Tax Dodging - how the 1% avoid and evade tax

Most of us have scant opportunity to dodge tax. Receiving salaries from our employers we are subject to Pay As You Earn (PAYE). The taxman takes his share of our earnings before we get a sniff of the money. 

We are never in a position to be tempted by tax advisors who see no profit in tempting us. Pretty much our only tax-dodging opportunity is paying our plumbers cash to evade VAT. Like children gazing through a toyshop window, tax dodging is something we see but can’t touch. 

But for those whose income is not pre-strained by HMRC – businesses and businessmen, the independently wealthy living on unearned income (dividends and capital gains), freelancers and contractors on screen and in suits – temptations to avoid tax together with the tempters and temptresses who will indulge you for a fee abound.

Our complaints about tax dodging are twofold:

1)      The nation is deprived of much needed revenues, which are made up by increasing taxes on the rest of us (increase VAT; abolish 10% band; freeze allowances) and by cutting services (NHS; Police; Armed Forces; Education; Research) and by delaying and cancelling investment (airplanes for our aircraft carrier; transport infrastructure; schools; hospitals).

2)      Much of the tax dodging is completely legal. This is characteristic of a Britain that chases the 99% of ordinary Britons mercilessly, while indulgently leaving legal loopholes for the 1% who can afford to pay for expensive advice. Loopholes that are by no means limited to tax avoidance.

By far the most popular tax dodge is to simply hide your money. A former Chief Economist of McKinsey, the global consultancy firm, estimates between US$21 trillion and US$32 trillion (1 trillion = 1,000billion) is deposited in hidden bank and investment accounts. According to the Economist newspaper the UK & Channel Islands is the biggest hidey-hole of hidden cash in Europe after Switzerland. And a recent investigation by the Bureau of Investigative Journalism uncovered a sustained lobbying campaign in the UK by British dependencies such as the Cayman Islands to protect their privateer status.

Hiding your money is like going on holiday. There are many tempting destinations, the only question is how best to get there. When hiding your money, how do you get the money from your legitimate account into your secret account without leaving a trail for the taxman to follow? Perhaps this explains why such ludicrous prices are paid for such dreadful art (as well as some good stuff)

• Say I have $100,000 in my high-street bank account that needs to go into hiding.
• I buy some Brit Art for $100,000 - perhaps half a glass of water, a neon light turning on and off, and a few small balls of squished blue-tac - from a dealer based in a tax haven (who therefore doesn’t have to account for the money received).
• Hey Presto! My high-street bank account is empty, I have an invoice to show HMRC explaining my 'expenditure', a few new consumable items for my office, and my Cayman account is replenished.

[Please let us have any other suggestions for other ways to make your money disappear into the offshore realm by adding them below to the Comments of this post, or email us at taxdodge@rippedoffbritons.com]

Hiding money like this is sort of illegal. “Sort of” because HMRC has bent over backwards to reach agreements with havens, including Switzerland, that legitimise hidden money while keeping the dodgers’ identities hidden.

More balefully fascinating than these disappearing tricks are the crude steps taken to dodge tax in full view of the taxman. It is not necessary for these dodges to be legal, they simply have to evade being illegal. Obey the letter of the law, or find the gaps. Saint Paul could have been the patron saint of tax advisors: “where there is no law there is no transgression” (Romans chapter 4, verse 15). As such, the steps of the taxation tango are designed to be circuitous and confusing. This does not imply they are elegant and sophisticated, but more brutish and short lived.

Short lived because deals like this are like mayflies. They are created to be legal, they enable you to dodge tax for a year or so, they are spotted by HMRC, they are made illegal and they expire. The tax advisers then create another short lived dodge earning them another round of fees. That’s how the tax advisers keep themselves profitably employed.

Tax dodges are there for a purpose: to allow the elite to dodge taxes everyone else has to pay. When scruffy contracting computer programmers cottoned on to setting up one-man companies to enjoy the dodges of the elite HMRC specifically introduced IR35 legislation to cut them out.

Tax dodges are not there for the likes of 99% of us. David Gauke, Exchequer Secretary to the Treasury, in his speech “Where next for tackling tax avoidance?” said:

“Tax avoidance is not a recent problem. In the fourth century AD, the Roman Emperor Valens had to make it illegal for individuals to sell themselves into slavery to avoid tax.”

You can be pretty sure it wasn’t the rich selling themselves into slavery, surrendering their freedom and their legal protections including from crucifixion (only permitted for slaves and foreigners). It would have been the last resort of the desperately poor. Gauke unintentionally (we assume) reminds us that even in the fourth century AD tax dodging by the 99% was not allowed.

We at Ripped-Off Britons are compiling a list of tax dodging tactics, which will continue to grow over the months and years. We will attempt to explain how the dodges work in simple terms.

For clarity and comment we are keeping each dodge in a separate post. Here are brief descriptions of our first ones (click through to see each dodge explained in simple terms):

The "K2 Scheme", for which David Cameron the Prime Minister condemned Jimmy Carr a comedian:

The dodge: Disguise employment income as a loan.

The benefit: Potential to reduce tax rate from 50% to 0.8%

The "Eclipse35" scheme, which uses beneficial tax treatment intended for investors in the film industry:

The dodge: Create a tax credit for interest paid on a loan.

The benefit: In the example case, GBP117 million tax credit shared between 289 individuals (on average just over GBP 400,000 each).

Cross tax-year & non-residence dodge:

The dodge: Create a capital loss just before 5th April, cancelled by an equivalent profit just after 5th April.

The benefit: Capital loss used to cancel out a capital gain in the earlier tax year. By becoming non-resident the capital gain in the later year is not taxable.