The vexed question of taxation

In the UK we have a situation where technically every business that makes money pays tax, and every individual who earns money pays tax. You would think that, in a wealthy country like the Uk this would mean that we had plenty of taxation revenue to pay for health, education, military and social enterprise spending, and perhaps even to start paying off the enormous debt caused by the banking crisis. Indeed, if everyone that owed tax paid it this might well be the case. To give you an idea, it is estimated by Her Majesties Revenue and Customs division (HMRC) there is a shortfall of something like £550 billion missing from expected tax revenue each year. This might seem quite a lot, and indeed it is, so why is there any shortfall at all? You would think, as I do, that it would be pretty straight forward. A company has to, each year, declare its income and expenditure in the form of a tax return. HMRC can check these figures at any time and demand receipts and invoices and so on, so it should be pretty easy to demonstrate what tax is owed. Similarly, if you earn money, the tax office requires a record of what you have earned and taxes you accordingly. That's the theory, so what is the problem?

Well, to find out we need to work out how it is that in such a simple system it is possible to avoid paying tax. Lets start with business tax avoidance. Recently in the press there has been coverage of large scale tax avoidance schemes from companies like Vodafone, on a spectacular scale. Now, the way this works from the companies point of view is that they operate in many different companies, and it makes sense to pay tax in the country with the lowest tax rate, so revenue is transferred between divisions of the company in different companies until there is no profit in high tax countries like the UK, and lots of profit in low tax countries like Switzerland. The thing is, this is pretty much legal, although that is being challenged. It is a similar story with personal tax. If you earn a lot of money in the UK you can move it offshore or invest it in tax deductible vehicles that reduce tax liability. Again this is currently legal, although under observation. What is interesting is that many of these tax avoidance vehicles are created by banks, coincidentally, banks that are owned by the UK tax player. You really couldn't make it up.

What seems most odd is that, as previously seen with the MP's expenses scandal, there is an assumption that if behaviour is not illegal then it is acceptable, rather than questioning whether behaviours are ethical or not. So you have a situation where a Prime Minister who claimed expenses for cleaning a wisteria plant, and claimed for a second home despite being a multi-millioniare is castigating a comedian for using a tax avoidance vehicle, whilst a previous Prime Minister pays a tiny amount of tax on a vast income despite being married to a leading human rights lawyer. If it wasn't so tragic you would have to laugh, but perhaps it is time for a somewhat more radical change.