4.6bn savings on avoidance? Is it possible? - Insider

4.6bn savings on avoidance? Is it possible? - Insider

There are two ways to reduce your taxable amount: (i) tax evasion and (ii) tax avoidance. Tax evasion could be done by lowering your income or by increasing your expenditure through FALSIFYING your accounts. Which is illegal. Tax avoidance is merely exploiting the loophole in the tax law, and it is completely legal to do so. It annoys the government though as they cannot penalise you for the lost in revenue, while they have to spend time covering the never-ending loopholes.

Nick Clegg mentioned that it was possible to cut the budget deficit by cracking down on tax avoidance. Is this true?

"In 2008 the Budge laid out a number of measures which the chancellor claimed would save £1.7bn over three years. In 2009 similar savings, though for different measures, would amount to £1.1bn over threes year and the Budget this year said measures against avoidance would save £1.6bn, once again over three years.

That's a total of £4.5bn. Not far from the number the Liberal Democrats estimate they can save. But the savings come over a period from 2008 to 2013 - five years."

If tax avoidance was so easy to crackdown, why hasn't the UK government done so? If the lib democrats were able to crackdown on tax avoidance, the Labour party would be able to do so as well. Not to forget, there are tax consultants who know more about the tax law than the government itself. Tax avoidance cannot be eliminated as loopholes would continue to persist in the system. Consider this example.

UK income tax rate: 40% (50% for high income earners)

UK dividend tax rate: 32.5%

If I set up a company I could pay myself in the form of: (i) salary or (ii) dividends. Just by knowing the tax law, I will pay myself FULLY in dividends and save 7.5% in tax. What I did is known as "tax avoidance", the very thing Nick Clegg wanted to eliminate. So what can he do? Setting the dividend tax rate to 40%? I'm sure this would be an unpopular move as some individuals survive on dividends alone. Not to forget that dividends are only received once a year (twice or more if the company pays interim dividends), which leads to lower disposable income for the 'poor' individuals. Second solution: enact a law to prohibit managers from receiving dividends instead of salary. I'm sure that most directors in the company are major shareholders for the company itself.

The conclusion is: it is very hard. End of post.

P.S. Courtesy to Mel as well for urging me to write this.