Tax avoidance, an apocryphal tale

Posted by Christie Malry on April 10, 2012 at 1:14 pm

The young man cleared his throat and adjusted his tie, then knocked on the door.

“Come!”

He opened the door and went inside. The Chancellor of the Exchequer sat behind his desk. He pointed at a chair.

“HMRC, isn’t it?” said the Chancellor.

“Yes, sir. I had a few questions about income tax that I wanted to run by you.”

“Fire away.” The Chancellor was very proud of his income tax idea. It would ensure that the very richest would pay their fair share towards the nation’s coffers.

“Well sir, it’s like this. You announced to the House that you would be taxing the rich’s business profits. But we’ve received some questions about the way that those profits should be calculated.”

“It’s very simple,” the Chancellor replied. “You recognise all income and then you deduct business expenses. The difference is your profit.

“Yes, sir. But some of these businesses have borrowed money from banks. That means they’re paying interest to those banks. Does that reduce their taxable profits?”

The Chancellor felt a wave of irritation but used his experience to hide it. “Of course it does. Interest is a business expense, so it gets deducted just like any other business expense. Anyway, the interest income will end up in the bank’s profits, so we’ll get our tax back there.”

“That’s what we thought too, sir, but it’s always better to check these things with you first. Anyway, we had another question.” He paused for a moment, before continuing, “Businesses have been asking us what to do about losses. You see, we tax them when they make profits. Should we give them a refund when they make losses?”

The Chancellor laughed out loud. “No, dear boy, of course not! We’d go out of business before we know it. But I understand their concern. It’s clearly unfair to tax them in good times but not to relieve them in hard times. So, I’ll tell you what we’ll do. Any business that makes a loss can claim relief for that loss against its future profits. In the long run it’ll all even out.”

The Chancellor sat back in his chair smugly.

“Thank you, sir. There was just one more thing. On the personal tax side.”

“Yes, what is it?”

“Some of the charities have been asking us whether charitable donations can be made before the tax is payable, or whether they’re only paid out of post-tax income. They seem to think that it’ll encourage people to give more if they can give money to charity before tax.”

“I already covered this with the Archbishop of Canterbury!” snapped the Chancellor. “I made it abundantly clear to him that charity comes before the State. I’m not the bad guy here!” he exclaimed.

“Again, sir, I just wanted to be clear with you before we draft the legislation. We’d hate for this to come back to bite us in the future.”

“No, of course. Thank you for your caution. Good day!”

Epilogue

The Chancellor picked up the report from HMRC on tax avoidance by the super rich. It claimed that the super rich were using clever tax avoidance schemes to reduce their tax bills, sometimes down to as little as 10%. He flicked through the executive summary. There were three main tax avoidance techniques being used: utilisation of brought-forward losses, deduction of loan interest expense and charitable donations. This was an outrage! How dare they use clever accountants to avoid their obligations under such a simple tax system!

He picked up the phone. “Get me HMRC, please”

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