Tax Dodging in Britain is a government regulated sport

A chancellor is reputed to have said: 

"Laws, like sausages, cease to inspire respect in proportion as we know how they are made" 

Not said by our chancellor of the exchequer but by Bismark, the Iron Chancellor of 19th Century Germany. He may not have been the first to say it, but like most witticism the originator rarely gets the credit.

Successive British governments, from left to right, have bent over backwards to keep a sausage machine of laws creating loopholes for tax avoidance. The industry knows it; the tax dodgers know it; the government and government in waiting (the opposition) know it.

In Britain tax dodging is a government regulated sport. In a session of the Public Accounts Committee (PAC) of the UK Parliament looking into tax avoidance schemes they questioned Aidan James, a director of a tax consultancy advising those who want to avoid tax:

Q103 Ian Swales: How many of the schemes you have marketed are now illegal?

Aiden James: Most of them.

Ian Swales: Most of them?

Aiden James: All of them, I suspect.

Q104 Ian Swales: All the schemes you have marketed are now illegal, so you are now looking for the next loophole-is that a fair description of your business?

Aiden James: That is how it works, yes.
.....

Q110 Stephen Barclay: The model, if I am understanding correctly, Mr James, is that most of the schemes that you introduce get closed down within a relatively short period of time.

Aiden James: Yes.

Q111 Stephen Barclay: So then you aggressively target a client base and get as many as you can through in a short period of time on the basis that HMRC cannot pass retrospective legislation. Therefore, your clients will get a tax window where they can reduce their tax until HMRC wake up and close that scheme down, by which time you have moved the game on to the next scheme. Is that a fair summation?

Aiden James: I would agree with all that you said apart from "aggressively market". 

The UK government plays its part in the tax-dodging sport by pledging not to take away the tax-dodging industry’s meal ticket, which is that tax window of opportunity between a loophole being found by the dodgers and closed by the legislators. In an official Government notice the solemn pledge was made by the legislators:

The Government agrees that changes to tax legislation where the change is to have effect from a date earlier than the date of announcement should be restricted to wholly exceptional circumstances. The Government has made a commitment to this effect in the Protocol on unscheduled announcements, published in Tackling Tax Avoidance at Budget 2011.

So, the game goes thus:

• Government produces loophole ridden tax legislation
• Tax advisors find loophole to create a tax dodge.
• Tax advisers rush clients who can afford their fees through the loophole like Noah populating the Ark - leaving most of us Ripped-Off Britons outside to drown.
• Government looks into legislating to close the loophole
• Law is changed, but those who got their tax money through before the change get to keep it.
• Tax advisors collect their fees and move on to the next loophole.

The ‘window of opportunity’ can last a considerable time. In the National Audit Office’s report in November 2012, the section on HMRC’s response to mass marketed avoidance schemes states

“the majority of avoidance cases that were open in August 2012 had been open between one and five years.”

The same NAO report provides details of the “five largest types of mass marketed tax avoidance schemes”

1) Partnership loss schemes: 

A partnership is set up, which makes a loss. The participants in the partnership use the loss to shelter their other income from tax.

Tax at risk: £3.5 billion

Number of users: 14,000

2) Employee benefit trust schemes: 

Employee benefit trusts are trusts set up by employers to reward or incentivise employees. They can be used to disguise employment income to avoid tax and National Insurance contributions. For example, a trust is set up offshore and makes loans to employees, which are not taxable. In practice, the loans are never repaid and are used as a way of rewarding employees. HMRC has identified 75 variants of this scheme.

Tax at risk: £1.7 billion

Number of users: 3,400

3) Interest relief schemes:

Schemes which seek to engineer a situation where a taxpayer can claim interest relief as a deduction against their general income. They evolved when legislation was brought in in March 2007 to counteract partnership loss schemes.

Tax at risk: £1.1 billion

Number of users: 900

4) Employment intermediary schemes:

An intermediary (which could be a company, partnership or sole trader) is set up to pay contractors or employees working for a company in the UK. Instead of paying the worker directly, the company using the worker’s services pays the intermediary. The intermediary then pays the worker a small salary on which PAYE and National Insurance contributions are paid. It pays the remainder to the worker via interest-free loans, but the loans are never recalled.

Tax at risk: £0.6 billion

Number of users: 16,000

5) Stamp Duty Land Tax schemes: 

These schemes take advantage of sub-sale relief. A property sale is structured so that tax relief can be claimed because it is contractually going to be passed on via a connected party. The transaction is structured such that another relief can be claimed, or a low-value transfer can be arranged, when the property is passed on.

Tax at risk: £0.5 billion

Number of users: 6,600

Why do they do it, all these politicians, tax advisers and tax dodgers? The dodgers clearly do it to dodge tax. And at least the partners in the tax dodging advisory firms take their money over the table, and may even pay tax on much of it.  In a PAC committee meeting on 31st January 2013 tax chiefs of the Big Four (the world's four largest accountancy firms Ernst & Young, Deloitte, KPMG and PwC) were asked what they were paid:

Q146 Chair: Are you all on seven-figure sums? Taking salary and bonuses-are they seven-figure sums? Yes.

Bill Dodwell [Head of Tax Policy, Deloitte LLP] : I’m not, no.

Kevin Nicholson [Head of Tax, PwC]: Yes.

Chair: Jane?

