My name is Luis Enrique and I’m a Tax Avoider

Guest Post by Luis Enrique.

About 5 years ago I moved out of the flat I half-owned, and sublet it while I attended university in another city. I made sure to sell my share in the flat before a three-year deadline after which I would have been liable for capital gains tax. I did this to avoid paying tax [1]. Feel free to call me a looting scumbag.

Corporations cannot avoid choosing how they classify their sales and costs, how they price internal transactions and so on. It is inevitable that they will make choices that minimise their tax liabilities within the boundaries set by current laws, just like me timing the sale of my flat. It’s crazy to expect otherwise and some would argue anything else would be a dereliction of duty to shareholders.

This, incidentally, is why many tax experts believe that tax allowances to encourage certain activities usually aren’t worthwhile. If, for example, you decide to give a tax break for investment in R&D, corporations are going to classify as much of their costs as possible as investment R&D, with the result that the quantity of foregone tax is usually much greater than estimates of pre-tax-break R&D spending would have led you to expect, and the cost-benefit picture doesn’t look good (‘cost’ being foregone tax, ‘benefit’ being the increase in genuine R&D activity).

However, we all know that tax avoidance can take more extreme forms than merely thinking “hey, I can probably get away with classifying this cost as an R&D investment and claiming a tax rebate on it”, and involve hiring expensive lawyers and accountants to devise clever wheezes to exploit loopholes in the law [2], sometimes making use of tax havens. Clearly there is no hard and fast dividing line between acceptable tax minimization within the law, and activity of this sort [3].

I am perfectly happy with creative lawyer-devised tax-dodging wheezes being regarded with moral opprobrium, and I’d like to see the legal system and tax collectors coming down on it like a ton of bricks when they have a good case the law is being bent out of shape. And obviously we want vigilant legislators shutting down tax law loopholes and tax havens. I’m all for aggressive policing of corporate tax dodging shenanigans – ideally we would have a situation in which corporations look at the cost/benefit of such behaviour and decide not to bother.

What I cannot understand is the popular view, on the left, that all varieties of tax avoidance are the moral equivalent of theft [4]. I do not believe I stole money from the tax payer when I sold my flat before the capital gains liability deadline. I don’t believe companies claiming R&D tax allowance are either.

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[1] Lest I face the fate of Hari, I should say I intended to do that, because some tax advisor told me to, but in the end I did not get round to it and copped for CGT. But I would have done it, and it makes for a better story this way.

[2] I am presuming what companies can get away with is curtailed by an observant tax collector, who will not, for example, let you get away with classify paying a graphic designer to research and develop your new company logo as investment in R&D.

[3] I appeal to the “just because I don’t know where exactly to draw the line, doesn’t mean I don’t ever know which side of it I am on” defense here. If the people who designed the tax law think “no, we didn’t intend for you to be able to do that”, or generally think the letter but not spirit of law is being obeyed, and the letters are being twisted at that, then either the tax claim should be legally challenged or, if necessary, laws tightened up.

[4] Here is a good expression of that sentiment from Sunny Hundal. I’d interpret that as calling for tax loopholes to be closed, tax avoidance is legal by definition.

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5 thoughts on “My name is Luis Enrique and I’m a Tax Avoider

  1. it occurs to me some might be wondering: how could you afford your own flat before going to university. The answer is, by working for a decade first.

  2. @Luis, from old case law, but still good precedent:
    “Every man is entitled if he can to arrange his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be.”
    IRC v Duke of Westminster [ 1936 ]
    Lord Tomlin

  3. Evasion and avoidance are distinct terms in the law with a clear difference in meaning:

    Evasion is deliberately not paying tax which you are obliged to pay (usually abetted by actions like hiding it in Switzerland so the Inland Revenue does not know about it), and is illegal.

    Avoidance is, as you say, arranging your affairs so the tax does not become payable in the first place, and is legal – though its morality is up for debate.

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