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Revision as of 09:47, 10 May 2018
This chapter has been fully updated for the 2018/19 edition
Users may contribute to the text. If you see anything that needs correcting or expanding, please click on the edit link and make the corrections. A copy of the next edition of the book will be given to the user who makes the most edits. User contributions are reviewed by Mary Ashley.
- 1 Tax avoidance: Introduction
- 2 Need for analysis
- 3 Tax avoidance and morality
- 4 Tax gap
- 5 The rule of law
- 6 TAAR/unallowable purpose test
- 7 "Tax advantage"
- 8 Retrospective tax legislation
- 9 Naming and shaming
- 10 Avoidance by multinational companies
- 11 Footnotes
Tax avoidance: Introduction
The subject impinges on many aspects of this book, but it is best to consider it as a topic and in a chapter of its own.
The title of this chapter derives from the splendid admonition of David Cameron:
- Of course there is a difference between tax evasion and tax avoidance. Evasion is illegal. It can and should be subject to the full force of the criminal law.
- But what about tax avoidance? Now of course there's nothing wrong with sensible tax planning and there are some things that governments want people to do that reduce tax bills, such as investing in a pension, a start up business or giving money to a charity. But there are some forms of avoidance that have become so aggressive that I think it is right to say these raise ethical issues, and it is time to call for more responsibility and for governments to act accordingly.
- In the UK we've already committed hundreds of millions (?) into this effort, but acting alone has its limits. Clamp down in one country and the travelling caravan of lawyers, accountants and financial gurus will just move on elsewhere. ...
- I believe in low taxes, that is why my government is cutting the top rate of income tax, we've cut corporation tax. [Delete - political].
- Individuals and businesses must pay their fair share. And businesses who think they can carry on dodging that fair share, or that they can keep on selling to the UK and setting up ever more complex tax arrangements abroad to squeeze their tax bills right down, well they need to wake up and smell the coffee, because the public who buy from them have had enough.
All the main tropes of the political debate are in this passage:
(1) Everyone should pay a "fair share" of tax.
(2) Some taxpayers fail to do so due to tax avoidance.
(3) Tax avoidance is unethical, immoral or anti-social.
(4) Acknowledgement of the avoidance/evasion distinction; but it does not contradict point (3). In the words of Margaret Hodge: "We're not accusing you of being illegal, we're accusing you of being immoral."
(5) Disparaging references to tax advisers.
On the political left, the same points are made, but more stridently, and of course without David Cameron's approval of low taxes.
Need for analysis
This chapter draws on a paper published by the Oxford University Centre for Business Taxation, ("the OUCBT paper"). The OUCBT paper says:
- The question is how to tackle the problems. This requires a clear analysis of their cause and differentiation between different causes. Labelling a whole range of quite different behaviours as "avoidance" without further differentiation is unhelpful. ...
Any differentiation requires terminology. As there is no agreed terminology, it is best not to use any terms at all without some explanation of what is meant.
Categorisation of avoidance
If one is to identify the correct response to the problems of avoidance, one must distinguish:
(1) Ineffective avoidance (no tax saving if the law is correctly applied)
(2) Effective avoidance (tax saved by avoidance)
(3) Non-avoidance (little tax paid but not due to avoidance)
These are important distinctions because:
(1) Ineffective avoidance may be countered by enforcement of the law.
(2) Effective avoidance can only be countered by changes in tax law.
(3) In cases of non-avoidance:
- (a) It may be no change in tax law is appropriate.
- (b) If change is needed, the change is one of policy as well as of tax law; and the matter should be considered without the haste and moral outrage that effective avoidance tends to cause.
If one wishes to assess emotional and moral responses to avoidance, and actual or theoretical anti-avoidance rules, we need further vocabulary to discuss the range of tax-motivated behaviour.
