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“The hardest thing in the world…

“The hardest thing in the world…

… to understand is the income tax”. So said no less a person than Albert Einstein. Meanwhile the Coalition, in the shape of Treasury Minister Danny Alexander, have been talking about ways to increase the amount of tax flowing into the Government’s coffers.

I think most thinking people agree we need to close the gap between UK income and UK expenditure and you can only go so far in cutting down what you spend. Unless you’re a bank of course, but that’s another subject.

The only snag is, Mr Alexander was using the same old rhetoric we were really tired of hearing from the last lot: His speech was littered with references to “avoidance and evasion”. He also went on a little bit too much about “fairness” – and we all know what that means! OK he was talking at the Lib Dem conference so we might forgive a degree of tub-thumping overstatement, but his words carry a hint of his true intent.

Personally I find this very worrying. Firstly there is a very clear difference between avoidance and evasion: one is legal and one isn’t. If you want to stop avoidance, the answer is very simple; you cancel that concession or you pass a law saying that you can’t do things that way. If, for example, it is avoidance to take advantage of the tax free allowance we all get – which it is, of course – then you cancel the tax free allowance. How hard is that?

Of course there is the slight problem that an already complicated tax regime, after years of Brown-induced fiddling, is now so labyrinthine that nobody really knows what taxes they owe. Including HMRC themselves, if the various stories of under- and over-payments and the odd billion pounds of uncollected taxes are to be believed.

Secondly, if someone can define “fairness” when applied to taxation, then I would be very surprised. Danny boy’s concept – like a certain Miss Primarola’s – is basically to ensure everyone whose gross income is £50,000 pays £10,000 in taxes. Simple enough idea, but is it fair? I don’t think so. A freelancer’s gross has to cover a host of things that an employee’s doesn’t. A company owner’s gross has to cover off building the business and quite possibly tying money up for years to do so. Fairness is a good word, but it’s not one that you can apply to taxation.

You can of course arrange things so that while you may pay differing amounts against your £50,000 you at least know in advance how much it is going to be and why. What we need is someone to look long and hard at simplifying the tax system. An Office of Tax Simplification, if you like. Oh, hang on a minute…

Nevertheless, HMG need all the income they can find, and even an old cynic like me can see that if you live in the UK, work in the UK and get paid in the UK, you should be paying taxes at UK levels. Are you listening Mr Green? Just because your company pays lots of taxes against its profits doesn’t exempt you from paying taxes on the money you take out if it for your own use. Sorry, for your wife’s use.

Still, getting back to the point, HMG doesn’t need to tackle evasion, it’s already illegal. All they need to do is apply the law consistently. If they want to tackle avoidance, all they have to do is define what it is and which practices they consider to be unacceptable. The various avoidance schemes that are their real target all exist by virtue of ambiguity in the wording of the tax laws. It’s down to HMG to remove that ambiguity so those schemes become unworkable or unprofitable..

That, to my mind, is what the fairness argument should be about.

Alan Watts can found at LinkedIn.
© 2010 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: Scattered puzzle pieces next to solved fragment by Horia Varlan

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