Taxation Analysis – Tax avoidance: a question of definition.

I live in hope that one day Gordon Brown or Dawn Primarolo will astonish me by using words to mean what everyone else understands them to mean. For example the proposed anti-avoidance legislation on the provision of services through personal service companies. I understand anti-avoidance to mean something intended to combat avoidance. It will be remembered that at Budget time Gordon Brown talked of people leaving their employment on Friday and returning to do the same job on Monday as an employee of a service company. I find it hard to see how changing employment is perceived as avoidance; an employee of a service company is taxable in exactly the same way as any other employee, so where is the avoidance? What avoidance really appears to mean to Gordon and Dawn is entering into transaction B instead of transaction A. For example, putting money into an ISA, as that attracts less tax than putting the same money into a direct investment. Or possibly spending your money and therefore avoiding the tax you would have had to pay on income it would have generated had you invested it. So is that avoidance? No, of course not. Entering into one transaction rather than another is not in general avoidance. It only becomes avoidance if Gordon or Dawn designate it as such. In the service company context avoidance means paying the lower rate of tax that Gordon has imposed on investment income by receiving a dividend instead of distributing every penny a company earns as directors’ bonuses.Even that is not right. If a small shopkeeper has a company which pays him dividends rather than a bonus that is OK. It is not avoidance at all. If a large company pays a director, with a large shareholding, a dividend instead of his income being wholly by way of salary this is OK too. So where does the line between avoidance and commercial common-sense fall? I wish I knew. The proposed personal services company rules seem to me to be simply a discriminatory measure aimed at penalising some categories of small business. It would have been far more honest to have said; ‘This government does not like micro-businesses. We will tolerate them if they are buying and selling things, but if they are simply giving advice we’ll regard them as parasites’. The Inland Revenue has recently issued guidance on employment status rules in the context of service companies. This is actually a very good and fair-minded document, subject to one glaring exception. It says that where a worker is in doubt about whether an engagement would have been an employment he can ask for an opinion from the Revenue. The guidance goes on to explain that where a worker is engaged under an agency contract ‘for a period of one month or more … we will say the engagement would have been employment’. In other words: ‘In some circumstances when you come to us for help we will ignore both the facts and the law, as we have adopted a rule of thumb that says we will treat you as an employee irrespective of whether you are one.’ I have no objection to rules of thumb, but it would have been fairer to have pointed out in the guidance that this is simply a rule of thumb, that the worker is entitled to be taxed in accordance with the law if that gives a more beneficial result than the Revenue’s rule of thumb, and what the Revenue really means is, ‘Form your own view in such circumstances as we are not prepared to give you any help’. Unfortunately that leaves the poor worker in a Catch 22 situation. He can follow the Revenue’s rule of thumb and pay tax he does not really owe, or he can follow his own view and risk interest and penalty charges if in this extremely complex area the Commissioners decide the position is uncertain, so he cannot displace the assessment the Revenue will have raised. But who cares? After all, wanting to have one’s own business and be in control of one’s own destiny – or wanting to work and contribute to the economy at an age when no-one is prepared to employ you – is tax avoidance to Gordon and Dawn. And tax avoiders obviously deserve what they get!

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