Wednesday, 20 June 2012

Taxing Times

"Why is everyone acting as though @JimmyCarr has killed a baby?! Because babies die in underfunded hospitals". (Comedian John Robins, on Twitter)

'As bad as benefits cheats': Minister attacks Jersey tax avoidance scheme that Jimmy Carr 'has £3.3m in'
Comedian Carr is 'largest beneficiary' of scheme which shelters £168m a year from taxman Danny Alexander, Chief Secretary to the Treasury, says rich tax dodgers are 'moral equivalent of benefit cheats' He warns Government is 'coming to get them' (1)

Those are the headlines in the Daily Mail, although it was in fact the Times which broke the story. And once more, it is Jersey that is at the centre of the tax scheme, termed K2:

K2 works by transferring salaries into a Jersey-based trust, which lends investors back the money. As the loan can technically be recalled, it is not subject to income tax .(1)

Of course, technically, the scheme is a legitimate loophole, so Jimmy Carr is breaking no laws. And before the moral crusaders start wagging their fingers, just see what David Cameron has sent as a message to French taxpayers, who are looking at the possibility of a hike to 75% tax rate over there:

British prime minister David Cameron slammed French tax plans saying that French businesses fleeing high tax rates at home are welcome in the UK.  While speaking at a business forum held on the sidelines of a G20 meeting in Mexico on Wednesday, Cameron said  "If the French go ahead with 75 top rate of tax, we [the UK] will roll out the red carpet and welcome more French businesses to Britain and they can pay taxes in Britain and that can pay for our health service and our schools and everything else. Every country must set its own tax rates but I think in a world of global capital, in a world where we are competing with each other, in a world where we want to send a message that we want people to build businesses, grow businesses and invest, I think it is wrong to have completely uncompetitive top rates of tax," he said. (2)

So apparently it is right for high earners to avoid paying tax - although in this case, the method used is to relocate to the UK. But there is a total inconsistency at the heart of this policy.

If it is fine for people to use such means as they can to legitimately reduce their tax bill, then where does that leave the likes of Jimmy Carr? He hasn't relocated, because he has found a means to reduce his tax bill without being so. And the reason for this is that the rates in Britain are punitive for the high earner. At what point do they become legitimately too punitive? That's a question we should ask because clearly David Cameron is sending out a strong message that a 75% tax rate is too high. But isn't 50% - when the scheme was devised - also too punitive.

Perhaps if you are a Chief Executive, earning millions, packing away bonuses, with a generous pension scheme, you should be paying the top rate, but a comedian, after all, might be earning a lot today, and drop off the radar tomorrow. There doesn't seem to be a way to consider the tax rate for people whose salary might be - if averaged out over 10 years - the equivalent of paying perhaps 30% or lower - but because they have big peaks and then deep troughs - get hit excessively more than someone earning the same amount over that timescale.

In the meantime, the Telegraph reports that:

HMRC have confirmed the K2 scheme is under investigation and have vowed to "challenge it in every way available to them", saying "Government does not intend anyone, no matter who they are, to get away with paying less than they should." (3)

The Daily Mail, meanwhile, is having a full scale rant about tax:

These mercenaries - people, for example, such as the all-too-clever comedian Jimmy Carr, exposed as ruthlessly exploiting a highly aggressive but legal scheme to minimise his tax payments - use financial and legal wizards who specialise in tax avoidance and operate below the radar. (4)

Could this be the same Daily Mail, which some years ago was trying to relocate itself to the Neverlands:

The facts of the Daily Mail case concerned the transfer of the Daily Mail's central management (real seat) to the Netherlands as a tax avoidance measure. The Daily Mail's application to the UK's Treasury for its consent to the move had been refused and so the company appealed to the High Court which referred the matter as a preliminary question to the ECJ in the following terms: whether EC Treaty arts 43 and 48 precluded a Member State from requiring that its prior consent is granted to a company wishing to transfer its Head Office to another Member State given that the transfer constituted a transfer of residence in order to avoid tax liability. (5)

Surely the Daily Mail couldn't have been engaged in trying to ruthlessly exploit a legal scheme to minimise their tax payments? - this is something not mentioned in the Daily Mail, and very much an operation which falls "below the radar". What they wanted to do was firstly to allow - under both UK and Dutch law - the intended transfer of Daily Mails' centre of administration to the Netherlands whilst retaining its legal personality and continuing to be subject to UK company law. The case concerned the UK Treasury's right to refuse to allow Daily Mail to transfer its tax residence without paying accumulated tax in the UK.

