A taxing necessity

Few will have missed the very public airing of Jimmy Carr’s tax affairs, with the comedian having been exposed as one of over a 1000 people using the legal ‘K2’ avoidance scheme. Jersey based K2, exploiting a loophole in UK law, allows users to pay as little as one per cent tax and is currently estimated to be costing the UK Treasury £168m. Whilst Carr has suffered the worst of the public ire, he is far from alone in using the scheme.

Prime Minister David Cameron was quick to condemn Carr’s actions as “morally repugnant”; others have been less willing to blame individuals however, highlighting the need for government action to close such loopholes. Some believe the singling out of Carr may be unfair. Many have pointed to the fact that the newly-honoured Gary Barlow, also a participant in the K2 scheme, received little media criticism or political condemnation – Barlow himself has links to the Conservative Party, whilst Carr is a recognised Labour supporter.

Tax avoidance is nothing new. Carr’s efforts to shelter some £3m of his earnings from DVD sales and tour revenue pale into insignificance when the tax bills of Britain’s richest residents are examined. In 2006, 56 billionaires were resident in the UK. From these 56, only £14m was collected in tax revenue – £9m paid by one man, James Dyson. It seems that few of the wealthiest citizens are paying a proportional percentage of tax, with many significantly richer than Carr. Current estimates place tax avoidance as accounting for around 14 per cent of the UK tax gap.

{{quote Gone are the days when such leniency on tax dodgers could be accepted as good for the economy as a whole}}

The Tax Justice Network (TJN) have released a new report outlining the global extent of the problem. In “The Price of Offshore Revisited”, TJN estimate that around £13tn (that’s £13,000bn) is currently being sheltered from domestic tax laws through manipulating gaps in transnational tax arrangements. Such calculated moves have allowed high-worth individuals and companies to channel large sums through to low-tax, less transparent jurisdictions such as the Cayman Islands and Switzerland with the help of global private banks. The report estimates the biggest amounts have been achieved by Goldman Sachs, UBS and Credit Suisse. Oil-rich states such as Russia, Nigeria and Saudi Arabia have seen the biggest loss to offshore activities. Yet perhaps most emotive is TJN’s assertion that the capital outflows of many developing countries since the 1970s would have been more than enough to repay their international debts.

HMRC are expected to announce attempts to close such loopholes by demanding UK based advisors offering avoidance schemes to hand over client lists, allowing the government to warn individuals of their potential tax liability and keep track of the activities of those involved. The current government has been criticised by Labour for their reluctance to act sooner and the ineffectiveness of their actions, accusing the Conservative party of benefitting hugely from their donors’ offshore activities. The results of such proposed actions, of course, remain to be seen.

What is clear nonetheless is the public demand for change. Gone are the days when such leniency on tax dodgers could be accepted as good for the economy as a whole, based on arguments that top earners are crucial for growth. Many feel that excessive wealth and greed led to the economic crisis, in which the wealthiest have suffered disproportionately less. With public services squeezed in the name of deficit reduction whilst the top rate of tax is cut and more cases of avoidance become public, the less wealthy are understandably unhappy with the situation. The government must be seen to act.