Paradise Papers: perhaps tax ought to be more taxing?…

Older readers may remember me, the first face of the Inland Revenue, as voiced by Sir Alec Guinness. I may be a distant memory, but I never left my desk.

The news in the lead up to this week’s Budget has been coloured by the Paradise Papers, as noted by David Becket in the comments sections when they first hit the headlines, who wondered why they haven’t been covered here. Well, in truth, tax policy is quite dull, and the issue of taxation of overseas holdings is rather more complex than is thought.

Here are some thoughts, however. Holding funds in offshore accounts isn’t, in itself, a problem. As long as the funds are declared to the proper authority, and taxed at the appropriate rate, you can hold funds wherever you like. The more interesting question is, why are the funds held offshore?

You may be in search of better returns, using jurisdictions with less onerous regulatory frameworks, where anonymity is better protected. You may be hiding the funds from partners, business or personal, but that isn’t necessarily a crime either.

The crime, of course, is not declaring the income from those investments to the proper authority. Ironically, HMRC probably have more access to information across the globe than ever before, with tax information exchange agreements in place with a number of offshore jurisdictions. You’ll note that a number of them were signed during the Coalition years. And now that HMRC have sought access to the documents that make up the Paradise Papers, one presumes that they’ll be using their Connect system to compare the data with individual returns.

The penalties for failure to declare offshore income can run up to as much as 200% of the unpaid tax, although past campaigns where individuals are incentivised to disclose their under-declared income have included reduced penalties. So, we’ll see what happens, and we’ll see just how much of the money uncovered by the Paradise Papers is ‘hidden’.

It has to be said that Liberal Democrat policy in this field is not particularly prominent;

We will make the wealthiest pay their fair share by clamping down on tax dodging…

but the 2013 policy paper on taxation, “Fairer Taxes“, whilst to some extent made obsolete by later developments, does point towards greater transparency, and pressure on tax havens to open up their banking and corporate structures to easier scrutiny.

Better information sharing between jurisdictions, enhanced data sifting and matching tools, greater resourcing for HMRC and more transparency, these are the tools that will allow governments to more effectively attack those who seek the benefits of civilised societies without wishing to make an appropriate contribution towards maintaining them.

And there is much at stake, as noted recently by the Economist, commenting on a Scandinavian study which seeks to estimate the level of tax evasion. Whilst Scandinavia has surprisingly low levels of offshore investment, the tax loss climbs steeply as you reach the highest levels of wealth.

It demonstrates that, with opportunities for hiding capital using easily available technology and some of the sharpest legal and accounting expertise that money can buy, there is a risk that the super rich will use that power for their own benefit. Governments will have to work collaboratively to counter that. And that includes this one…

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This entry was posted in Op-eds.


  • Sue Sutherland 20th Nov '17 - 2:21pm

    If we are losing similar amounts to tax evasion, how much more must we be losing to tax avoidance, which is perfectly legal. We have a tax avoidance culture which for the super rich may well blur the lines between the two. It’s seen as foolish to pay tax when you can avoid it because that blundering entity ‘the State’ really doesn’t know how to spend your money as well as you do, so consulting your accountant may cost a little but you will save a lot more money if you follow their advice.
    As Lib Dems we aren’t trying to increase the power of the state but to alleviate the situation of those who can’t afford to pay for their children’s education, or their health, their housing or help in their old age. We see society as a community which works better when we are all enabled to reach our potential. It’s obvious to us that at present our society is severely damaged and that the welfare safety net has too many holes in it.
    So we need to maximise our tax take. There are ways of doing this which don’t involve ensuring people pay the tax they owe, choosing policies that reduce unemployment and low wages for example, but surely if the government thinks you should be paying x amount of tax, then that is what you should do. Tax loopholes should be closed because otherwise the burden falls more heavily on those who can’t afford expensive accountants rather than on those who can. Let accountants use their expertise to inform the government of these loopholes rather than to help the wealthy get richer. We need to mend the holes in our tax system in order to mend the holes in our welfare safety net.