We might cover the terrain in four categories:
Uncontroversial tax planning Taking advantage of a tax relief in a manner everyone would accept as reasonable and indeed desirable. As this is at the bottom of the spectrum, it is easy to find clear examples: for instance, pension contributions, and moderate charity giving. This is so even though some care is often needed in order to maximise the relief, for instance, fixing contributions each year to below the cap for the relief, or fixing benefits within the permitted limits for gift aid.
Ordinary tax planning Using tax legislation in a way which some politicians and commentators do not like, but where the planning is ordinary in the sense that many people have done and continue to do it; it is obvious and foreseeable; the points probably came to the mind of those responsible for the legislation, or should have done, or there is no reason to think that parliament would have done anything different if it had considered the points. Ordinary tax planning is not contrary to the "intention of parliament" as that construct is normally understood.
(1) Advancing or delaying
- (a) disposals for CGT purposes or
- (b) bonuses or pension contributions for IT purposes
in anticipation of changes of rates or going non-resident.
(2) Transfer of family assets or business to a spouse to equalise income.
(3) Transfer to a company to reduce tax rates.
(4) Lifetime giving to avoid IHT.
(5) Going non-resident.
The term "tax mitigation" could be used to cover uncontroversial tax planning and ordinary tax planning.
Tax avoidance Something legal but contrary to the intention of parliament in the sense that had parliament thought about it, it would probably prevent the tax advantage. An example is the transfer of assets to a non-resident company where the transferor has power to enjoy.
Other possible examples are:
(1) The scheme in Furniss v Dawson.
(2) Temporary non-residence (if tax-driven).
However one might place these at the upper reaches of the ordinary tax planning spectrum.
Tax abuse Tax avoidance with aggravating features (typically, self-cancelling steps) that make it (more) unreasonable. As this is at the top of the spectrum, it is easy to find clear examples: take the schemes in: Ramsay, Fitzwilliam, Astall and Mayes, UBS.
Thus this terminology raises three distinctions:
(1) Uncontroversial/ordinary tax planning
(2) Tax planning/avoidance
(3) Tax avoidance/abuse
Before considering whether these distinctions have, or should have, different consequences, it is important to note three difficulties which they entail:
(1) Demarcation problems Except at the extreme ends of the spectrum, the demarcation problem is intractable: the classification of specific examples (if it actually had to be decided) would give rise to endless disagreement (and has done so in the context of tax motive defences). There are two reasons for this:
- (a) The distinctions rely on:
- (i) imponderable hypothetical questions (what would parliament have done if it had noticed the issue?)
- (ii) vague constructs ("the intention of parliament" and "the spirit of the legislation")
- (iii) identifying tax policy (there may be no clear policy, or it may fluctuate).
- (b) The four distinct categories attempt to impose an order on tax motivated behaviour which exhibits a scale of unreasonableness, without distinct divisions. It might be better to mark out a sliding scale from 1 to 10, recognising finer distinctions, but that would not help for practical purposes. It is often the case that experience is a continuum on which the law seeks to impose bipolar categories, but the difficulty in doing so here is greater than usual because the distinction is more imponderable.
(2) Tax-law knowledge problems Except for the extreme ends of the spectrum, (a small part of the field) a serious discussion of where any particular arrangement should be classified, or graded, can only be carried out by someone who understands the tax background. Few non-practitioners have much understanding. Journalists in the UK do not arrange for their work to be reviewed by someone who understands tax. Politicians are characterised by grandstanding and soundbites. Pressure groups grind their axes. The details, important to those within the profession, are likely to bore or bewilder most people outside it.
(3) Factual knowledge problems If discussing particular instancies, one needs to know the facts, which are not usually in the public domain.
Significance of distinctions
The distinctions I have drawn are not easy, but they are the best that can be achieved.
The ordinary tax planning/tax avoidance dividing line is established in tax law. It marks the point where:
(1) Tax motive provisions begin to bite.
(2) Extra-statutory concessions cease to apply.
(3) HMRC Manuals cease to bind HMRC.
