Why does the word "tax" mean people abandon all logic and sense?

[king_pellinor]

From the BBC today:

"Among the ploys used by the very rich to cut their income tax bills to nothing, are giving all their money to charity, or offsetting business losses, or the interest on some types of loans, against their taxable incomes."

Hold on: you can cut your tax bill to nothing by:

- Passing the money on to good causes rather than keeping it; or
- Losing money in business, so you've not actually made a profit at all.

Er, how is this abusive, exactly?

Surely the abuse is where someone rich, who you'd expect would get to keep £48 out of every £100 he earns, actually keeps £90.  If he ends up with nothing in his pocket out of £100 of gross income, then how on earth has he been cheating?

I understand tax (mostly), but I really don't understand public attitudes to it. 

<rant>

It's that Vodafone thing all over again.  Someone has mentioned a big number in connection with you, so if you don't pay tax on it you're a tax avoider - QED.  Regardless of whether that number is anything to do with anything taxable, or indeed exists outside someone's fevered imaginations.

Let's see... my house is probably worth something over £200k, so hey, look, I must owe about £85k in tax and NI this year.  OK that's a tax bill which is well over my actual salary - but £200k is an amount of money so it must be what I owe tax on!  Although... it might be worth £300k, so logically I owe £137k!  But what if someone offered me a million?  Well, I'd sell for that in the unlikely event that anyone did, which must mean I owe tax on a million pounds!  It's a number, therefore it's taxable!

</rant>

Comments

[bunn.livejournal.com]

This post creates a pleasing counterbalance on my friends list....

I spose with the 'give it to good causes' thing, rather than giving the money to the government to be spent in ways that seem good to the government, the rich person giving money to the charity can select the charity to support their own prejudices and preferences.

So, instead of money going to hospitals, schools and prisons, it goes only to support the orphans of itinerant noodle manufacturers. If a lot of people did that, it might adversely affect the hospitals (while making the Noodle Orphans with whom no-longer-rich-Donor likes to spend his time making macaroni art... very cheery).

I'm not sure 'abusive' is the right word even then though.

[king-pellinor.livejournal.com]

Yes, I can see that could in theory be a problem. Unless you're a noodle orphan, of course (are they a big thing in the charity world? They ought to be "noodle" is a pleasing word, and "orphan" is almost onomatopoeic).

Although:
1) You have to give away all your income to avoid losing half (or less) of it; and
2) The Government gets to define who's a suitable charity to give it to.

Which to me sounds like a bit of a special offer from the Government: if you want to be specially generous, then we'll let you choose where the money goes. And I don't really see a problem with that :-)

[philmophlegm.livejournal.com]

The BBC (and, to be fair, other news outlets and commentators) clearly breaking Rule 25:

http://philmophlegm.livejournal.com/223846.html

[kargicq.livejournal.com]

So why was the Chancellor shocked then? Or was he just pretending to be so as a PR exercise?
(as presumably Gordon Brown was re the Laura Spence thing - he can't really have been "shocked" that good predicted A-levels don't guarantee you a place to read medicine at Oxbridge.)
N

[king-pellinor.livejournal.com]

He's pretending, I think.

It's tied in to something from the budget, where he's proposed a cap on tax reliefs of £50k or 25% of your taxable income - so you can't eliminate your tax bill by doing something that would give you a lot of relief. That sounds fair enough, until you realise that this catches entirely unobjectionable things like charitable giving, as well as artificial things like losses and profits being from different sources (where "different things" can be the business and the loan you've taken out to fund it - ie economically the same thing).

By being "shocked" he's building the case for this cap, which will discourage philanthropy and exploit artificial distinctions in tax law (oh, sorry, that's OK if the Treasury does it...).

[wellinghall.livejournal.com]

More discussion here: http://nielsenhayden.com/makinglight/archives/013780.html#013780

[kargicq.livejournal.com]

