I spoke to a tax accountant from one of the Big Four about tax avoidance ahead of next month’s general election
The election is coming. I said, THE ELECTION IS COMING! That means, batten down the hatches, we’re in for an intense month of political windbaggery. One of the hottest topics this year is tax – inheritance tax, income tax and perhaps most emotive of all, tax avoidance. The tax-free status of non-doms has, this week, been touted by Labour as a key policy for May’s general election. Supporters say that the current system, which allows non-UK born residents to legally avoid paying tax, is unfair and discriminates against UK citizens. Naysayers, however, say that scraping the tax breaks will make the UK less appealing to rich foreigners and therefore reduce the amount of money coming into the UK.
Over the years, plenty of politicians and parties have attempted to close this loophole, yet none of them have been successful. Why? I spoke to a tax accountant with one of the Big Four accountancy firms to find out more, he or she chose to remain anonymous for professional reasons.
Do you deal with businesses or individuals?
Most of the clients I deal with are predominantly wealthy individuals who are internationally mobile. Many are born outside of the UK, but have lived in the UK for several years.
Do you have any examples of how the current system is being abused?
The main headlines over the last few months have been about offshore accounts hidden in Switzerland. The thing that interests me is the way the newspapers make it sound like something from James Bond, as though these people are stashing millions of pounds away to hide it from HMRC. Sadly, in the vast majority of cases, it’s not that exciting. Yes, these Swiss accounts exist, but HMRC should, in theory, know all about them because of the various information disclosure agreements in place between the UK and Swiss governments – why have there been so few prosecutions for holding Swiss accounts?
Note from editor: As of 1.1.2013, Swiss banks are obliged to declare account details to HMRC
There are various legitimate reasons for holding overseas accounts such as those held in Switzerland. In the vast majority of cases the individuals holding the accounts are what are called non-UK domiciled taxpayers. The meaning of ‘domicile’ is complicated, but often it relates to individuals who were born overseas but are now resident in the UK on a temporary basis.
There are various tax advantages in being non-UK domiciled, one of which allows non-doms to avoid paying UK tax on income received from their foreign bank accounts, as long as they do not bring that income into the UK. The real question is why does the government allow this tax benefit to non-UK domiciles, when UK domiciles – who are typically British-born residents – would be required to pay tax on income from the same foreign accounts?
The simple answer is that a sizeable number of the non-doms holding Swiss bank accounts are extremely wealthy individuals, and it makes the UK a more attractive place to live from a tax perspective. From the government’s viewpoint, attracting wealthy individuals from the Middle East, Russia and the US, for example, brings significant investment into the UK. This may include the creation of new businesses and therefore help to reduce UK unemployment. It also means more money flowing into the UK in the form of retail spending (i.e. increase in VAT revenues) and a boost to the property market, which brings an increase in stamp duty revenues.
The Big Four accountancy firms assist the government with setting tax legislation, and have been accused of unfairly using that expertise to help their clients to then bypass the law. Should they be allowed to do this?
In terms of tax legislation, which is increasingly complicated, the government drafts new laws, but consults with various bodies – including the large accountancy firms – in order to understand the potential tax consequences and iron out any anomalies. As far as I am aware, the Big Four have no vested interest in making, or actually writing, the tax law.
It’s true that the Big Four, like all accountancy firms and other financial institutions, use their expertise in, and understanding of, legislation to help their clients to mitigate taxes. However, it’s important to understand the distinction between ‘tax avoidance’ and ‘tax evasion’. Tax evasion is a criminal offence; it is not paying the taxes that you are legally required to pay. Tax avoidance, however, is when a party takes – often simple – steps to avoid paying certain taxes, which doesn’t involve anything illegal.
I’m not aware of any of the big firms being involved in tax evasion. Firstly, they receive sufficient fee income that they don’t need to do it. More importantly, they would never risk involvement in criminal activity because it would ruin their reputation and public image.
How do you feel about new proposals, put forward by both Labour and the Conservatives at various points, to fine accountants and firms for exploiting legal loopholes to help reduce their clients tax bills?
The law is extremely complicated which is why individuals pay accountancy firms to help them understand it. We help them structure their tax affairs efficiently, in line with their specific circumstances. Accountancy firms have received such bad press recently – why, when they are simply advising individuals on how the law works?
The main reason is a lack of understanding about what accountancy firms do. There is a belief that they are actively advising individuals on how to evade tax. This is completely unfounded and I think some of the recent journalism on this topic is poorly researched. Perhaps the question we should also be asking is why are all the negative stories about the accountancy firms and banks coming out now? Why did the phrase “tax cheats” appear on the front pages of newspapers and on the BBC’s Panorama show? After all, the government is fully aware of the role of accountancy firms – they are simply advising on the tax legislation written by the government.
The information about the HSBC clients holding accounts in Switzerland was given to HMRC several years ago, in 2007. There’s a general election next month though, and along with tough rhetoric on immigration and saving the NHS, there is nothing that riles up voters more than the perception that some people are cheating the tax system. It gives the political parties another ball to kick around in their political wrangling. Pointing the finger at accountancy firms deflects from the fact that everything goes back to the law that they have written.
What changes would you like to see to the system to make it fairer?
There is an argument that everyone living in the UK should be treated as equal, that there should be one simple system that applies to all. This would make sense, but the UK tax system has become so complicated that it would come at a huge cost to the government to re-write the law. The fact is, the existing law achieves various political objectives – for example, it attracts wealthy foreign individuals to the UK.