These have been a rough few weeks for anyone who takes time to minimise the amount of tax they pay. Amid the controversy over whether the Swiss arm of HSBC was helping its clients to avoid taxes, any kind of planning to reduce the amount you or your children might have to hand over to the government is being demonised.
The Labour Party is making most of the running on changing what it describes as a culture of tax avoidance. The shadow chancellor, Ed Balls, has said that if he wins the election he will review every tax scheme, and crack down on them if necessary. He even said he always got a written receipt when he paid someone a tenner to cut the hedge, and seemed to suggest everyone should do the same. Ways of reducing tax that were considered perfectly legitimate, such as deeds of variation to cut inheritance tax bills, or investing in films to take advantage of the tax breaks on offer, are now under attack.
Stop the witch hunt
While Labour might be making the most noise on this issue, the sentiment runs deeper than that. Every party manifesto now routinely includes promises of a few billion to be spent on schools and hospitals through stopping some unspecified “avoidance scheme”. In this kind of environment, many people will be starting to feel nervous about doing anything that leads to accusations that they are not paying their fair share.
Yet there is a problem here. There is nothing wrong with people doing what they can to pay less tax – so long, of course, as they do so within the law.
And as this witch-hunt gathers strength, we risk losing sight of two points. The first is that we surely want a society in which people build up some private capital. That is how they provide for their families, cushion themselves against downturns in the economy, and put together the means to support themselves in their old age. If they don’t do that, they will have to rely onwelfare even more than they do already.
Private wealth is also where much of the money to invest in new small businesses comes from. Banks are very rarely interested in lending to start-ups. Much of what is referred to as tax planning, and is now regularly condemned as avoidance, is actually minimising inheritance tax, or putting shares in trust, or building up a pension, which creates capital within families. If that all gets taxed away because every strategy for reducing those liabilities has been banned, there will be much less wealth – and that will not necessarily be a good thing.
Secondly, tax breaks are often a useful tool for the government. Over the years, governments have used the tax system as a way of nudging behaviour in one direction or another. So, for example, we have had high taxes on smoking cigarettes, or on driving gas-guzzling cars, which we judge to be bad for society. At the same time, we have had tax reliefs available for things that we think are good, such as saving for a pension, setting up your own business, or investing in films.
On the whole, this works pretty well. People respond – surprise, surprise – to financial incentives. People smoke far less than they used to. Our cars are far more fuel efficient than they were 20 years ago. By contrast, there are more start-ups and investment in films is booming.
You can argue about what should be encouraged and discouraged. It is slightly hard to understand why we are so keen to encourage film production, as opposed to manufacturing sewing machines, or making frozen pizza.But it is a big step to say that the government shouldn’t offer tax breaks for anything, or that people shouldn’t take advantage of them if they do. We can surely all agree that it is good to discourage smoking, for example, or to save for retirement.
Losing more than we gain
What we risk doing now, however, is demonising anyone who takes advantage of one of those tax breaks. Anyone who invested in a film scheme, for example, is likely to be pilloried as a tax dodger, even though it was the last Labour government that created the break. The same might be true of anyone who minimises inheritance tax, using legal but complex methods.
That is hysterical. Britain is hardly a country where tax avoidance is rampant (unlike Greece or Italy). The sums involved often turn out to be fairly trivial. When the figures are published, the amounts raised in the endless HMRC clampdowns are not that huge – the Swiss-UK tax deal, for example, raised about £800m in 2013, a quarter of the £3.2bn that was expected.
There is nothing immoral about managing your affairs to hang on to as much of your own money as possible. Everyone is entitled to do that. If we have less private wealth, our welfare bills will be higher, and if we ban every type of tax relief, the government will have lost its main tool for shaping the way people behave. It is not even very likely that more money will be raised.