So, help me understand this because as far as I can see all the coverage has been incredibly unhelpful. As I understand it: previously, if you had £1M income, you would normally have to pay £500k income tax to the treasury, so £500k would be available for schools'n'hospitals. But instead, you could choose to give all your income to charity. This meant the charity got £1M and the treasury got £0. So effectively, if a rich person chooses to donate £500k to his favourite charity, he can force the exchequer to donate £500k as well, meaning that the rest of us have to stump up more for schools'n'hospitals. Something similar happens when I give a tenner to my favourite charity, because I sign the gift aid box and thereby force the exchequer to donate an additional £2.80. Did I get all that right?
If so, then I really don't understand the debate around this. Why would the change put rich people off donating to charity? Let's say for simplicity Osborne had abolished the tax breaks entirely. Then the rich man would have to give £500k to the treasury whatever he did, but he would still be free to give his £500k to charity. Nothing's changed for rich guy - he had 0 income before and he still has 0 income now. The only change is for the charity. So I can understand why the charities are upset, but they're not saying "We will have less money if the government ends its matched-donation scheme", which is undeniably true, they are saying "This will put rich people off donating", and I can't see why that would be true. I would still give my tenner even if there weren't gift aid.
And I can see why in a really tough economic time, the Chancellor feels he needs to be the one making the decisions on how to spend that £500k - maybe he wants to spend it on early-years intervention for poor children, rather letting a rich guy force him into donating it to a donkey sanctuary or something.

But maybe I have got the facts all wrong? Hoping you can clear it up for me.

Neuromancer

[king-pellinor.livejournal.com]

There are a couple of things all wrapped up together.

One is that people don't just donate money, but tax always works in cash terms. One client I have is looking at donating some of his property portfolio,: at the moment he can just give the houses to charities, but under the new rules he'd also need to fund a cash tax bill too - taxable income isn't always liquid cash, of course.

It's a larger cousin of another charity problem I've just come across, where the widow of an artist has heard from the Tate, who've said they'd like to have one of her husband's works but have no budget to buy one so would she consider donating one? Yes she would, but as she owns a gallery and sells paintings she'd have to charge VAT on the gift. Oh, and as the cost of the painting to her is only that of the canvas and paints, the net impact is that if she gives the nation a painting worth £20,000 she has to pay £4,000 for the privilege.

My property owner is in the same position: under the new rules, he'd effectively have to pay a fee to be philanthropic. That's not exactly encouraging of such behaviour.

Another aspect is that these are well-established and legal reliefs, which are there to encourage people to donate to charity. We're now finding that if you donate large sums to charity you're actually a bad guy not a philanthropist. People donate because they think it's a good thing to do and it makes them feel good; but if they're now told it's not, and they'll be frowned on for doing it. That's rather a big disincentive too.

And a third aspect is how you view tax. The government's view, and the one in your post, is that the Treasury is entitled to tax on your gross income before you do anything with it. So if you earn a million, half that is the Treasury's and the rest you can dispose of yourself. But the other way to look at it is that the tax is on the net amount you keep: so if you want to have the use of all the income, then you need to pay half of what you keep in tax. If on the other hand you divert part or all away to good causes, then you haven't had that the benefit of that income so shouldn't be taxed on it. That is the way tax law regards it (although that has been heavily eroded by Governments who like building inefficiencies into the system as that generates receipts), and follows my understanding of the legal position (a deed of covenant basically earmarks your income as someone else's, for example).

So in my view it's a bit off to say you're donating £500k and forcing the Treasury to donate another £500k of "taxpayers' money" - which is of course the money that you earnt, and wouldn't be in the Treasury's hands if you hadn't. What you're doing is bypassing the Treasury altogether. I can understand why they don't like that, but then it's not really their business in my view (though it is a complex area, and one can analyse it in a number of ways).

Now I can see that the Government might want to redefine the situation, and say that actually tax is levied on gross income which is then relieved if the Treasury feels like it (and the relief for business losses is a whole other can of worms here). That would be in line with a lot of deeming provisions (eg parents deemed to earn their children's income) and so on. But I think that they should acknowledge that it's a change, and I'm absolutely sure that it's unfair to castigate people for being nice - especially if you specifically encouraged them to do it.

[king-pellinor.livejournal.com]

One other thing. Take this question (of who has the primary rights to income) to a logical conclusion: say that there's no Gift Aid or other charity relief and, philanthropically, you decide to volunteer to work for a charity - full-time job, no pay. Should the Government then say "Well, you could have earnt £40,000pa if you'd taken a paying job, so you'd have paid tax of £10,000. By not charging for your time, you've avoided that tax. £10,000 in 30 days' time please, or we'll send the boys round. Oh, and a quick fine for the charity for breaching Minimum Wage rules, and let's have a think about PAYE compliance..."

That sounds reasonable on one level, because it takes you to the same situation as you'd be in if you took a full-time job earning £40,000 and then donated all your earnings to the charity. But is that really a good situation to aim for? Essentially, the Treasury would be charging you (or the charity, if they operated PAYE on the notional salary) £10,000 for your voluntary labour. It pretty much boils down to saying that your primary obligation when choosing how to spend your time is to pay tax, and choosing to take no pay is therefore avoiding that obligation - this is starting to head down some rather unpleasant roads.