  • There are questions here of illegality and immorality. It is not illegal to have money in an offshore account and everyone who has savings at all is implicated. What do you think your bank does with the money you deposit?
    As long as it is declared it is perfectly legal.
    I think a greater immorality is those who own a second home in the Cotswolds or Devon and deprive some youngsters of a home. That, to me is worse.
    Unless you intend to make it illegal to send any money abroad (which will take us to a very strange place) then raging about the Paradise Papers is just two faced virtue signalling.
    A much more real problem are the big global companies who have no ‘proper’ home so pay no tax to anyone. At least when a UK investor returns their funds home they have to pay all tax due. The multinationals export profits to no tax jurisdictions then use that to grow at the expense of local firms who make, and recycle, their profits within the UK.

  • Eddie Sammon 20th Nov '17 - 10:42pm

    Businesses should be taxed where they are actually based. Do all these people really have businesses in the Cayman islands? We need to toughen up the rules on this.

    Two points for caution:

    1. Taxes can already be high. Business owners often have to pay VAT, corporation tax and then dividend tax, or if they take a salary, employers and employees national insurance and income tax (instead of the dividend and corporation tax).

    2. As I’ve said many times: the General Anti-Abuse Rule (GAAR), which some want toughened, in my opinion increased the uncertainty in tax law. Maybe this is a good rule, but we really need to be careful about toughening it up. There needs to be a clear distinction between illegal tax evasion and legal tax avoidance/planning. We shouldn’t seek to blur the lines.

    I work in financial planning/advice.

  • Graham Evans 20th Nov '17 - 11:38pm

    Many of the tax loopholes which are exploited by the rich arise because governments use the tax system to influence behaviour, not simply as a way of raising money to pay for public services. Once you go down the route of using the tax system to incentives particular types of behaviour it is inevitable that clever accountants will come up with schemes which breach the spirit, but not the rule, of the legislation. It might actually be better for governments to grossly simplify the tax system, concentrating on sources of revenue which are difficult to avoid, and then hand out grants to companies or organisations which they wish to promote, perhaps through arms length quangos, rather like the Arts Council, National Lottery Fund, SERC, etc. It could still use some forms of taxation to discourage certain types of behaviour, such as a sugar tax, but only if it was straight forward and difficult to avoid. However using the tax system to incentivise is fraught with difficulties.

  • Eddie Sammon 21st Nov '17 - 7:46am

    Graham Evans is right. Spotting tax loopholes can be as easy as combining different incentives created by the government in the first place. If A works and B works then why not do A + B?

    Obviously it requires a professional level of tax knowledge, but I think there is a bit of a myth about expensive clever accountants spotting loopholes – they can be spotted by freshly qualified tax advisers too.

  • Stephen Booth 21st Nov '17 - 9:00am

    Good start to what should be an informed debate in the party about tax. But I can’t help but think that “Governments will have to work collaboratively to counter. . .” is a tad naiive.
    We’ve seen small islands and countries virtually bought by larger ones in order to buy influence at the UN for a particular course of action (China and several Gulf countries are offenders) as well big business gaining a maffia-like hold over countries. In our own back yard Aaron Banks appears increasingly to have bought the Leave campaign to promote a stream of lies and half-truths and therefore the result.
    Meanwhile the Tories have plenty of offshore users in their ranks suggesting that they buy influence and power in our government.
    The end of the coalition brought any reform (always a slow project in progress) to a standstill notwithstanding the Maybot’s ability to talk the talk but alas awaiting a serious hardware upgrade to even begin a slivery crawl in the right direction.

  • Peter Martin 21st Nov '17 - 10:55am

    Eddie Salmon is quite right. So called tax loopholes don’t need clever accountancy.