- The Government agrees with the Report's recommendation to introduce a rule which is targeted at artificial and abusive arrangements (those that the Report refers to as "egregious", "very aggressive" or "highly abusive contrived and artificial"). It accepts the Report's conclusion that introducing a "broad spectrum" general anti-avoidance rule would not be beneficial for the UK tax system. ... the GAAR should not affect what the Report describes as "the centre ground of tax planning".
There has not been much judicial discussion (the issue has not arisen for decision) but a passage in Furniss v Dawson recognises something like a tax avoidance/abuse distinction:
- The scheme [in Furniss] has none of the extravagances of certain tax avoidance schemes which have recently engaged the attention of the courts, where the taxpayer who has been fortunate enough to realise a capital profit has gone out into the street and, with the aid of astute advisers, manufactured out of a string of artificial transactions a supposed loss in order to counteract the profit which he has already made. The scheme before your Lordships is a simple and honest scheme which merely seeks to defer payment of tax until the taxpayer has received into his hands the gain which he has made.
The uncontroversial/ordinary tax planning distinction is not relevant in tax law, but it is relevant to the public debate on morality.
Tax avoidance and morality
Morality and taxation
This is intended to be a practical work. The relationship between morality and law (or tax-morality and tax law) is another book. But attitudes to the (im)morality of tax avoidance do have practical consequences for tax: it affects judicial attitudes and decisions; it was a driver for the enactment of the GAAR and will play an important role in its interpretation.
The topic of the relationship between morality and taxation should be seen as part of a wider discussion of the relationship between morality and law. Without entering into these deep waters, it should generally be accepted that not everything which is immoral should be proscribed by law.
Judicial view in the past
Older cases do uniformly regard tax avoidance as morally neutral. In 1900:
- Bundey J. recognises to the full both the legal and the moral right of every man to dispose of his property if he can in a way which does not expose it to be taxed under the existing system of taxation.
- The fact that a settlement is drawn with a view to avoiding particular charging provisions is neither reprehensible, nor a proper ground for inclination to a conclusion that it ought to come within those or some other charging provisions. ... If any moral criticism could be levelled at them, then the consciences of the judges of the Chancery Division, in the exercise of their discretionary jurisdiction under the Variation of Trusts Act 1958, would be in a sorry state.
Lord Diplock expressed the traditional view in 1964:
- Tax law no more lies within the field of morals than does a crossword puzzle.
Likewise in 1982:
- the fact that the purpose of the scheme was tax avoidance does not carry any implication that it was in any way reprehensible or other than perfectly honest and respectable.
Without attempting a full survey, it appears that similar views were held throughout the common law world. In America in 1947:
- Over and over again courts have said that there is nothing sinister in so arranging one's affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.
In Australia in 1995:
- The obligation to pay [income tax] is a legal one. Some politicians try to treat it as a moral obligation. But it is not. The citizen is bound to pay no more tax than the statute requires him to pay according to the relevant state of his affairs.
- Consistently with this view, it has long been a principle of the law of income taxation that the citizen may so arrange his affairs as to render him less liable to pay tax than would be the case if his affairs were cast in some different form. In the language of the layman, the citizen is entitled to minimise his liability to pay tax. This is sometimes expressed as a right to avoid tax...
The following points can be made in favour of the traditional view, that tax avoidance is morally neutral:
(1) Difficulties of "right amount of tax
The tax system is full of anomalies, artificial, arbitrary, and not based on any consistent principles. One might say there is generally no "right" amount of tax except in the sense of what is due by statute.
(2) Difficulty of applying moral principles
This is perhaps another way of putting point (1): The view that taxation is governed by moral principles distinct from the rules of black letter tax law either:
(a) requires one to enter into the intractable distinction of tax avoidance/abuse; or
(b) spreads the net very wide, far wider than any practitioner is likely to accept (and still requires one to enter into the intractable distinction of uncontroversial/ordinary tax planning).
