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Money Programme

Get the facts behind the big business and finance stories from around the world – and down your street, in The Money Programme.

HM Revenue and Customs (the new name for the Inland Revenue) has been levying income tax for more than 200 years and knows a thing or two about it!

It’s more or less true that tax avoidance is for the rich. It costs money to arrange your affairs to reduce taxation, so tax avoidance is only interesting in regimes where income tax is steeply progressive and you earn enough to be paying tax at the highest rates. This is one reason for the popularity of so-called flat tax rates in Central Europe – high earners have little incentive to avoid tax when it’s not progressive.

If your income comes from employment, there is very little scope for avoidance. HM Revenue has it pretty well pinned down. Even if your employer might be prepared to go along with a complex scheme, they might find themselves having to pay your tax themselves, and this discourages them!

However, some avoidance is available because the government encourages it. One of the simplest ways of reducing the tax burden is through paying extra into a pension scheme. You reduce your tax (within limits), but also lose access to the money paid into the pension scheme until you retire, so you need enough income for this not to be a problem. Another way is to invest in small businesses: government has promoted schemes to encourage this in the past.

Assuming you have income other than from a single full time employment (which rules out most people), you could look for more complex schemes, but then the next obstacle is knowledge. You have to find out about schemes, and this means paying fees to tax advisers, and being confident that they know what they’re talking about.

The nature of tax avoidance is such that an adviser may come up with a complex scheme but you cannot be certain that it is fireproof until it has been tested in court – which is not an experience you would enjoy. How do you know what adviser to talk to? KPMG, one of the world’s biggest networks of accountants, paid $500m in 2005 after selling illegal tax shelters.

As you move up the scale of complexity, avoidance schemes take advantage of the issues of territoriality and legal personality. Although there are bi-lateral tax agreements between many countries, taxation is essentially limited to activities in a particular territory, and subject to national statutes. If you have international transactions, you can try to organise things so that you do not fall into any tax net. This is a particularly interesting issue in electronic trading on the internet: whose territory does the transaction fall in?

"National tax authorities have an armoury of weapons"

However, you need to have either investment capital or income which comes from outside the UK, or you need to be resident in a tax haven such as Jersey. And of course, national tax authorities have an armoury of weapons to try to limit your opportunities. Equally the European Union has started to introduce tax cooperation arrangements between member states that provide for exchanges of information, and for tax to be deducted from investment income at source.

Taxation falls on individuals, but legal personality extends to companies: if you form a company and that company receives income, the company becomes a taxable person separate from you. Personal service companies were very popular in the UK, until HM Revenue started taking an interest. The company receives fees from selling the services of an individual, that individual then receives a salary from the company. The company can retain a proportion of the income and might use it to supply facilities and goods to the individual. The company will also pay a lower rate of corporate income tax than the marginal rate of 50% (40% tax and 10% national insurance) that the individual would pay on extra earnings.

"Can you be certain the Revenue is not going to come knocking on your door?"

There are generally some limited opportunities for tax avoidance (legal diminution of tax as opposed to evasion which is simply illegal) even in a mature tax system like that of the UK. However, even the simplest forms require you to have money available that you do not need right now. The more complex forms mean that you will have to pay potentially substantial fees to advisers, so up to a certain level of income the tax saving will be less than the professional expenses. Finally there is always the question of knowledge and uncertainty. Finding out about schemes could have a high initial cost, and then can you be certain the Revenue is not going to come knocking on your door years later?

Further reading

• Tax shelters – nobody likes paying tax – but how far would you go to avoid it?

About the author

Professor Peter Walton is a member of the Accounting & Finance Unit at the Open University Business School. His research interests are in comparative international accounting and financial reporting in an international context.

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Blogging about

Money Programme

Get the facts behind the big business and finance stories from around the world – and down your street, in The Money Programme.

Pregnant? You’re fired! touches on a sore point for many women – the trade off between having money and having children.

Not only may getting pregnant lose you your job immediately; leaving work to have one or more babies costs – and costs a lot. It’s not just the obvious things like nappies, child care, or even school or university fees. It’s the opportunity cost of not working and the consequences that has for your pension – the income you would have got if you hadn’t taken on a maternal or caring role.