Mind you, I note that it's a very close parallel to the VAT situation my artists' widow is in, so maybe it is the situation we're aiming for :-(

[kargicq.livejournal.com]

Um, maybe I'm being too literal here, but I'm not seeing how the reduction of tax relief takes us down that particular road at all. We're talking about actual income; nothing hypothetical about that.

Re the houses / artist's widow: boggle, I got lost there. How can giving something away *increase* your tax liability? Since the gift has a value as a donation, then I can see how under the old rules it could have reduced your tax bill, and now it won't. But why would giving something away cause you to pay *more* tax than you would if you kept it? That seems to be a completely different rule from the one we were discussing and I'm not seeing the link. (Can you tell I am not a tax accountant? Brain circuitry is seeming simple in comparison:-)

Re whether tax is payable on gross or net income, I need to check something first. Is tax relief on charitable donations the same for everyone, i.e. you reduce your gross income by the amount you gave to charity, and it's just that if you were rich enough to give ALL your income to charity (and live off your capital) then you pay no tax? Or are there special tax breaks which only kick in if you give all your income to charity?

Either way, when you say "how you view tax", well, tax is defined and imposed by the government. So it's really how they view it that counts. If you're right and they view it as "the Treasury is entitled to tax on your gross income before you do anything with it" [but have chosen to waive that entitlement in some circs], then that's the situation. You might think it's a bad situation which sets up false incentives, but that doesn't change what tax is; it's not like it corresponds to any external physical reality. It's like legal or statutory rights - they are what the government says they are. Of course in the "rights" field, you also have the philosophical concept of "human rights" which AIUI are taken to have some kind of external reality independent of how any particular government defines them, but I'm not aware of a similar concept re tax. In a civilised society, we need tax to keep things functioning, and the govt defines what tax is payable on, whether that's hot pasties or gross income. No?

Where I think we do agree is on the attacking the philanthropists. Everyone seems to agree that this Chancellor is absolutely terrible at PR, even where they agree with his policies. I have no idea why they spun this as "cutting down on shady tax avoidance." This is what has confused me and I think most of the rest of the population, judging by comments on the blogosphere. They've given the impression that these crafty rich folks are doing something terribly clever with tax loopholes that enables them to avoid income tax *and keep the cash*. Whereas in fact they are not keeping any cash; they are selflessly giving it all away and not even keeping the half to which they are entitled by law. So I can completely understand why they are hacked off that Gideon seems to be implying they have their hand in the till and I have no idea why he presented it like that (well, I assume it was the worst kind of playing politics, but it has backfired spectacularly). A sensible justification of this policy would be: "We welcome philanthropy, we are delighted so many of our richest citizens are so generous, but in this time of economic crisis we can sadly no longer continue the donation-matching scheme we've been operating up till now."

God, I've written an essay. And I didn't even read PPE. I do apologise, and blame the gin and tonic.

Neuromancer

[king-pellinor.livejournal.com]

If you don't ever get it, is it your income? That's the question. Say I do some work for a charity that I'd normally charge £1,000 for but actually I waive the fee because, well, they're a charity. I could have billed them £1,000 and they'd quite happily have paid me, so have I earned nothing or have I earned £1,000 that I've then donated to the charity? Does it (and should it) make a difference?

Giving something away increases your tax liability because if you'd sold it there'd have been a tax charge. In the absence of a relief, like the one for charitable giving, you get tax charges. There's no VAT relief for the gift of a picture, so VAT is chargeable. VAT looks at the market value of the picture in this case, but although income tax looks at the value when giving the relief, it also says "well, if it cost you nothing and it's now worth £20,000, then taht's a £20,000

Actually though the Tate should be able to recover the VAT, so in fact it's not so much a tax charge as a requirement to donate £4,000 in cash along with the painting. Which is probably even more absurd than a tax charge.

Tax relief for charitable giving is the same for everyone. If you give £100 to charity, it's as if you hadn't received that money in the first place, ditto a million, ditto a billion. If you give away more than you earn, then you get extra relief that you can't use. If you give in kind instead of cash, same thing - except that the disposal of assets has capital gains, VAT and Stamp Duty consequences too, which is where the extra tax charges come in.

Tax levels are imposed by the government, but they are subject to a lot of restrictions - some statute law, like the Human Rights legislation (UK and European), bits of case law, and some common law. Common law is explicitly *not* what the government says it is, it does have a separate existence and it puts limits on what the government can do. As I understand it, anyway. Common law strongly resists the suggestion that you should be treated as if you've done something that you haven't, and needs some solid statute law to over-ride it.