The judgement of the courts at the time was that in the context of a tax avoidance scheme such as the one at stake in Daily Mail, a company should not be allowed to invoke the community right of establishment to avoid having to settle its tax situation in the UK before transferring its head-office to another Member State. Yes - a sordid tax avoidance scheme - that's what the very moral Daily Mail was trying to do!

Meanwhile, Jimmy Carr has broken his silence:

Comedian Jimmy Carr has broken his silence over claims that he dodged tax, insisting: "I pay what I have to and not a penny more."(6)

What has happened though - is that in the eyes of millions of people in the UK - Jersey has suffered reputational damage as a result of this whole affair. It may be legal, but it doesn't seem morally right - and there seems to be a total inability to address the subject of moral indignation - the call for fairness. Geoff Cook has defended Jersey:

Jersey Finance's Geoff Cook said the position on tax evasion was clear.  "Tax evasion is illegal in Jersey and it is a criminal offence to facilitate or engage in it," he said. He added: "Jersey is, and remains, one of the best regulated international finance centres in the world. Mr Cook said: "In our view, conflation between illegal tax evasion and legal tax avoidance, or tax planning, is unhelpful in moving any wider debate forward and the articles in today's edition of The Times raise some important points in this area."

I am sure that Shylock in the Merchant of Venice ran a well regulated business, and he broke no laws, all he wanted was his legitimate pound of flesh. That's how people outside tend to see Jersey with this kind of story, and while not every merchant in Venice was like Shylock, it was his actions which tainted the very honest people who also lived and worked there.

That's an issue which we really need to address, and making claims that nothing is criminal here really doesn't address the matter, and it is unfair to all the other people here who do simply make an honest living. Because when Geoff Cook says "tax evasion is illegal in Jersey", what the outside world often hears is a reply which does not address the moral issues in any substantial depth - and that's what we need.

Of course there is nothing illegal in the scheme. But remember the words of Shylock: "It doth appear you are a worthy judge; You know the law, your exposition hath been most sound".



Nick Palmer said...

I think there is a moral quantum leap between relocating to a lower tax area, as Cameron suggest Frenchies do, and arranging your affairs so that you pay proportionately a lot less tax than the general taxpayer. One is reasonable, the other is outrageous.

BTW I've always thought we could well do without the standard line that Geoff Cook and Minister Ozouf trot out regularly - that Jersey is squeaky clean cos we are well regulated and we don't do that nasty evasion stuff - just the nice avoidance stuff.

It's a bit embarrassing to see them repeatedly ploughing this furrow whenever and wherever criticism of Jersey shows up. I don't think it fools too many people outside Jersey, so I suspect they do it to keep the rank and file finance industry clerks content that they aren't doing anything immoral.

Now that Arch Tory Cameron has identified "aggressive" tax avoidance as immoral, large parts of Jersey's chief industry are probably now about to find themselves on a slippery slope.

TonyTheProf said...

I don't think its a quantum leap - the principle he is articulating is not just to relocate but also that high tax rates like proposals in France are unacceptable - that could also be applied to the UK. Where does one draw that line?

I'm extremely glad to see Ian Gorst come out strongly against the K2 scheme. It makes a welcome change, and shows we do have a Chief Minister who can take a moral rather than pragmatic stand.

I wonder what Geoff Cook will say to that!

Nick Palmer said...

The quantum change for tax revenues is the difference between staying in ones own country and manoeuvring to pay less tax thereby paying less than expected, and moving to a country where less is expected or needed.

