THE BLOG

Is Tax Avoidance Really Normal?

13/02/2015 11:31 GMT | Updated 14/04/2015 10:59 BST

A friend of mine is one of several people working in a fashionable barbers in Shoreditch, offering the latest hipster cut and beard trim for the best part of £50.  Both he and his colleagues are part of the Coalition's success story that has seen two million private sector jobs created since 2010, of which approximately 60% are businesses with a single employee.

Another friend was until recently, also part of a one-person business, employed full-time at a product design agency. In fact, the whole work force was employed in this way despite being permanent employees in all but name.  They received not a salary - and therefore no additional benefits such as holiday pay - but payment for the work their business completed.

Economists and policy makers have been confused; they want to see these 'SME's grow but can't work out why they don't take on additional employees.  But that may misunderstand their purpose; these single person businesses have been created to avoid tax.

For the employer, who has few if any employees, they save by not paying National Insurance Contributions or benefits such as holiday pay.  For the employees - who are often given little or no choice - the arrangement is sold as a way to maximise their earnings by paying little or no tax, they instead receive a dividend subject to much lower capital gains tax or declare everything as business expenses.

There are other examples; one friend works for a chain of independent clothing stores, and is paid cash in hand.  I have heard of others withdrawing their salaries from an account established by their employer rather than being paid via PAYE, whilst others are made directors of small companies and receive dividends instead of salaries.

Anecdotal though it may be, there is a clear trend in young professionals and their employers avoiding tax.  Hearing your friends casually declare they don't pay tax is jarring; but it echoes similar arrangements that were uncovered at the BBC and the wider corporate world.  Tax avoidance it seems is normal.

There are several problems with this situation.  Beyond arguments of fairness - why should some pay tax when others don't - there are clear economic consequences.  The Treasury has been surprised that despite the growth in employment, income tax receipts are unexpectedly below forecast and this kind of tax avoidance is likely to be partially responsible, having consequences for the public finances and public spending.

It also erodes the social contract; we each pay our taxes to reflect that we all benefit from society.  My friends who pay no tax are only able to do so because of the tax contributions of others, funding their state education, university courses, healthcare and ensuring a stable society throughout their lives.

When challenged on their tax affairs the reasons provided are instructive. Some believe that whatever you can get away with is fine, as long as it's legal.  This beggar-my-neighbour argument, if followed to its logical conclusion, would see everyone do the same and destroy the tax base entirely.  Those arguing for it are either naïve, disingenuous or fundamentally against the entire concept of a state and public services.

Other reasons include arguing that it's the only way to save up for a deposit to buy a house.  Perhaps it is, but what about those that pay their taxes and cannot afford to save; its 'free riding' in a classic economic sense.  But it does hint at the wider issues of fairness underlying this activity.

Many of these friends have been to university and held unpaid internships before finally getting a job.  Often paid less than an average graduate salary, it's barely enough to cover the cost of living in London, let alone trying to access the housing market which appears to be designed in favour of older generations.  They are also saddled with thousands of pounds of student debt accumulated acquiring a degree which, despite promises to the contrary, doesn't always lead to a well-paid career.

Avoiding tax is evidently not the answer to addressing these issues of fairness.  It just exacerbates the problem; increasing inequality and placing the tax burden on those unable to avoid it, who may have the least to begin with.

The answers must go much wider and address both specific challenges - the cost of living and housing - as well as broad issues such as intergenerational fairness and the types of jobs our economy creates.  We also need to challenge the perception that it's ok or that everyone else is doing it.  The problem is it often appears those that make these claims, might just be right.