That's how a lot of anti-avoidance law works at the moment - common law says "what did you really do?", and ignores the details of what you did if they're just there to achieve some unexpected result. But, strangely, HMRC considers that the principles which say "you didn't make an economic loss so you can't have a tax loss" don't seem to work when you try to say "I've not made any economic gain so what exactly are you taxing me on?".

I think as far as the PR goes they've just not thought things through. The mood of the country is against tax avoiders, which is great for HMRC and the Treasury even if no-one's really quite sure quite how people do the avoiding. So they've said they'll cut the chances to avoid tax, but only then have they looked at what that means. They've then found that there are only two main things: people making losses in one business and profits in another, and people making big gifts to charity. The public doesn't really understand the former - and anyway given the state of the economy no-one wants to be seen to be attacking people whose businesses are in trouble - so they've been left with the latter. That's OK, it's attacking people with more money than they know what to do with, no-one will have any sympathy with them... oh, wait.

[kargicq.livejournal.com]

Well, my poor non-accountant brain is boggling here. "If you don't ever get it, is it your income? That's the question." I would have said that has a very clear and unambiguous answer: "No." We all do all sorts of things which under different circumstances we could charge for. Bake a cake for the lab meeting, babysit for friends. If I charged for those, I'd have to pay income tax on the proceedings, and probably satisfy all sorts of other regulations e.g. have my kitchen inspected. I had imagined that since no money was involved, there was no tax liability. Am I wrong?? My life could be about to get a whole lot more complicated...

Re "I've not made any economic gain so what exactly are you taxing me on?": surely the basic principle behind income tax is that you are taxed on your income, irrespective of whether you then give it away. The waiver for charities is a special case - as far as I'm aware, if I decide to give all my income to my friend Bob, I'm still liable for exactly the same amount of tax. And now he's saying he's reducing that waiver, because he needs all the tax he can get to spend on essential things and can't afford to have N million of potential tax being diverted to the Royal Opera House instead. Seems fair enough to me, and I don't think there would have been a problem if he hadn't gone all populist by attacking tax avoiders.

Going back to my original question, is there any rationale for philanthropists saying they will reduce their donations? I really don't understand that. When I give my tenner, it's nice to think that my fave charity is also going to get another £2.80 of my tax instead of the Chancellor choosing how to spend it. But if gift aid was abolished, why would I spit my dummy and say right that's then, I'm never donating a tenner again? TBH, that is a major PR mistake of the philanthropists - it has contributed to the impression that there is somehow an advantage to them personally in these tax breaks.

Neuromancer

[king-pellinor.livejournal.com]

"If you don't ever get it, is it your income? That's the question." I would have said that has a very clear and unambiguous answer: "No."

Exactly! :-D

"...the basic principle behind income tax is that you are taxed on your income, irrespective of whether you then give it away."

Yes, but the question is whether you're giving away post-tax receipts that then get a tax credit (Gift Aid) or pre-tax income that there's then no tax on (other reliefs).

You could give all your income to Bob and end up not paying tax on it, if you structured things properly (in a legal sense, not a tax one). A deed of covenant would do it, I think, though I think they might have changed the rules on that since I last looked because HMRC didn't like it. If I remember correctly the Duke of Westminster case was about that: the Duke decided to pay old retired estate servants a pension (this was before proper state pensions) by giving them a deed of convenant so they got some of his income, rather than paying them out of his post-tax income, and that meant that as he was now no longer entitled to the income in the first place he wasn't taxed on it. The tax followed the legal position.

The rationale for reducing donations is that if you donate in kind then you get stung for tax bills even though you're worse off. The current debate is conflating two points, though: at the moment the relief for gifts in kind is that you get a rebate on other income, so that's just a question of reducing that relief, whereas the cap on Gift Aid is a question of being taxed on income you haven't received.

[kargicq.livejournal.com]

Oh I get you now (a little bit) - re the charitable giving, I was representing it in my mind as "bloke gets income, decides to donate it to charity", whereas you are representing it as "bloke arranges for income to be diverted to charity instead of coming to him". So does this tax relief business only apply to money which has been so arranged that it never enters your bank account in the first place then?

So, the thing about somehow being worse off if you donate. Is it like this: If you have an income of £100k and you donate £100k to charity then you are not liable for any tax. Whereas if you have an income of £100k and you donate a £100k painting to charity, then you still have to pay tax on the the £100k? If so, I can't code that up as being "worse off" especially. Am having a bit of a sympathy-fail for these millionaires...

Neuromancer