Jane McCormick [UK Head of Tax, KPMG]: Six.

Chair: Are you seven or six?

John Dixon [Head of Tax Policy, Ernst and Young]: Seven.

Bill Dodwell: Six.

Bragging rights go to Kevin “seven figures” Nicholson of PwC. Mr.Dixon and Miss McCormick take as consolation prize the ammunition to get a pay-rise at their next appraisals. All for helping people dodge tax.

When the government looks like making a change in the law that seems to close the gaps too tight the government is easily persuaded by those who need a bit more space to “manoeuvre” their taxes. An example from the UK budget of 2012 was putting a limit on tax relief available from donations to charity.

HMRC provides a helpful example of a Higher Rate taxpayer making a donation via the ‘gift aid’ route:

“For example, if you donate £100, the total value of your donation to the charity is £125 - so you can claim back:

£25.00     - if you pay tax at 40 per cent (£125 × 20%)

£37.50     - if you pay tax at 50 per cent (£125 × 20%) plus (£125 × 10%)”

So, a top rate taxpayer can claim back £37.50 in tax for every £100 of taxed income he donates.

The scrapped proposal in the 2012 Budget was to put a cap of £50,000 or 25% of income, whichever was higher, on the donated amount on which you can obtain tax relief. For example, a person with a £1 million income could claim tax relief on donations up to a maximum of £250,000. He could donate more, but no tax relief would be available on sums above £250,000. Surely, you would have thought, the higher of £50,000 or 25% of income is enough?

Lobbyist came pouring out of the oak panelling shedding bitter tears for the charities that would lose out. After all, it would cost a dodger £100 to dodge £37.50 of tax at the 50% higher rate, wouldn't it? A net loss of £62.50 to the dodger. So why would he do it other than for sweet charity? Think of the seals, snow leopards and butterflies, the crumbling stately homes, the orphans and the privately educated youth who benefit from charities! 

Chapel of Registered Charity Number 1139086

George Osborne, the chancellor, may be a hard hearted man. But he relented. Perhaps he thought of the beneficiaries of Registered Charity Number 1139086, "The Kynge's College Of Our Ladye Of Eton Besyde Windesore" that helped out his dear friend David Cameron as a child. Whatever the reason, Osborne scrapped the cap. 

Surely not even the most hard bitten cynic could doubt someone who would give away £100 to get just £37.50 back? So what's the need to put a cap on that philanthropy?

Well, if you thought that then silly you! The tax dodging industry managed to invent a legal avoidance ruse that allows dodgers to claim £millions of tax relief from charitable giving by donating nothing except the fees paid to the accountants running the avoidance vehicle. An example is "the Cup Trust", which was the subject of enquiry by the Public Accounts Committee in March 2013. The activities of The Cup Trust were described in the course of questioning:

Q41 Chris Heaton-Harris: I just want to see if you recognise this statement: "The trust bought £176 million-worth of Government gilts, which were sold to donors for only £17,000. The donors sold the gilts and donated the equivalent of the proceeds to the trust. Gift Aid of £46.4 million has been claimed on these donations by the trust." Do you recognise that?

William Shawcross [Chairman of the Charity Commission]: Is that from the Spotlight report from HMRC?

Chair: No, Spotlight is nothing to do with this trust. Again, I know Lin Homer will not tell us.

William Shawcross: Yes, I recognise the figures.

In short, the Trust gave £176 million to the dodgers, who then 'donate' it back to the trust. The Trust claims £46.4 million in tax rebates. The dodgers claim approximately £77 million in tax rebates. HMRC loses £millions in tax which the government recoups by increasing other taxes and cutting services (schools, hospitals, armed forces, police), and Charities get enough peanuts to keep the Charity Commission impotent. 

The number of peanuts is also exposed in that Public Accounts Committee session, when the question of how much the Cup Trust had donated to charities:

Q16 Chair: How much?

William Shawcross: £55,000.

Q17 Chair: Out of how much?

William Shawcross: Out of many millions.

...

William Shawcross: Madam, £55,000 has already been paid to charitable causes. In the course of our investigation, which we started as soon as the tax avoidance thing came to our attention in the spring of 2010, we looked to see whether this was a proper charity registered under English law. We did not like the tax avoidance scheme, but we operate according to the law. Tax avoidance is not actually our issue; it is much more HMRC’s issue.

Q20 Fiona Mactaggart: Public benefit is your issue.

William Shawcross: And they were giving money for public benefit. [Interruption.] I know it was not very much money, but the proportion of money that a charity gives away in every year is not for the Charity Commission to determine.

Q21 Austin Mitchell: It was giving away thruppence for every £100 it received in donations. That is ridiculous.

William Shawcross: If you think it is ridiculous, Sir, the law may have to be changed. We are looking with HMRC, with whom we have a very close relationship-

Austin Mitchell: But you didn’t mind that it was such a pathetic donation?

Amyas Morse: I understand that the law does need to be changed.

Tax advisers, dodgers and legislators who know they are doing wrong will no doubt take comfort from a much higher source than Bismark and his disparaging comments about sausages.  The Bible, Romans 5:13, states:

"for sin indeed was in the world before the law was given, but sin is not counted where there is no law."

So long as there is a loophole in the law, that's alright, your sins don't count.

So long as you are one of the 'in-crowd', tax dodging is a sport of choice.

Picture from Wikipedia