Monday, September 20, 2010

No - ISAs are not a form of tax avoidance

Kirsty Wark on BBC's Newsnight has just put it to Vince Cable that:
"at one level, using ISAs is tax avoidance."
She was suggesting that Nick Clegg and Danny Alexander had made a mistake by referring to plans to challenge both tax avoidance and tax evasion. Except that they were deliberate in their choice of words. There was no mistake.

Throughout my 25 year career as a tax adviser I stuck to the old adage that tax avoidance is legal and tax evasion is illegal. When I started to be troubled by the morality of tax avoidance I gave up giving tax advice.

As former British Chancellor of the Exchequer Denis Healey memorably explained:
“The difference between tax avoidance and tax evasion is the thickness of a prison wall”.
This distinction remains true today. But something has changed. As Nick Clegg stressed, the Coalition Government wishes to stamp out (as did the previous administration) tax avoidance that is:
"perfectly legal but morally questionable"
For Kirsty's benefit - and that of anyone else who is confused, let's be clear. It is self evident that investing in in an ISA (Individual Savings Account) is not 'morally questionable' and thus not under attack. As long as all the published conditions for saving through an ISA are met it is simply good tax planning to make use of the facility to save money in a tax-free structure (ISA) specifically intended for this purpose. So perhaps we do need to be able to distinguish acceptable and unacceptable tax avoidance.

In this connection I again refer back to a post on this blog from over two years ago: Distinguishing Tax Evasion, Tax Avoidance and Tax Planning.*

* The distinction was first made by Richard Murphy and I note that he has more recently published a new tax briefing on the subject. Whilst I may not agree with his politics or all of his views, I think on this he may be right.


  1. Hi Mark,

    Of course ISAs are a form of tax avoidance. The user/investor is using a means to avoid a tax by investing in a vehicle that legally avoids incurring tax that might have been due if another investment vehicle had been used.

    To quote Denis Healey is not particularly useful as he erroneously lumped avoidance and evasion in the same bucket with this flippant statement - effectively indicating that both were illegal. How thick are the prison walls for the ISA investor by the way?

    I'm not sure either of the real usefulness of Richard's split between avoidance, evasion, and planning. After all, if I advise someone to put money into an ISA this is surely planning (as well as avoidance)?

    I guess the unfortunate thing is that there is a spectrum with obvious (and moral?) planning at the one end and obvious (immoral and illegal) evasion at the other. The danger too is that what one person sees as moral and 'right' another might not. Is it moral for example for a senior member of say Bank management to earn millions when many employees earn significantly less? The danger then is that we get into a sort of situational morality game - a bit like MPs expenses, where valid claims (ie within the rules) suddenly become classified as immoral?

    I'm not convinced that we as professional accountants and advisers should be determining morality; our role is to advise clients on what is legal (eg in my personal view planning in advance not 'planning' in retrospect) and what is illegal (eg hiding income). If there are grey areas we can only use our best judgement but need to rely on our Government and political representatives (oh dear...) to change the law.


  2. Thanks for this Keith.
    We'll have to agree to disagree.
    The only people who consider investing in ISAs to be a form of tax avoidance are accountants and those who have heard accountants do this.

    It's an analogy used to confuse the issue and to strengthen the argument that it's not possible to distinguish good/bad forms of tax avoidance.

    And yet, looked at objectively, there is almost nothing that links investing in ISAs with the 'morally questionable' contrived schemes to which Nick Clegg, david gauke, George Osborne, Alastair Darling, Steven Timms and even G Brown have referenced in recent years.

    There's an enormous (as you say 'unfortunate') difference between these two extremes and we all know that.

    Everyone decides for themselves how close they will get to the line - that's fine by me (as long as they stay within the law). And this is the other side of the coin.

    There is no precise line between black (evasion) and white (legal avoidance). There is a big grey area and some people are more willing than others to go very dark grey - as long as someone satisfies them that it's only dark grey, not black. That is will take the courts to decide if it's black and that even if it is black, HMRC may not have the resources to pursue it so we can pretend it was only dark grey. And so on.

  3. HiMark

    Yes but.... How many times has last year's tax break become this year's "tax loophole".

    CGT Indexation allowance on losses,
    Rent a room,
    Corporation Tax £10K annual allowance,

    etc etc.

    In my mind evasion is clear cut at the black end of the spectrum. It is not paying the tax that the person knows to be due. It is failing to declare sales/income, it is making up expenses. It is not putting together a complicated and contrived scheme in which each step is legal but overall creates a tax saving HMRC/HM Treasury did not intend.

    However, I see a moral spectrum of tax avoidance starting with whiter than white ISAs and heading to a dark grey area inhabited by EBTs connected to offshore trusts and such like, morally suspect,maybe, contrived, yes, but still legal.

    Each adviser mustjudge where they draw the line. This must be a moral issue and not a question of legality.

    If HMRC don't like something and feel it is being abused then they should block it with clear legislation. If EBTs are being abused then scrap them for everyone earning over £30K.

    If they don't like dividends being paid in lieu of salary, then bring back Investment income surcharge to dividends in excess of say £2K from close companies.

    Don't like income splitting in family businesses, then set the persons tax rate by looking at the total income from the business. I'll stop there just in case HMRC are reading and they get ideas! But my point is that in most cases a simple piece of legislation would prevent further "abuse".

    We simply must not let the politicians blur things and make the avoidance/evasion line grey. It must remain a thick black line so everyone knows when they have or are about to cross it.

  4. It doesn't matter if 1 person evades paying £1 million or 1 million people avoid paying £1 in tax; the net result to the country is the same.

    The only difference is in the first example, the person would be vilified and considered evil.