In practice, public debate does not engage with black letter tax law and it is difficult to envisage that it ever would, or could. Ethics is a practical subject. It only works if the entities called “right” and “wrong” are reasonably distinguishable and of a more or less permanent nature. If standards are so vague, or so difficult to apply in actual cases, that we cannot see how we could act on them, we become sceptical. That suggests that morality has little if any role to play.
(3) The problem of egregious over-taxation
I coin the expression “egregious over-taxation” to refer to situations where HMRC take advantage of anomalies in their favour in a manner which is unfair and contrary to the intention of Parliament (as that expression is understood in a tax avoidance context). It is the opposite of tax avoidance. Three distinct sub-issues arise here:
(a) Does egregious over-taxation arise in practice
(b) Is it proper for HMRC to seek egregious over-taxation
(c) What light does that shed on the issue of tax avoidance morality
Issue (a) is a question of fact, to which the short answer is, yes. Of course the Courts generally try to construe statutes to prevent egregious over-taxation, just as they try to prevent avoidance; but sometimes they do not achieve this. For instance, the unfortunate Mr Lobler fell into the trap of a partial surrender of life policies:
- He made no profit or gain as that term is commonly or commercially understood and yet he becomes liable to pay tax which exhausts his life savings and may bankrupt him. That is an outrageously unfair result....
- This is legislation which does not seek to tax real or commercial gains. Thus it makes no sense to say that the legislation must be construed to apply to transactions by reference to their commercial substance….No overriding principle can be extracted from the legislation....
- Thus with heavy hearts we dismiss the appeal.
There are then four possible moral approaches:
View Tax avoidance Egregious over-taxation 1 Wrong Right 2 Right Wrong 3 Wrong Wrong 4 Right Right
One might perhaps adopt view 1, that tax avoidance is wrong but egregious over-taxation is right, in short, fairness should apply in favour of HMRC but not the taxpayer; but no-one has had the temerity to advocate that.
One might perhaps adopt view 2, that tax avoidance is right, but HMRC should be bound by a further requirement of fairness; but few if any advocate that either.
So if sauce for the goose is sauce for the gander, we are limited to views 3 or 4.
View 3 is possible, but it is not supported by HMRC. Those who support the view that tax should be governed by rules rather than discretion also cannot logically criticise HMRC for seeking egregious over-taxation, where the law requires, though can certainly criticise them for not seeking to change the law promptly after unfairness has been identified (and, if appropriate, publish an ESC to operate in the meantime).
So we fall back on view 4, thus this consideration supports the view that there is nothing wrong in avoidance.
One would wish that HMRC were as concerned about egregious over-taxation as they are about its flipside, avoidance (egregious or otherwise). Of course, egregious over-taxation is different in that it brings in revenue rather than losing it; however, in addition to the unfairness for its victims, it has an intangible cost in that it brings the UK tax system into disrepute. But there it is.
(4) Tax avoidance sometimes leads to fair results
This relates to point (3): There are cases where tax avoidance avoids egregious over-taxation. An example is the use of multiple policies to avoid the tax trap of partial surrender.
Parliament sometimes admits this, by enacting a new relief to allow directly what had previously been achieved by avoidance. Examples are:
(a) Nil rate band discretionary trusts, which allowed transferable nil rate bands before the IHT relief was enacted in 2007.
(b) CGT group relief to obtain loss relief. A company about to realise a gain on an asset would formerly transfer it to a group company that had realised an allowable loss. Alternatively, a company which had realised a gain might acquire from a group company an asset which was to be sold at a loss. That would allow the loss to be set against the gain before the introduction of the election to allocate gains and losses around a group, in 2009.
Offshore trusts mitigate the economically deleterious lock-in effect of CGT by deferring tax until gains are received.
Tax avoidance (if it be such) sometimes permits a business to continue which would otherwise be destroyed by taxation.
Related to this is the use of tax avoidance for political/economic ends.
