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If tax avoidance is so bad, why is it legal?

Let’s get one thing straight: I am a tax avoider. I use the government’s Cycle to Work scheme, which allows me to pay for the bike I commute on through my gross, rather than my net, salary. It’s quite a saving.

Then there’s Childcare Vouchers – that’s a similar deal: I fund my five-year-old’s after-school club from my income before the Taxman has taken his share. It’s a cheeky little scheme that saves me money, and costs the State a few hundred quid a year in lost revenue. 

Just days after Labour leader Ed Miliband caused a stir by attacking Conservative Party donors for being tax avoiders, it emerged that he (or rather his mother) was one too.

Marion Miliband, acting on standard advice, had effectively just transferred her husband’s tax allowance to her two sons.

It emerged that Ralph Miliband, Ed’s late father, had simply failed to make the appropriate arrangements in his will before he died, so Marion had fixed the problem afterwards. Had the late Miliband Sr ever got round to making a tax-efficient will, the effect would have been the same, so there was no ultimate tax advantage from Marion’s Deed of Variation. But in the strictest sense, Mrs Miliband was ‘guilty’ of tax avoidance, just like the rest of us.

Whether it’s a Deed of Variation, Childcare Vouchers or the Cycle to Work scheme – much tax avoidance is perfectly legal and is in fact actively encouraged by the government. Tax avoidance is legal, popular and common. So why do some types of it upset so many people?

HMRC draws a distinction between normal tax planning, and contrived, artificial schemes which may be within the letter of the law but are not, to the Taxman’s mind, in the spirit of it.

Maybe the Taxman has a point. Only a complete pedant could fail to recognise the difference between a government-promoted salary-sacrifice measure like Childcare Vouchers and an outlandish mechanism like the one that landed the comic Jimmy Carr in hot water a few years back. The K2 scheme proposed by Carr’s accountants was completely legal – but the byzantine way in which individuals could siphon their salary into an offshore trust and then have the cash loaned back to them was elaborate, to put it mildly.

The reality is that it’s not possible for the Law to keep up with every possible wheeze and loophole because – guess what! – accountants and financial advisers are very clever people. As soon as HMRC closes one loophole, some tax advisers will go out of their way to find another one. That’s not to say that the tax system can’t be more watertight – greater efforts to simplify it would be a good start. But there will always be grey areas.

At some point, professional judgement must come into play: just because tax avoidance is legal doesn’t always mean it’s right. If it feels elaborate, contrived and awkward, it probably is.


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