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Tax Avoidance by big corporations is in the news a lot, Licensed Insolvency Practitioner Neil Henry discusses Tax and legal tax avoidance in his latest blog.
Legal Tax Avoidance
We are all aware of the controversy about the avoidance of tax by large multinational companies and wealthy individuals who can afford to pay the fees of experts. Tax avoidance has always been legal. There is no obligation to pay more tax than you legally have to and it is entirely legal to organise your affairs in such a way that you minimise your tax liability. However, this perfectly legal behaviour is now being deemed unacceptable by politicians and commentators who are trying to say that there is a moral obligation to pay more than is legally due.
The problem with this line is that morality is not a definitive concept because people hold many attitudes and beliefs. If we operated our legal system on the basis of one person’s view of morality then who would decide what is right and wrong? Do we really want politicians deciding on a whim what is now legal or illegal? The Prime Minister is finding out how difficult it is when people are demonised for carrying out legal activities. He was happy to say how unacceptable legal tax avoidance was when it applied to other people and he could get publicity for it. He was less happy when it was pointed out that his father had also been involved in perfectly legal activities of the kind he had previously railed against.
Tax Avoidance and the Law
The answer to the problem of dealing with an action that a society considers wrong is to pass a law making it illegal. Then everyone knows what can and cannot be done and the Courts can enforce the law. There is no moral judgement to be made just a consideration as to whether or not a law has been broken. So, in the case of tax avoidance, if you do not approve of the legal loophole that is being used to minimise a liability then close the loophole. Do not demonise those who acting legally and try to shame them into paying more tax than they have to because this is fraught with problems for the person making the judgement without the use of a legal framework.
I have similar conversations with individuals and directors about the morality of not paying liabilities because they have to go bankrupt or a company has to go into liquidation or. Many people feel guilty about not paying what they owe. I point out that we live in a capitalist society where insolvency is a part of life. There has been a recognisable system of legally writing off debts for companies and individuals since the middle of the nineteenth century. There is a perfectly legal system of dealing with debt that is enshrined in the Insolvency Act, 1986. There is no need for moral judgements, there is just a need to comply with the law. This same law also sets out the consequences for those people or companies that may have committed offences that contributed to an insolvency. My opinion is that if society believes that insolvency legislation is too lax then Parliament should change the law. Until that time, insolvent companies and individuals are dealt with under the existing legislation.
I would like to point out an anomaly regarding the payment of taxes which I think underlines the need for the collection of tax to be controlled by statute rather than arbitrary moral judgements. My firm deals with individuals and SMEs. I am regularly told that ‘it is alright, I do not owe any money to anybody, I only owe the taxman’. The view being that it is acceptable not to pay tax so long as every other creditor has been paid. The taxman is the only creditor who is never given a choice about whether or not he lends to a business. Every other creditor, be it a trade supplier, bank, or finance company, makes a conscious decision to extend credit. HM Revenue and Customs lends money without being asked because businesses collect VAT on goods and services provided and withhold PAYE from wages. This money is often used by businesses that are loss making to fund their operations because no-one else will lend to them. However, taxation is not put in place to fund insolvent businesses but it is there to pay for all the services that the Government needs to provide for the nation as whole. Why is it acceptable for small business to avoid paying tax when legal tax avoidance by the wealthy is unacceptable? I do not know the answer to this other than to say I am far more comfortable about dealing with situations in accordance with clearly defined law rather than deciding whose moral judgement I should be applying at that particular moment.