Has The Rhetoric Between Tax Relief And Tax Avoidance Gone Too Far?

The distinction between tax avoidance and tax evasion is becoming increasingly blurred, raising the risk of penalties for perfectly legal activities. Although tightening regulations on tax avoidance might seem attractive, there is a danger that such measures could swing too far and undermine essential tax reliefs that protect individuals and business owners.

Labour has already pledged to review business tax reliefs. However, it is essential that this review does not result in the removal of policies that incentivise entrepreneurship and ensure businesses can continue for future generations.

What’s the difference between tax evasion and tax avoidance?

Currently, taxpayers can generally be classified into three categories: compliance, avoidance, or evasion. ‘Compliance’ involves paying taxes as agreed upon with HM Revenue & Customs, while ‘evasion’ refers to the intentional non-payment or fraudulent underpayment of taxes.

Tax ‘avoidance’ is entirely legal, but it is often discouraged, and is largely guided by a sense of ‘what is right’. But who determines what is right? The law should be the ultimate guide on this matter.

The concept of tax avoidance arises when either it is either criticised in the court of public opinion, or if the country’s leadership deem it to be unacceptable in some way.

A surprising example of ‘tax avoidance’

Pensions are a good example of tax avoidance. Most people wouldn’t choose to tie up their money until their mid-fifties if it weren’t for the tax benefits that come with pension contributions; these contributions not only offer immediate income tax relief, but also give tax relief from income tax on investment returns, capital gains tax, and inheritance tax.

Therefore, in essence, those who contribute to pensions are engaging in a form of tax avoidance. However, pensions are viewed as a smart financial decision and have been actively encouraged by the government for many years (although some sceptics would argue this encouragement is self-serving, as it reduces the likelihood of individuals needing state support later in retirement).

So, at what point does the usage of a perfectly legitimate tax relief morph into something that the government suddenly declares as ‘unacceptable tax avoidance’?

It seems the main influencing factors are public opinion, or the personal preference of those in power, thereby introducing a degree of subjectivity that can obscure the law’s intent.

Undoubtedly, the tax system has been broken for a long time, well before the new Labour government took office. However, the current concern is that the desire to crackdown on ‘tax avoidance’ could go too far, and potential changes to tackle it could be ill-thought out, which could lead to serious unintended consequences.

It is hoped that the new government will take a sensible approach to tax reliefs and does not overemphasise the tax-avoidance rhetoric. Speculation is already circulating about certain inheritance tax (IHT) reliefs being reformed, or even scrapped. While some question why business owners are entitled to pass on their wealth (potentially without paying any IHT), while others face a 40% tax, there are sound economic reasons for this relief. It enables businesses to continue operating without the risk of having to liquidate to cover IHT liabilities.

The same logic applies to reliefs for agricultural holdings. While removing these reliefs might boost IHT revenue for the government in the short term, arguably it loses out on a lot more revenue overall; for example, if businesses are forced to close, taxpaying employees may suddenly require state assistance (due to their job loss) and will stop paying income tax.

Equally, a business that is forced to close will no longer contribute to corporation tax or VAT receipts. Nor does it stimulate the economy through consumer spending.

The government must carefully consider these factors before making any changes to tax reliefs, ensuring that the broader economic impact is fully understood.

Is business asset disposal relief under threat?

Business asset disposal relief can reduce a business owner’s capital gains tax rate from the standard 20%, down to 10% when they sell their business. While some view this as ‘another tax break for the wealthy’, and therefore could also come under threat, this relief is important to encourage entrepreneurship.

Launching, operating and growing a business comes with commercial and financial risk. To help mitigate these risks and encourage entrepreneurship, it’s crucial to maintain tax incentives at every stage of the business lifecycle. After all, successful business owners don’t just generate money for themselves, they also create jobs and make a wider economic contribution.

The wider impact

Rather than reducing, or eliminating certain tax reliefs, there might even be an argument for the government to expand on some of them. While many different types of businesses benefit from IHT exemptions, others, like those involved in owning and letting property, have been overlooked.

Some of these property businesses often represent full-time jobs for the owners, yet they do not qualify for IHT or other reliefs. In fact, they suffer more penal taxes than most other businesses. As a result, without, for example, IHT relief, beneficiaries of such businesses may be forced to sell properties just to pay the tax bill, potentially putting tenants at risk of eviction.

What happens next?

Hopefully, as the new government reviews tax policies, it will take a sensible and balanced approach to tax reliefs and not overemphasise the tax-avoidance rhetoric. Short-sighted decisions may increase tax receipts in the short term, but at a significant longer-term cost. Such decisions could harm the country’s financial health as well as its cultural and economic vibrancy.

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