The Sunday Telegraph has established Mr Galloway has channelled his substantial media earnings through one service company and set up another such structure just seven weeks ago.
OK, use of a personal services company. Pretty much anyone who has substantial earnings from a variety of sources should be using this sort of structure. But then we get:
In a speech during last year’s election campaign for the Scottish parliament, Mr Galloway said: “We support progressive taxation that means the rich will pay more. We will campaign to close all tax loopholes – this measure alone would bring in an estimated £120?billion in unpaid or avoided tax and eliminate the budget deficit in a flash.”
And we know where those numbers come from: Richard Murphy.
And we also have that lovely report for the TUC that Murphy did.
Tax avoidance is the grey area between tax compliance and tax evasion. In
straightforward terms tax avoidance is trying to get round the law without breaking it.
When tax avoiding, a company seeks to ensure that one of the following happens:
a. Less tax is paid than might be required by a reasonable interpretation of the law
of a country.
b. Tax is paid on profits declared in a country which does not appear to be that in
which they were earned.
c. Tax is paid later than the profits to which it relates were earned.
d. Tax is paid by a person who did not really generate the income that they declare.
For example, income is quite often switched between members of a family to
ensure it is declared by the person with the lowest tax rate even though the
family member in question did not really earn the income in question.
We don\’t know enough about what Galloway has been doing to know whether he\’s been doing any of that. Although that he has set up a new company at the end of one marriage and the beginning of another makes one ponder that perhaps he has been income switching between the two wives (or perhaps was with wife one in company one and is going to in company two with wife two).
And as the Great Man tells us this is tax avoidance. And as Ken delayed recognition of income as his income by parking it in his company, this again is tax avoidance by the standards of the Great Man.
How is tax avoided?
The ways in which tax is avoided differ slightly for companies and individuals. They
do, however, have many techniques in common. They seek to secure reduced tax
1. changing the identity of the person undertaking a transaction
4. delaying recognition of a transaction
Examples of each, in turn, include the following:
1. putting a transaction that an individual might undertake into the name of
their partner or children or alternatively into a company or trust, or in the case of
a company choosing to create a separate subsidiary that enjoys a tax advantage
in a group of companies
3. paying the income of a director of a company as a share dividend rather than as
a salary so that National Insurance is not paid
4. using accounting rules to ensure that tax is delayed to a later set of accounts
As the Great Man says, these are examples of what the Great Man thinks are tax avoidance. And these are the very things that the use of a personal services company allows: indeed, these are the reasons to use a personal services company. The limited liability one gains from a company means very little to those earning from broadcasting: if you\’re going to get sued for libel you\’ll get sued as an individual anyway.
What is the cost of individual tax avoidance?
This figure is best estimated by considering the main techniques that individuals use
to avoid tax. These are as follows.
1. Income is reallocated to a person or entity that has a lower tax rate than the
individual whose activity really generates the income. The people or entities to
whom the income is diverted might be:
a. other members of a person’s family e.g. a spouse or child
c. a company owned by the individual but taxed at lower rates than those they
might enjoy personally
3. Changing the nature of a transaction so that it appears to be something different
from what it actually is. This is commonplace, the most popular tactics being to:
b. convert earned income into unearned income such as dividends to avoid
National Insurance charges that only apply to earned income
Income shifting happens in two ways. Either income is shifted from the person who
really generates it to someone else (that might be, for example, a member of their
family or a company they own) who will pay a lower rate of tax on it than they
would if they declared it on their tax return. Alternatively, income is shifted to try to
change employment income into investment income.
The other significant way in which a transaction’s nature is changed is to recategorise
it as investment income rather than as earnings from employment. The motive for
this is simple: investment income is not subject to National Insurance charges and
earnings from employment are. For those in employment this recategorisation is almost
impossible but for those who own their own businesses the process is relatively simple.
All they need do is not pay themselves a salary out of the companies they own in
exchange for the labour that they supply to it. The company is then recorded as making
a higher profit as a consequence and the dividends that they can then pay themselves
as shareholders out of that profit are considered investment income and not earnings
from employment. The result is that National Insurance charges are avoided.
However, it is thought that there are at least 200,00019 (and maybe many
more) companies now registered in the UK that are owned and managed by the one
person who also generates all the income of the company who then substantially
rewards themselves by way of payment of a dividend to avoid the payment of National
Insurance Contributions that would arise. Assuming each of these persons has above
average income, because if they do not there is little or no incentive to incorporate
a company (it being easier to be self employed), the likely distribution from each
company might be as high as £50,000 a year, or £10 billion, a sum within the plausible
range. If this whole sum had been subject to the employer’s and employee’s National
Insurance Contributions avoided in each company, the figure lost probably exceeds
£9,000 per annum, or a total of £1.8 billion.
It is extremely hard for anyone to argue in favour of criminal behaviour, such as tax
evasion, but the measures dealt with here relate to legal, but ethically unacceptable
activities and debate is, therefore, inevitable.
Well, there we have it. In the words of the Great Man himself and approved and published by the TUC. This is all legal but unethical tax avoidance.
I do hope they\’ll stand up and say so, eh?
Now as is well known I take a very different view. The way the politicos piss the money away it is our duty, so far as it is possible within the law, to deny them our money. So I\’m just fine with Ken and George setting themselves up in this manner.
However, those who would condemn me if I were to do such a thing* because I\’m a baby eating rightie neoliberal should at least have the good grace to condemn such behaviour in those they might otherwise politically support.
Otherwise we might begin to suspect them of hypocrisy, mightn\’t we, and that would never do.
*For clarity\’s sake, there are two business organisations in the UK of which I am an owner/director/partner whatever. One is an LLP which was set up in a burst of enthusiasm for a project which then never happened and it has thus never traded. I\’ll get round to closing it down someday. The other is a company which has also never traded. That exists purely and entirely to produce a legal personality in order to register certain chemical combinations under the REACH directive. Neither have ever had a penny flow through them, indeed they don\’t even have bank accounts let alone any trade and therefore quite clearly have not provided me with any income.