The last week has seen yet another big row over taxes. The Panama Papers leak has revealed a variety of people from around the world taking advantage of tax free jurisdictions to, possibly, hide money and avoid paying tax. This has included our own prime minister.

The City of London is the world’s premier banking and investment centre and creates a huge amount of wealth for this nation. However, most people would want Britain to make money on honest toil rather than facilitating criminal activity. So why does The City use tax havens?

The City raises money for large numbers of businesses that employ millions of people across the UK. It does so by selling shares in these business, the proceeds of which pay for factories and investment. But as an investor, selecting shares to buy is complicated so most people will buy shares through some form of collective investment scheme. It is these collective schemes that are the tax free element.

When a business raises money on the London Stock Exchange, the returns it gets on building its business are subject to corporation tax and all staff pay income tax. The product may also be liable to VAT as well, so a lot of tax is generated. Direct investors such as you or I will pay tax on any profits we make as a result of our investment. However, any investor in a collective investment scheme, such as a unit or investment trust or any other type of fund, would naturally be annoyed if they had to pay extra tax on the internal profits made by the fund. So fund managers (who charge a small fee to run the funds, on which they pay tax) will create an investment vehicle that is tax free. By doing this, it allows end users to pay tax at whatever rate they are charged, be it in the UK or abroad. The tax free status of the fund allows the widest variety of investors, and so the greatest opportunity to raise funds to invest in, amongst other things, British businesses.

This is not an area for the super rich. It is almost a certainty that everyone who has a pension, or ISA, or other investment scheme will be benefiting from this type of arrangement. It seems this particular part of the story has lost sight of basics of investment for the masses.