High tax rates may be mitigated by avoidance, achieving a pragmatic compromise between incompatible political viewpoints, or allowing a public perception which is different from the reality. IFS say:
- ... in principle, it would be efficient to tax relatively mobile activities at a lower rate in order to avoid deterring mobile activities while allowing a higher rate to be supported on less mobile activities. Avoidance behaviours are one way that de facto lower rates on more mobile income are achieved. ... In this case, there may even be benefits to the UK from avoidance opportunities if the lower tax rates achieved on mobile activities – for example, through profit shifting – mean that more real activity is in the UK than would otherwise be the case.
This fudge has its costs, including the inefficiencies that arise from tax planning, fiscal instability and public cynicism; but it happens.
Practitioner/judicial views today
The above sets out a powerful intellectual case in favour of the view that avoidance, like Lord Diplock’s crossword, is morally neutral. It was formerly generally accepted, and has never been refuted. But the argument has been found less convincing, or unconvincing, I think for two reasons:
(1) The traditional view was formed in earlier times when In earlier times there was tax avoidance but little (if any) activity in the category of tax abuse. When that changed, I think in the 1970's, the above argument came to be regarded as less convincing.
(2) The argument assumes a good understanding of the tax system as it actually is. Politicians and other non-tax practitioners entered into the debate without that knowledge.
Whatever the reason, the argument has been perceived as less cogent. By 2007:
- For many directors, the objection to arrangements that are in their view 'too' artificial may be framed largely in terms of business ethics. Other directors, equally determined to behave in an ethical way, may consider that the degree of artificiality is not an ethical issue provided no attempt is made to misrepresent the facts or to hide them from the tax authorities....
- At one time such a view would perhaps have been more widely held than now. At the present time it represents one end of a range of views in a debate where probably most commentators would hold that within the compass of what is legal there is some behaviour that is acceptable and some that is not...
In 2011, Aaronson's GAAR study reported the views of taxpayer representative bodies:
- There was unanimous disapproval, indeed distaste, for egregious tax avoidance schemes.
Of course tax practitioners do not all share the same view. But I think it is the case that they are mostly drawn to the view that opprobrium should only attach at the top end of the scale, in cases of tax abuse, in which case the GAAR has more or less rendered the issue academic; or if any opprobrium attaches to tax motivated behaviours lower down the scale, the amount of opprobrium should vary according to the scale.
This might be consistent with Lord Templeman's views in tax abuse cases, which were expressed trenchantly (some would say, stridently):
- In common with my predecessors I regard tax-avoidance schemes of the kind invented and implemented in the present case as no better than attempts to cheat the Revenue.
This may be consistent with a comment of the Supreme Court in 2014:
- Since the seminal decision of the House of Lords in Ramsay v IRC there has been an increasingly strong and general recognition that artificial tax avoidance is a social evil which puts an unfair burden on the shoulders of those who do not adopt such measures.
Evil is a strong word, even if constrained by "social"; though the scope of the comment depends on the word "artificial", which may mean little or much.
And again in 2015, but perhaps more moderately expressed:
- [Tax avoidance] gives rise to social costs which are significant and increasingly controversial.
This comment, or its implication, has not been enthusiastically adopted. In Altus Group v Baker Tilly negligent accountants argued it was contrary to public policy to award damages for their failure to advise or implement an avoidance scheme. The argument was summarily rejected. In a Guernsey case, an ill-advised gift to an EBT was set aside for mistake. The fact that the individual was participating in a scheme to avoid UK tax was not a reason for the Guernsey Court to refuse the relief.
Impact of the GAAR
How has the GAAR altered the position? HMRC cite one of the best known dicta in taxation:
-  No man in this country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores.
-  The Inland Revenue is not slow - and quite rightly - to take every advantage which is open to it under the taxing Statutes for the purpose of depleting the taxpayer’s pocket.
-  And the taxpayer is in like manner entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Revenue.
