THE BLOG
16/02/2015 09:39 GMT | Updated 18/04/2015 06:59 BST

Explaining (Aggressive) Tax Avoidance and Evasion

In the media, we're constantly hearing talk of tax avoidance, aggressive tax avoidance and tax evasion. Changing one word for another can completely change the meaning of a sentence. So when we talk about clamping down on 'immoral' ways to get out of paying tax, what do we mean? And what should the country do about it?

A very simplistic (and therefore, perhaps, slightly wrong) view is to say that tax avoidance is legal, and tax evasion illegal; avoidance being about finding ways within the law to minimise the tax you pay, and evasion being about deceiving the Inland Revenue over your true tax position.

The current situation goes back to one of the most famous legal cases, in 1936, with a ruling handed down by Lord Tomlin on the Duke of Westminster's tax arrangements:

"Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow tax-payers may be of his ingenuity, he cannot be compelled to pay an increased tax."

Those who want to legally avoid tax have relied on this ruling ever since, although it was modified slightly in 1981 in the Ramsay case. Now, a deliberate and aggressive attempt to exploit a loophole isn't enough to save you from legally having to pay tax: a court may take into account the purpose of the legislation. To take a rather silly example, if Parliament were to introduce a tax on all red cars, then you fixed a black stripe on it and claimed 'I don't have to pay the tax any more because this car is no longer fully red', you might find yourself on the wrong side of the law. Actually there's a lesson here that politicians should be careful about how they introduce new taxes: in 1696, a law was introduced taxing people based upon the number of windows in their house, and it wasn't long before windows were bricked up across the country with consequent lack of fresh air and health issues. Getting the law right is important.

First of all, what do we want to achieve? We want to ensure that large multinational companies pay their share in tax. We want to ensure that it's no longer in the interests of the very rich to hire hugely expensive accountants because it's still cheaper than paying the tax that's owed.

But at the same time, we don't want to harm the small business which is in a precarious situation. Whether a business voluntarily registers for VAT or not, whether mileage is calculated on the HMRC per-mile rate or based on the depreciation of the car, or whether a sole trader registers as a company or is self-employed - these decisions are often taken on the basis of what's best for the business, and which option will pay the least tax.

When the wrong action is taken, it can make things worse rather than better. For example, the European Union VATMOSS regulations have just come into force at the start of the year. The idea is to make sure that VAT is charged at the rate applicable in the country where goods are bought, not where they're sold. Someone from Sweden will pay Swedish VAT, if you're in Spain you'll pay Spanish VAT, and so on. This should, according to the EU, create a level playing field and help with tax avoidance. But no-one bothered to think about the impact on small businesses.

If you're a British small business which is below the VAT threshold, you don't currently have to charge VAT. Suddenly, with VATMOSS, if you trade with Europe everything is vastly more complicated - and you become instantly uncompetitive. Want to sell to Sweden? You suddenly have to add 25% to your prices, and a whole load of extra administrative work. The result: many small businesses either close, or stop trading with Europe.

We need a better way to deal with tax avoidance and evasion, one that won't hurt our small businesses the EU way. It's possible to sort the problem, with a few simple steps:

1. Large corporations (a suitable legal definition of 'large' isn't too difficult) should always pay at least a certain percentage of their turnover in tax. If they've found a way to pay less than that, tough luck: HMRC would simply bill them for the difference. In one single action, the worst aggressive tax avoidance becomes pointless.

2. We need to simplify our tax system. We already have one of the most complex tax systems in the world, and over 500 pages of new tax law are created every year. But the more complicated the system is, the harder it becomes to detect both aggressive avoidance and evasion.

3. The VAT system needs a complete overhaul. Part of the problem is complexity, with this hugely bureaucratic tax. The problem is that it's paid and reclaimed at every stage from manufacture to wholesale to retail. Businesses have unnecessary work, and if the process breaks down anywhere then the country loses out. Personally I'd like to go further and replace VAT with a simpler tax on sales, chopping out swathes of paperwork.

4. We need to make sure that we prosecute when the law has been broken. Now, we have an independent judicial system in this country so politicians should never comment upon individual cases. But it is the role of government to ensure that HMRC and the criminal justice system have the resources and guidelines needed to take a zero-tolerance approach to tax evasion.

Dealing with the current problem is not rocket science, but it needs the political will to be there to take action. Fortunately one Party has that political will: Ukip. Each of the points above were raised by Ukip long before the current scandal. Why? Because it's the right thing to do, and it didn't just start when the media spotlight fell on this issue.