In the Mel Brooks’s film The Producers, hapless film producer Max Bialystock meets down-at-heel accountant, Leopold Bloom. Max spends his time milking investments from a series of rich widows to fund films which always lose money. Leopold has the idea that Max could make a fortune if he could be sure that his films would lose money. He could simply raise the money and make a poor film on the cheap (while writing it up in the books as having been expensive). Then he would not need to pay his investors anything because the film made a loss, while keeping all of the original investments for himself.
This sort of nonsense is what tax advisors do when building tax avoidance schemes. There are even tax avoidance schemes in the real world which involve British films. They rely on the generous reliefs which are given to British film-makers. Some of them are so brazen that they would make Max Bialystock blush.
It sounds like a game - The Producers is a comedy classic - but there is nothing funny about tax avoidance. We lose approximately £25billion each year through tax dodging of various kinds. Even at his worst, when George Osborne was inflicting his disastrous austerity cuts on us all, the cuts were £40billion. If he had directed his attention to cutting tax avoidance then he could have saved jobs, businesses and misery for millions.
So, what have the Tories done to fight tax avoidance? It introduced a rule - called the General Anti-Avoidance Rule - in 2013. However, this rule is far too narrow. It only deals with ‘abusive’ avoidance schemes which are not done for ‘reasonable’ purposes. It does not even start to address the problem. Even the Tories did not think it would make an impact at the time they created it.
By contrast, Labour is proposing a root-and-branch public inquiry into tax avoidance. We will examine all of the ways tax is lost.
Money is lost to the public finances through money being paid through offshore tax havens, as the Panama Papers have shown. Money is also lost by multinationals transferring money between subsidiaries in different countries.
The scams are childishly convoluted. A coffee chain buys its coffee from Colombia. It sells that coffee to its subsidiary in Luxembourg. Then, entirely coincidentally, the UK subsidiary is charged exactly the same amount for its coffee by the Luxembourg subsidiary as the UK subsidiary makes in profit that year.
Sounds complicated? It is supposed to sound complicated so that we cannot follow what they are doing. The end result is that no tax is currently paid in the UK.
The feeble Tory anti-avoidance rule has done nothing to combat these sorts of scheme. What is lacking is a real desire to fight tax avoidance. Perhaps that is not surprising from a government whose last Prime Minister benefited from a tax avoidance scheme created by his father with Mossack Fonseca. Even the Osborne’s family business was found by Channel 4 News to have benefited from another tax avoidance scheme.
Like the upper crust Soames Forsyte in The Forsyte Saga, this Tory ruling class seems to be ‘jealous of intrusions on their property’. Perhaps that is why they don’t just pay their taxes like everyone else. After all David Cameron dismissed the £30,000 he saved thanks to Mossack Fonseca as being a piddling amount of money. Of course it is more than the average annual wage in the UK.
The Tory anti-avoidance rule has been surpassed by the work done by the judges. In the 1980s it was the judges who created a principle which allowed them to ignore the artificiality in tax avoidance schemes so that they could be taxed as if the artificiality had never been there. While some later decisions weakened this approach, there are signs in recent decisions that the judges have understood the need for clever tax schemes to be prevented. Of course, it should have been Parliament which led the charge in this context.
The next Labour government will scrap the weak Tory anti-avoidance rule. We will replace it with a broader anti-avoidance principle which will empower the courts to neuter tax avoidance schemes. As experts have found, a broader principle is difficult to avoid precisely because it is so flexible.
Our complicated tax code must be rewritten. The use of too many narrow ‘rules’ means that it becomes too easy to avoid those rules. There is an old Peanuts cartoon in which Linus says: ‘I love the rules. Once you know the rules, you can cheat.’ Tax lawyers feel the same way. Rules are written in words. And words can have several meanings. That is all tax lawyers think they need to avoid those rules.
The better way to draft tax statutes is to base them on general principles which can be used to interpret those rules proactively.
In 2013, Labour supported the original rule because it was better to have something than to have nothing. Now it is clear that the Tories are only ever going to go inch-by-painful inch in each year’s Finance Bill in making tiny, narrow changes. All the time trying to convince us all that they are determined to make a difference. In reality, unless we change the rules completely, the tax avoidance industry will carry on the same way in the huge London law firms, the multinational accountancy firms and the investment banks.
The Tories are prepared to let tax avoidance run rampant. They never believed that their anti-avoidance policy would make inroads into the £25billion being lost each year. They even hobbled their own rule, just to make sure. They set it up so that the use of the rule has to be approved by a panel of tax avoidance experts before it can be put to work. This is like asking a panel of turkeys what they want to be on the menu for Christmas lunch.
Tax experts are much more tolerant of tax avoidance than everyone else. They will not fight as many tax schemes as you or I would. The appalling part of creating this panel is that it means tax avoidance becomes a game. The government is acknowledging that some dodging will go on and that it will not be too astute in fighting it. We need to recoup as much of that £25billion as we can.
The Revenue need to be empowered to fight tax avoidance in all its forms. In 2013, it was found that there were only four staff at the Revenue employed to chase the 125 most serious tax evaders. We must resource the Revenue with reinforcements who are trained in combating tax dodgers. The Financial Conduct Authority showed how it could fight criminality in financial markets once it had the will to do so and enough staff to do the work. Every penny brought in by the Revenue helps to build another hospital and to refurbish another classroom.
We also need to stop talking about all tax avoidance as being ‘legal’. Tax evasion, where someone deliberately lies to the Revenue or files a false return, is a criminal act. Beyond that, we cannot be sure that everything is lawful. Most so-called tax avoidance schemes are simply disingenuous devices which mean that a super-wealthy individual or multinational company pretends that they do not need to pay tax. There situations in which the tax statutes deliberately countenance that no tax will be payable - for example, in inheritance tax law when a spouse leaves property to the other spouse in her will.
The super-wealthy will go to all sorts of lengths to avoid paying tax. They organise to spend the right number of days outside the jurisdiction - timing their jets to take off at exactly the right time - so they can claim not to be permanently resident in the UK under the current, rigid rules. They often camp out in the Isle of Man or somewhere similar until they know they have saved their money.
Some companies create crooked charities to pay public school fees for the children of their directors. It needs a lot of investigators to find out how these charities are being run.
Some banks have paid their traders in coffee or peanuts in Switzerland. The law used to say that they did not have to pay National Insurance Contributions if they were paid in commodities like peanuts. Those traders were not being paid peanuts in any other sense. They did not have to take delivery of the coffee or nuts. Instead, the banks arranged complicated derivatives so that they could turn their coffee mountains into cash. That cash was then deposited in accounts in Switzerland.
All of this trouble to avoid paying their fair share of the taxes that maintained the infrastructure which kept their banks working. The electricity they need for their phones and computer screens; the transport infrastructure to get everyone to work; the sewers to take all the stink away, and so on.
Instead of playing this tax avoidance game, we have to call tax avoidance what it is: tax dodging. It is wrong. At a time of deep economic insecurity after years of austerity economics, ensuring that enough tax is raised is a matter of national security.
There is nothing more community-spirited than paying your taxes. Our taxes keep our communities working. A Corbyn-led Labour government will make the changes that are necessary to make a difference.