HMRC say that the GAAR has changed this:
- [The above quote] epitomises the approach which Parliament has rejected in enacting the GAAR legislation. Taxation is not to be treated as a game where taxpayers can indulge in any ingenious scheme in order to eliminate or reduce their tax liability.
At the abuse end of the spectrum the GAAR now applies, so the rules have indeed changed. This impinges on the avoidance-morality debate insofar as the debate only concerns successful avoidance, ie avoidance not caught by the GAAR. But nothing else has changed. Ayshire itself was not an abuse case (the issue was whether the taxpayer’s children had entered into a valid partnership) and the result would not have been affected by the GAAR. It also continues to be the case that HMRC enforce egregious over-taxation when the rules work in their favour.
Views of regulators
The SRA jumped on the bandwagon, issuing a warning entitled “Tax avoidance - your duties”:
- In the House of Lords case of Ayrshire Pullman v CIR, Lord Clyde said that "No man in this country is under the smallest obligation, moral or other, so as to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores." That approach has been rejected by Parliament by bringing in the [GAAR].
This is not correct.
- GAAR is clearly explained in HMRC guidance.
This is not correct. It seems unlikely that the author read and understood the guidance (admittedly not an easy task).
- Similarly, the widespread assumption that “tax avoidance is legal” no longer applies.
This is not correct.
While contemporary tax debate is characterised by shallow thinking and misinformation, perhaps inevitably so, it is dispiriting to see the same applies to the SRA.
The Charity Commission have made the same point. It seems likely that a circular went round from HMRC to regulators, with draft text, and the regulators complied without much consultation or comment from tax practitioners.
Professional codes of practice
Accountants now parade their tax-morality. For instance, KPMG’s Global Tax Principles provide:
- We shall only advise clients to enter into, or assist them to implement, transactions or arrangements on the basis that they have any substance required by law, as well as any business, commercial or other non-tax purpose required by law.
- We shall not advise clients to enter into transactions with the purpose of securing a tax advantage clearly and unambiguously contrary to the relevant legislation and shall not assist them to implement such transactions. If, in our view, the language of the legislation is uncertain, we shall consider the intention of the relevant legislators when advising clients.
Who would advise clients to enter into transactions which lack the “substance required by law”? Or transactions contrary to the relevant legislation (never mind the GAAR)? A reader well-informed about taxation may be tempted to say, with Scrooge: Bah, humbug. But there are not many such readers, and perhaps KPMG’s Tax Principles the code is not designed for them.
This raises a further set of issues arises in relation to practitioners who act in tax avoidance cases. There are conflicting normative visions of the lawyer’s role, raising the basic question: can a good lawyer be a good person? For legal practitioners, client autonomy is a fundamental value. That view is not usually accepted, or understood, by the general public or by HMRC. A whole book would be needed to discuss the topic.
Views of non-tax practioners
Outside the tax profession, the concept of what is unacceptable/immoral is not restricted to tax abuse, but extends to the ordinary tax planning level. That is, some very ordinary tax planning has come under fire. Tax practitioners might dismiss the views of those who know nothing about tax as unworthy of consideration. I give four examples from those whose views carry some weight.
Deferring bonus in order to take advantage of announced reduction in tax rates: This arose in 2013/14 when top rates fell from 50% to 45%. Practitioner-readers are likely to agree that this is ordinary tax planning near the bottom end of the scale. But Mervyn King, then Governor of the Bank of England, is reported to have criticised Goldman Sachs for it. The House of Lords select committee noted that the GAAR will not apply to the deferral of bonuses from one tax year to another, but one might infer that they disapproved none the less for that.
The Bump Plan In 2013 a minor political furore arose after David Heaton was secretly filmed, suggesting bonus payments to pregnant employees; if made during the relevant period this would increase the amount of statutory maternity pay. I do not think practitioners would regard that as on the abusive side of the line (though there are many points which need to be made to properly understand the legal and moral analysis, none of which were heard in the public debate). The point was not just political hot air: Heaton had to leave the GAAR panel following criticism from David Gauke (Exchequer Secretary to the Treasury).
