think?

Another thing I would really like to see is all companies that operate in the UK publishing their profits and their tax bills - then we can decide where to shop on that basis and companies can make the commercial decision to stay resident in the UK and pay their tax as a way of competing for customers.

In scandinavia individuals tax info is also public - you can see what your neighbours earn and how much tax they pay. Why not? Be proud of paying tax.

Paul

@Chil

You say "Pretty sure the thousands of various taxes I've paid down the years have more than offset the few quid the country has invested in me. "

I count myself very lucky. In over 40 years my only stay in hospital was being born. If in the next 40 I don't have to cash in on my investment in the NHS I still won't resent paying taxes.

The whole point of tax is that some people put in more than they take out. I would still rather be one of them and I am sure you would too. If not you have the choice: give up work and claim benefits quick while there are some left.

Paul