    Instead of taking out money from a UK company in salary or dividends, just set up a another company in a lower tax environment, or a tax haven, and invoice the UK company for ‘marketing services’ or whatever else you can think of. Or, arrange the other company to buy any imported goods you might need and then sell them on to the UK company at an artificially high price. The goods don’t have to actually go there. Just the invoicing. Or transfer the ownership of any trade marks you might have to the offshore company and then they can charge a fee for the UK company to use them.

    It’s all very simple. So, hey presto, the UK company superficially appears to do hardly better than break-even and pays little or no corporation tax.

    So we just need some ideas on how to counter it. Maybe it is better to forget about corporation tax completely and have a turnover tax instead?

  • A few things here.
    As Eddie and Graham have both said, much avoidance is through schemes that were designed to be used as the government wanted to pick winners using tax in the way they used to do with subsidies. Actually the claim that these loop holes are used “inappropriately” is also a big claim to make. There are incentives for governments to set up systems that favour a certain group because they are in favour then when a tabloid story breaks about how terrible it is that this loop hole is being used governments rush to blame the companies and their advisers rather than stand up for the decision they took to create that particular set of rules.

    Lots of the activity passing through tax havens is for the purpose of creating a neutral location for investors, so those from different jurisdictions can invest in a product which doesn’t get too complex for planning tax across jurisdictions. Offering investors a neutral access to investing and offering those requiring investment the largest possible pool is positive for the level of investment.

    There is another issue generated with the hording of funds in offshore locations particularly by US businesses but this is a result of the US having ridiculous rules around tax, the only solution is for the US to sort out their system.

    In addition there is the low interest rate driver where businesses fundraise “just in case” leaving funds poorly allocated and once interest rates rise this will drop off.

    There are also the really illegitimate activity going on, but this actually gets lost in the simplicity of people banging on about amounts that are over inflated by all the other legitimate activity.

  • The Hong Kong tax code, widely held by tax lawyers to be the most admirably efficient in the world, is 276 pages long. The British tax code, rapidly beginning to look like the most disingenuous in the world, is currently in excess of 17,000 pages. It has more than trebled in size since 1997.

    That says it all!

  • Sue Sutherland 21st Nov '17 - 1:19pm

    It’s a pity if we can’t use tax breaks to encourage better behaviour by companies, like investing in green packaging for example. The problem is unforeseen consequences but if they were tackled immediately by a government determined to get on top of these issues then surely that would be better than what happens at the moment.
    The obvious area in which this has happened isn’t a tax problem but a result of encouraging buy to let. Back in the 90s this was seen as a way of alleviating the problem of the lack of investment in rented housing and was advocated by housing professionals and academics. Unfortunately, it has also contributed to the rise in property prices. The solution would seem to be increased investment in housing which is what caused the problem in the first place.
    We need a different attitude from government so that the results of policies are monitored more closely. We may not be able to stop the horse from bolting but we should be able to stop a stampede.

  • Sean Hyland 21st Nov '17 - 1:34pm

    if you actively recruit staff from the big 4 accounting firms into HMRC on placement and to “assist” the formulation of the tax rules it is no wonder we have an increasingly complex tax system. The more complex the system the more “loopholes” or ill-defined wording to exploit.
    Coupled with a reduction over the years HMRC staff, the use of “sweetheart”deals, and the focus on the easier targets its no wonder there is anger about our tax system.

    The people who design these systems usually include in the small print a get out clause that suggests the scheme is believed to be ok with the tax authorities but if it proves otherwise they wont be held responsible. Change the rules – when the high profile cases went through recently – Jimmy Carr, Gary Barlow etc -they had to pay the tax back so make the designers liable as well – large fines, loss of government contracts etc.

  • Peter Martin 21st Nov '17 - 2:36pm

    There’s seems to be an argument on this thread that tax avoidance is too easy because the tax system is too complicated. I’d dispute that.

    It may well be beneficial in other ways to simplify the tax system, but unless it also addresses the question of transfer pricing, which is simple enough in itself, there is still going to be a huge problem collecting taxes from the multinationals.

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