Income sharing with a spouse I think practitioners were surprised that HMRC found this unacceptable in their (ultimately unsuccessful) attack in Jones v Garnett. But exactly the same planning has been criticised in India:
- While tax evasion is universally condemned, there is a disposition in certain quarters to regard tax avoidance as a permissible course of action. We are unable to endorse this view. The mere fact that the income-tax law is not violated does not mean that the procedure which results in tax avoidance is justified. We might take as an illustration the act of introducing, without adequate consideration, one's wife ... as partner in a business of which the assessee himself is a partner. It is an attempt to fraction income and reduce tax liability under a provision of law meant to apply to genuine partnerships. Conduct of this nature, though legal, cannot but be regarded as anti-social.
Gift of company to political party A donor who owns a suitable company might arrange that:
(1) The donor gives the company to the political party.
(2) The political party extracts the funds by way of dividend.
The gift at stage (1) qualifies for CGT hold-over relief; and the distribution at stage (2) would not be taxable, assuming the party is a company for tax purposes.
It seems that Labour arranged this in 2013, giving rise to a fit of indignation, or purported indignation, from the Tories. An open letter from George Osborne to Ed Milliband provided:
- ... the Labour Party has gone to great lengths to help your biggest donor, ... avoid paying tax on a political donation. ...
- The Labour Party registered a donation of shares in JML worth £1.65 million in January 2013, from Mr John Mills. By making a donation in shares rather than as a single cash dividend, it has been reported that Mr Mills managed to avoid a potential tax charge of £724,710. ...
- As leader of the Labour Party, and given your previous statements on tax avoidance, such actions by your party appear to be directly at odds with your public statements.
- Most importantly, will you now pass the amount of tax that has been avoided to the Exchequer? As you say, this is money that is needed to fund vital public services such as the health service and our schools.
What is one to make of this? I think any practitioner, or anyone who understood the tax background, would regard this as in the category of "sensible tax planning" or, perhaps, ordinary tax planning; in either case, well short of avoidance and opprobrium. The letter could be seen as just an example of debased political debate, meaningless playground insults whose object is just to knock the opposition. It could be taken as a case where ordinary tax planning is regarded as immoral. However, it may be regarded as an illustration of the difficulties which arise if one regards taxation as governed by moral principles distinct from black letter tax law. The letter might then be regarded as a rather subtle contribution to the political/moral debate. Perhaps there are elements of each of these.
Context of discussion
It is possible to discuss tax-morality in a lofty, disinterested and high-minded way. What is the good life? What would Aristotle say?
But in practice discussion is invested with flaming indignation, which comes to be fuelled by hatred for those who support and connive with these injustices. This is fed by a sense of superiority that we are not like these instruments and accomplices of evil. The result is moral panic, contempt, hatred and aggression. There is a great and easily mobilised hostility to anything that can be represented as avoidance. The remedies proposed become ever more penal and more discretionary.
The debate sometimes suffers from profound bad faith or hypocrisy. Politicians accuse others of tax-immorality in order to attack their opponents or promote themselves: see the letter to Ed Miliband above. Journalists do so for a headline to sell papers.
In short, there is widespread disagreement about the starting point, not to mention finish line, when it comes to the concept of avoidance or on issues of morality in connection with tax avoidance. This should not be a surprise, since the same applies to many contemporary moral issues, for instance, assisted suicide. There is no tribunal to adjudicate arguments on morality, except the court of public opinion, which, as Ibsen observed, is an extremely mutable thing.
Another common thread in public debate is a vast estimate of the amounts involved. HMRC publish figures called the "tax gap", said to be £34 billion in 2015/16. This is the total for innocent error, careless error, legal interpretation, avoidance, evasion and criminal attacks on the tax system. Statistics are only as useful and reliable as the definitions on which they are based. The combination of these different categories makes the total figure meaningless. There is a danger that spurious statistics may gain currency and influence policy.
