A question of Tax

Posted by Charlie on 25 April, 2012

The UK government has recently (and anonymously) investigated the tax returns of a number of wealthy individuals. The Chancellor of the Exchequer, the UK finance minister, is apparently ‘shocked’ that is many of them pay little or no tax. Just how do they do it?

It’s all about the difference between ‘tax avoidance’ and ‘tax evasion’. The first is legal, the second isn’t. There are a number of ways to avoid or reduce paying income tax. You can:

  • give to charity
  • pump money into a scheme to invest in a new business
  • employ your husband or wife and pay them very little
  • show so-called losses on paper, which can be offset against income for tax purposes (aka. “creative accounting”!)

The reason tax avoidance has suddenly become such a ‘hot topic’ is the idea that some rich people give money to charity simply to avoid paying tax. Charities are now scared that branding donors as ‘tax- dodgers’ is unfair to their benefactors. Mind you, it has been observed that there are some so-called charitable organisations that do “very little charity work”.

In the world of tax avoidance, where reputable accountants devote their lives to discovering tax loopholes and creating offshore accounts, it strikes me that the division between tax avoidance and tax evasion is maybe too simplistic. There is a grey area in the middle. Should wealthy individuals really be allowed to pay little or no tax?

Questions you may wish to ask your students:

1) Do you know any charities which do ‘very little charitable work’?

2) What do you think about the various schemes for avoiding paying tax? Can you add any more?

3) Is the tax system in your country fair?

Some websites of interest are:

http://www.worldwide-tax.com/

http://www.bbc.co.uk/news/uk-politics-17664893

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