Tax evasion, tax avoidance, and “ordinary sensible tax planning” – by John Redwood MP

Left wing politicians always wish to believe there is a crock of gold for the Treasury if only it showed some determination to end tax evasion and tax avoidance. They think these crimes and malpractise are the preserve of the rich. Tackling it more resolutely would be just, as well as filling a black hole in the naitonal accounts.

The first error in this thinking is to assume previous governments have not tried to do just this. Every government spends large sums and employs large staffs to hunt out evasion, and to legislate to make some avoidance illegal.

The second error is to confuse avoidance and evasion, without also considering what the Revenue and Customs themselves describe as “ordinary sensible tax planning”. If Labour want to stop all tax avoidance, they had better start by asking the government to withdraw all its own marketed schemes to urge us to indulge in tax avoidance or “ordinary sensible tax planning”. National Savings has gained a large share of the savings market in the UK for its nationalised product range by offering tax free savings certificates. Savers can legally avoid both income tax and capital gains tax on some of their products.

The Treasury’s policy of allowing income and capital gains tax concessions on savings held through an ISA would also presumably need to be swept away. Is it avoidance to put money into a tax exempt pension fund? Or to pay a donation to a charity, calling on a tax rebate at the same time? Some avoidance is part of a grand plan by government to encourage certain kinds of financial conduct.

The third error is to think the main cuplrits when it comes to the criminal activity of tax evasion are the better off. No sensible accountant, company director, lawyer, or other professional is going to fail to declare income or sales to lower their income tax or VAT bill. They would be likely to be found out, and they would lose a great deal from successful prosecution. Many wish to uphold the rule of law and understand their professional status depends on doing so.

It is people who are less well off who have the opportunity and the motive to indulge in tax evasion, or who might make mistakes with record keeping which result in tax evasion. Electricians, plumbers, jobbing builders, mobile hairdressers, the organisers of the local dance or music classes, market stall holders – anyone handling cash from the public – could forget to declare all the income to the taxman, and could be shy about putting all revenue into the VAT return if they need to make one.

If more action was to be taken against tax evasion it would entail a new level of scrutiny and audit of all these small businesses and events where cash is handled. I think the Revenue get their actions about right in this field. Judging from my correspondence they sometimes overdo the doubts and probing with honest people. As I understand it they have commonsense views of how much a person is likely to be earning from various activities, and look more closely at ones falling well below the average. They follow up tip offs or information sent in alleging evasion. They can examine a person where the gap between lifestyle and declared income seems large.

There is no large crock of gold to be found from a different approach to evasion and avoidance, unless they mean by that the removal of a series of tax allowances and incentives put into tax law to foster certain kinds of conduct. What is true is tax does have a huge impact on our collective conduct. High Stamp duties discourage home sales, capital gains tax puts people off selling investments and buying different ones, and high marginal income tax rates put people off venturing or working harder.

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