The Mug Effect

A story.

I have a friend. No, a real friend. I’ve known him forever and he’s the most risk averse person I’ve ever met. He was risk averse at University. And his job now? Think of the job that would be suited to the most constitutionally risk averse person in the world. No, more risk averse than that. That’s what he does.

He lives in an estate. No, the kind where houses are especially expensive. And several years ago he called me up because he was buying what us Labour Party voters these days call a mansion. And he wanted to know whether he should accept his solicitors’ suggestion to use a stamp duty avoidance scheme.

No need to discuss the technical details of how these schemes operate. But promoter develops ‘idea’; punts idea to public through a range of intermediaries. Charges punters 30% of stamp duty land tax saving – to be paid upfront, naturally – with a money back guarantee if the scheme doesn’t work. Punter pays the 30%. HMRC challenges the scheme. Scheme fails. Punter pays the 100% stamp duty he should have paid in the first place. Asks promoter for his 30% money back. Promoter (who has spent all the money in the meantime) winds company up. And punter asks himself (because the data shows that tax avoidance is typically carried out by men, even allowing for the effects of gendered wealth distribution) ‘why did I ever do that?’

That’s a question to keep punters awake at night. Because even though they might forgive themselves for not understanding the technical bits of the planning, they tend to find it more difficult to work out how they came to ignore something full square within their expertise: the credit risk they were taking on an unknown counterparty (the promoter).

Interesting side note: I think I am right in saying that no residential stamp duty land tax scheme has ever been held to work.

Of course, I told my friend “no”. I would never do one – those with specialist tax knowledge tend to have rather simple tax affairs – and with his risk profile he certainly shouldn’t. And so he didn’t.

What’s interesting about that story is not that he contemplated it – a fact interesting only to me, who knows him – but why he contemplated it.

In his estate, everyone was doing it. The neighbours to the right of him bought their house with a scheme, as did those to the left, as did everyone in the town. It was being sold by estate agents as part of the service. So that even those heavily inclined against such behaviour (such as my friend) were eventually left wondering, well, ‘perhaps these things really are ok?’ or ‘who’s the mug here?’

Those really in the know will probably know the town I’m talking about. But you don’t need to know the town. If you read the lists of members of partners of tax avoidance schemes – very often done through a vehicle called a Limited Liability Partnership – and the lists can be downloaded from Companies House, you’ll see the same effect. Let’s call it the Mug effect. You’ll see mouthfuls of dentists, or the whole squad of a particular football team, or staff of a particular bank.

I thought of this yesterday when I read that Swiss Bank accounts had become popular in the 1980s such that ‘probably anyone who was a member of a golf club then had a bank account in Switzerland’. In a different sphere (evasion) to the stamp duty sphere (avoidance) discussed above, the Mug effect remains a powerful force.

Now I’ve written elsewhere about the balance that HMRC seek to strike in tackling tax evasion.

On the one hand, there’s the pragmatic desire to maximise the cash you get in. You want people to come forward and ‘fess up. And if you send the signal you’ll bash them if they do, they won’t. I’ve also written about how the evidence is that this policy has failed to deliver.

On the other hand, you know that those who are wealthy and powerful are subject to the same rule of law as the rest of us. Or should be – that’s what Magna Carta says. And you know that society demands they be held accountable for any criminality. There’s also the more prosaic concern that, if you allow people to believe there will be another amnesty from criminal sanction for tax evaders around the corner, they won’t see the point of coming forward for this one: you’ll make it more difficult to achieve your pragmatic desire to maximise the cash.

But there’s also this isn’t there? You need constantly to be reminding people that evasion isn’t ok. Lest the Mug effect take hold. And the best way to accomplish that is a constant stream of criminal prosecutions for evasion. And we haven’t been having them – not amongst wealthy evaders anyway.

Now, to bring those prosecutions, you need to know where in the tax system the Mug effect is taking hold. And according to an excellent report by the National Audit Office, HMRC doesn’t. And nor does anyone else. But that’s a blog for another day.

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