Allan Massie: The logical argument for paying cash in hand

Published on 25/07/2012 04:11

A lecture on fiscal morality from the MP who billed us for his vacuum cleaner is unlikely to solve any tax evasion issues, writes Allan Massie

The speech which David Gauke, the Exchequer Secretary to the Treasury, gave to the Policy Exchange think tank was quite measured. It was all about tax avoidance, and much that he said was unexceptional. There are dodgy accountancy firms – “niche outfits”, he calls them – which “peddle crude schemes”, to enable their clients to “avoid liabilities”; and HMRC is looking at these and will come down hard on any that are found to bend or transgress the rules.

Fair enough, you may say, even though the courts established long ago that tax avoidance is legal, unlike tax evasion, and that nobody is obliged to arrange his affairs for the benefit of the taxman. The problem is of course that the line between avoidance and evasion is blurred and shifting. Mr Gauke must know this very well. According to the blogger Guido Fawkes the minister’s wife is “a professional support lawyer for Lexis Nexis, a company which boasts of its ability to support every tax practitioner in the front line as they deal with the tax collector.”

There is no suggestion that Mrs Gauke is engaged in anything questionable, though if Lexis Nexis is ready “to support every tax practitioner”, one may wonder whether this includes the giving of assistance to any of those “niche outfits” her husband condemned.

Then again Mr Gauke used the words “morally repugnant” to describe attempts to get the better of the tax authorities. Others, including Guido Fawkes, have been quick to say “tu quoque”; they recall that the leaking of MPs’ expenses disclosed that Mr Gauke had successfully claimed £10,248 in stamp duty and fees involved in the purchase of his second home. The taxpayer covered the cost, just as he did when Mr Gauke claimed more than £1,400 for a vacuum cleaner, a TV set, and bedding. All perfectly legal of course, but moral? A shade dubious, we may say, even if not (quite) “repugnant”.

Nevertheless, in the present climate of opinion, Mr Gauke’s endorsement of HMRC’s efforts to clamp down on dodgy accountancy firms and their clients, whether companies or rich individuals, probably meets with general approval. Almost everybody feels overtaxed, and almost everybody – certainly most on PAYE – resent those who contrive to reduce their tax liabilities and pay much less than others think they should.

It is however Mr Gauke’s condemnation of the informal cash economy, which exists without accountants and often slips below the taxman’s radar, that has stirred things up more. The sector of the economy where cash is king costs HMRC money in lost revenue. Cash payments are hard to trace and no doubt HMRC would be happy to see none made. That of course is impractical, and Mr Gauke admitted – generously? – that there is nothing wrong in paying cash to your window-cleaner. On the other hand, he said that if a tradesman offers you a discount for cash, and you accept the offer, then you are likely to be complicit in tax avoidance – or, more precisely – evasion. It is of course the tradesman’s responsibility to make his tax return and declare his income, and if he chooses to understate this by not recording cash payments, that is his responsibility, not yours. Nevertheless if he tells you that the job will cost £x if you pay cash and £x+y if you pay by cheque, you have to be fairly green not to realize that the £x you pay him may not appear in his books.

I suspect that most of us aren’t too troubled by this. Indeed we are probably happier about reducing a plumber’s or electrician’s bill in this way than we are about having had to pay indirectly for Mr Gauke’s TV set, vacuum cleaner and bedding. After all, we get some benefit from the tradesman, and none from Mr Gauke. We get the job done and we pay a bit less for it. What’s not to like about that?

One may argue too that the black, grey, or hidden economy has much to be said for it. It generates economic activity, while at the same time leaving us with more money to spend on other goods or services than we would have if the tradesman accounted honestly for every transaction. Of course there are cowboys who rip off customers – but caveat emptor.

An efficient and reliable tradesman, who does his work well and who cuts his price if you pay cash, spreads benefits around. He may even be able to charge customers who prefer to pay by cheque a bit less than would be the case if he didn’t conduct part of his business on a cash basis out of sight of the taxman.

If he accounted diligently for everything, his prices would be higher and – who knows? – he might have fewer jobs and go out of business.

Mr Gauke’s condemnation of this sort of tax dodging looks a bit like a diversionary tactic. He has focussed on an infringement of tax laws, but one in which each individual transaction seems of little importance to many of us.

We are more likely to agree with the Labour MP, Austin Mitchell, a member of the House of Commons Public Accounts Committee, who says Mr Gauke is being “unnecessarily moralistic” and adds: “This is petty stuff, there would have to be large-scale surveillance to stop it. You can’t control people’s morals like this, and it is best not to try. Instead HMRC should focus on large-scale tax avoidance” – even though avoidance is not evasion , and is legal.

The truth surely is that our tax laws are far too complicated and oppressive. They should be much simpler. We should accept that the hidden economy is a good thing, and should revise the law in such a way as to make tax avoidance, requiring the services of expensive accountants, less attractive.

It’s a strange world in which people incur huge bills from accountants in order to reduce the amount of tax they pay. The more we dwell on tax avoidance, the more attractive the case for a flat rate of income tax appears.

That might put a few accountants out of business, but maybe we can spare them more easily than we can plumbers, electricians and joiners.