The tax avoidance debate too often focuses only on direct taxation. But for many people and businesses, including contractors and corporates, income tax and corporation tax may represent only a small proportion of their overall tax burden.
We often see anti-avoidance protagonists, such as the Public Accounts Committee (PAC) and its chairman MP Margaret Hodge, trying to make an argument against tax avoidance with just a few pieces of the jigsaw. Once the bigger picture is considered, their arguments weaken.
But then that’s why some anti-avoidance campaigners choose to remain blinkered to the bigger picture. It stops them from having to create a genuine argument based on the full facts.
If those facts are examined, the total burden of taxation, including employee taxes, paid by employers such as Google, Starbucks and Amazon, dwarfs the corporation tax component of HMRC’s total tax take.
Income taxes, capital gains tax and National Insurance Contributions (NICs) accounted for 54% of HMRC’s tax receipts during 2012-12, versus the contribution made by corporation tax, which was only 9%.
Drive out large employers by forcing them to pay more corporation tax than they are legally obliged to, and they may up sticks and take their jobs, and all that income tax and NICs, with them.
The same principle applies to high earning individuals. When you examine the facts, it is the top 1% of high earning individuals who contribute 26.9% of all income tax. If you strip out the percentages and focus on cash contributions, then high earners who choose to use tax avoidance schemes are still making a significant contribution to the greater good.
Someone with an annual income of £3m who is using an ‘aggressive’ avoidance scheme to pay 5% in tax contributes an awful lot more cash to the exchequer than someone earning a salary of £20,000 and paying 20% tax. We need more of these high earners paying tax and spending money in the UK, even if they are paying a lower percentage.
The contractors who were members of the avoidance scheme who have been caught by the retrospective BN66 Section 58(4) legislation were at the time legitimately taxed at 5% of their gross income. They would have been taxed further when they spent their net pay, as a result of indirect taxes such as VAT on the goods and services they bought.
Then you can add the income taxes and NICs of those they may have employed directly, and indirectly by the providers of the goods and services they bought. No person or company escapes tax when you look at the whole picture.
Individuals and organisations should only be required to pay the tax that is due according to tax legislation in force at the time. If Starbucks should not have been required according to tax legislation in force to pay the £5m of corporation tax it recently paid to HMRC, then it was wrong to do so.
That’s because the so-called ‘spirit of the law’ used by anti-avoidance campaigners is undefined and subjective. Taxation needs to be objective, as does the tax avoidance debate. And it should consider the whole picture, not just those facts that conveniently fit the anti-avoidance agenda.
The tax debate needs to focus on the whole picture, not just on direct taxation. Before we drive massive taxpayers out of the country, let’s let the facts get in the way of a good argument.