"One in two women over retirement age are not entitled to the full state pension"

An Open University course starting in 2006, called You and Your Money, has a whole chapter devoted to ‘Sharing and caring’ and highlights the costs of having a family in fairly stark terms. Recent research has identified a longer term problem, though. One in two women over retirement age are not entitled to the full state pension – compared with only one in ten men - because they devoted themselves to caring and not to earning money. The poorest pensioners in the UK are women over the age of 80.

And younger women are building up a problem for the future. In 2003, 29% of all single women had no savings at all and nearly two thirds of single parent households (the vast majority women) were in the same position (according to the Department for Work and Pensions).

But it’s not all doom and gloom. Times are changing and more and more women work. Girls do better now at school and at university, and end up with higher skills and so higher pay. Higher income leads to higher savings and greater wealth. In the US, in 2004, women represented over 40% of all individuals with over $500,000 in assets. In the UK it is predicted that women will own 60% of the nation’s wealth by 2025. Part of this change can be explained by the growing rates of women’s employment, of education and of participation in the higher paid professions. But another key factor is women’s greater longevity - living longer than men means they are likely to do better in terms of inheritance.

What will women do with this increasing wealth? Will they save more or less than men? Are they more risk averse than men? Popular opinion says that women have more of a ‘nesting instinct’ and are prepared to take less risks in investing than men. This has potential consequences for retirement. Lower risk assets earn lower returns – on average. After 20 years, say, a retirement fund invested in a building society account will have much less than if it had been invested in company shares. A smaller retirement fund means a smaller pension.

So far, little research has been done in this area except in the US where women do seem to invest in less risky assets than men and single women more so than married women. But recent research on women and money in the UK in the nineteenth and early twentieth centuries has come up with a slightly different picture. There is evidence that if women do have money, they like to speculate with it. Wealthy women from the North and South of England speculated in the shares of the South Sea Company in the 1720s, some of them making tidy sums in the process. Wealthy female clients of Barings Bank in the 1820s and 1830s speculated in Spanish and Chilean bonds. In the early 20th century, women aristocrats – the celebrities of their day - were criticised for setting a bad example to the masses as they gambled with their housekeeping money.

There is also evidence that middle class women knew more about investment than they do today. In the nineteenth century, women only worked if they had to and many ‘genteel women’ lived in salubrious places such as Bath or Leamington Spa and relied on their investment earnings. For these women – and there were a lot of so-called ‘surplus women’ with a very small chance of getting married – the returns they got on investment were crucial. Advice was plentiful – from newspapers, magazines, text books and friends and advisers. But the risks were much greater than today. Companies starting up had only a one in three chance of lasting more than five years. And company prospectuses were not regulated, and more economical with the truth than they are today.

"There are still women penalised for choosing to care for others"

Of course, there were also many women who worked but had no savings and no prospect of a decent pension. In principle, today’s women are better off in many ways. They have the option to work and hope to save for their old age. They have had a better education, have better work prospects, and should have access to good advice. But, as this programme shows, there are still women penalised for choosing to care for others. As in the nineteenth century, there are disturbing discrepancies between women who have very little, both in terms of income and savings, and women who are comfortably off.

Further reading

• The price of parenthood – having children brings many changes
• '"The widow, the clergyman and the reckless": women investors in England, 1830 to 1914’ by J Rutterford and J Maltby, in Feminist Economics, vol 12
• ‘The Gender Asset Gap: What Do We Know and Why Does It Matter?’ by C D Deere and C Doss, in Feminist Economics, Special Issue on Women and Wealth 
• 'Why do Women Invest Differently than Men?' by V L Bajtelsmit. and A Bernasek, in Financial Counseling and Planning no. 7
• ‘Who’s Better at playing the Markets Game?’ by N MacEarlen, in The Observer (20 June 04) 

About the author

Janette Rutterford is Professor of Financial Management at the OU Business School, having previously worked in corporate finance and investment. Jannette's research includes pension funds, equity valuation and investment history, in particular the history of women and wealth.

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