Thursday, April 28, 2005

Court tax ruling is 'black day for small businesses'

The trouble with progressive income taxes is that - in order to verify accuracy - the State needs to intrude far into our lives. This case is a typical example. This couple have done what any sensible person would do. They so arranged their affairs, on professional advice, as to minimise their taxes. The Revenue took the view (presumably based on Furniss v. Dawson) that the arrangements were artificial and should be ignored. A judge has agreed with the Revenue. So they have been taxed on a less favourable basis.

To form this conclusion (right or wrong) requires knowledge of the arrangements in a private household. In less regulated countries, family members would naturally pitch in to work on the family business. For them to do so in Britain now, they must keep detailed records of what they do to justify any share they may receive of the business's profits (or as they might see it, the family income).

A flat tax would avoid some of this. No allowances to be juggled with. Just x% of income. So no need to spread the income so as to use the allowances. But even a flat tax would leave the question of whether a family member really worked in the business or not - and how much work they did. A more small "l" liberal society than ours (I have to keep saying that, not just to avoid confusing US readers who think "liberal" means "left-wing" but to avoid confusing UK readers who know perfectly well what a bunch of interfering Statists the Liberal Democrats are) would find a solution. Perhaps any family member not paying tax on income from elsewhere could be assumed to be working for the family business?

Labour hates big business. There are days when libertarians and conservatives worry about it too. The irredeemably boring British high street is no advertisement for it; nor is Microsoft. But surely everyone should love the "Mom and Pop" businesses which provide a service which is almost always better for being personal?

One wonders at the use of State resources to pursue these apparently productive and law-abiding people.

Telegraph | Money | Court tax ruling is 'black day for small businesses'


Bishop Hill said...

This looks like a completely arbitrary change to me - how can we be expected to run a business when the interpretation of tax law is going to change unpredictably.

Tom Paine said...

In fairness, I don't think it's arbitrary. The case law has said for many years that the Inland Revenue can "look through" artificial arrangements and levy taxes as if they were not there.

There are always marginal cases, and this has not been done by our anti-business government but by a judge with (one hopes) no ideological axe to grind.

My point was more general - i.e. do we want to live in a society where complicated tax laws necessitate this level of intrusion?