TonyTheProf said...

Less is certainly needed, because like the 1.1(k) policy, Britain operates a non-domicile policy, so they wouldn't necessary pay the full amount - so it is effectively encouraging unfair tax policies by selectively allowing incomers to pay not just less than expected, but a qualitatively different tax regime from ordinary people.

It's the kind of practice the EU frowns upon if companies do it - unfair tax practices.

I'm also not sure that metaphors from physics to do with different energy states really can be transposed to tax policy, any more than they can be used by New Age thinkers.

Nick Palmer said...

I think, like Vroomfondel and Majikthise, your mind is too highly tuned or something to see the point.

To make it simpler let's ignore the 11K aspect, which is aggressive harvesting of and/or denial of revenue from/to another jurisdiction.

A large number of Jersey people end up paying around 10% total tax.

There is a fundamental difference in kind (AKA moral quantum leap or crossing the Rubicon or whatever) between someone who moves to a lower tax area from the UK and pays 10% on income they used to pay 50% on and someone else who stays in the UK and, because they can afford the fees, arranges their affairs so that they pay (say) 10% tax on income sufficiently large that someone who didn't employ accounting jiggery pokery would have had to pay 50% on.

One is gaining unfair advantage against the citizens of the country you live in (= bad) and the other is paying the same as the general rates of the citizens in the second country (= neutral).

Of course, if the income is still generated in the first country, then you would also be denying revenue to it (= morally dodgy) but that is a separate issue.

TonyTheProf said...

Yes, there is a difference, but whether it is "fundamental" or not, is another matter - when taken from Cameron's point of view.

Let's leave aside the movement of people or the use of tax schemes for a moment - since clearly arguments can be taken in parts, and not as a whole - and see that David Cameron is sending a strong message - in his own words - that punitively high taxation for the rich is bad - "I think it is wrong to have completely uncompetitive top rates of tax".

Or to put it another way, Cameron's views are media driven and partial? Sir Philip Green has interesting tax arrangements but far from being labelled morally repugnant he is given a government review.

Unlike yourself, David Cameron's argument that Jimmy Carr's use of legal schemes is "morally repulsive" is open to many criticisms on the grounds that it is inconsistent - and I haven't touched on his father's tax schemes for the Cameron family, which have not been subject to the same critique.

In other words, he is sending out mixed messages, which are patently obvious, in which schemes other than those that Jimmy Carr was caught using might be quite all right, or at least will be fine if there is not so much of a media spotlight.

He has very much soft-peddled the case of Conservative supporter Gary Barlow, who has in fact recently received an OBE. " "I am not going to give a running commentary on different people's tax affairs. I don't think that would be right. I made an exception because it was a very specific case where the details seemed to have been published and it was a particularly egregious example of an avoidance scheme that seemed to me to be wrong and I made that point."

If you can't see that Cameron is inconsistent, then I fear you must be moving sharply towards the clutches of the Conservative Party. The kind of people who think they have special rules that enable them to park on yellow lines when ordinary people must not.

Nick Palmer said...

"In other words, he is sending out mixed messages, which are patently obvious"

Well, of course. He is a politician, riding the current wave of public outrage. But, as many commenters have mentioned, he might have shot himself and the UK in the foot with a ricin laced bullet by stating that schemes like K2 are bad bad bad.

I see him, by openly identifying a tax avoidance scheme as immoral, as having put himself at the top of a very slippery slope.

Jersey (AKA Ozouf/Geoff Cook) often trumpets how good we are for the UK because we funnel funds into the City of London, which is one of the largest "tax havens" around (click link for New Statesman article). Cameron's criticising as immoral, in the full glare of publicity, tax avoidance, and all it stands for, is a quantum leap across the Rubicon (/snark). He cannot go back from it.

With the massive re-evaluation of conventional economics and financial practices happening amongst the saner segments of society, maybe this is a cloud no bigger than a man's hand moment.