Broken down, the figures are:
£6.1bn Failure to take reasonable care £3.5bn Hidden economy £3.3bn Innocent Error £3.1bn Non-payment £6.0bn Legal interpretation £1.7bn Avoidance
- we don't know how much corporate tax is lost to the UK as a result of tax avoidance. This is partly because there is no accepted definition of exactly what constitutes 'avoidance' and partly because we lack full information about the activities of firms.
Of course, the fact that an amount is unknown and unknowable does not mean that it is small or unimportant. I wonder if time spent guessing at figures is productive. It is however striking how small a part tax avoidance plays in the tax gap figures, compared to the attention it receives.
IFS report continues:
- Importantly, even if we knew that information and could calculate the tax lost to avoidance, it would not be right to assume that, were all avoidance opportunities to be completely removed, the UK would be able to collect that full amount. We would expect higher taxes to feed through, at least to some degree, to lower investment and changes in prices such that genuine UK profits may be lower. To the extent that the corporate tax affects prices or wages, or the location of firms' activities (and therefore jobs), there may also be lower receipts from income taxes or VAT.
This is true for all taxes, but particularly for corporation tax:
- First, corporation tax is a particularly distortionary form of taxation that can work to reduce investment. This is especially the case for internationally mobile investments because firms will consider tax when choosing where to locate real activities...
- Second, the ultimate incidence of corporate tax always lies with households and is borne either by the owners of capital (in the form of lower dividends), by workers (in the form of lower wages) or by consumers (in the form of higher prices). We do not know with any precision who is made worse off as the result of the corporation tax. However, estimates suggest that, because capital tends to be much more mobile than workers or consumers, a significant share of the burden of corporate tax tends to be shifted to domestic factors – and specifically labour. In other words, there is reason to believe that at least a part, and in some cases a large part, of the corporation tax that companies are subject to is ultimately passed on to workers in the form of lower wages.
There is a certain irony in the second point, given the left's enthusiasm for corporation tax; I think most economists do accept that the burden of corporation tax is borne by employees., though not all.
The rule of law
What is "the rule of law"
There is no consensus on the meaning of the phrase. It is an emotionally charged label for a set of principles, or sub-principles, the content of which is contested. This may not be a bad thing: the consensus on the rule of law is only possible because of dissensus as to its meaning. There is a certain irony in that the principle which forbids vague legislation is itself difficult to pin down. But the same is true of other cherished political virtues, such as democracy. A discussion needs a book to itself; but as the term is used in different ways, it is best not to use it without some explanation of how it should be, or may be, understood. This section draws on the paper by Craig, "The Rule of Law" prepared for the Select Committee on Constitution.
There is a consensus that the rule of law includes at least the following minimum requirements.
- The Rule of Law and Lawful Authority
- A core idea of the rule of law to which all would subscribe is that the government must be able to point to some basis for its action that is regarded as valid by the relevant legal system. Thus in the UK such action would commonly have its foundation in statute, the prerogative or in common law power.
It follows that tax must be imposed by parliament through legislation.
- The Rule of Law and Guiding Conduct
- A further important aspect of the rule of law is that the laws thus promulgated should be capable of guiding ones conduct in order that one can plan ones life.
- It is from this general precept that Raz deduced a number of more specific attributes that laws should have in order that they could be said to comply with the rule of law. All are related to the idea of enabling individuals to be able to plan their lives. The 'list' includes the following
- (1) laws should be prospective, not retrospective;
- (2) they should be relatively stable;
- (3) particular laws should be guided by open, general and clear rules;
- (4) there should be an independent judiciary;
- (5) there should be access to the courts;
- (6) the discretion which law enforcement agencies possess should not be allowed to undermine the purposes of the relevant legal rules.
Rule of law v. other values
The rule of law is something to boast of, and a feature which makes the UK an attractive place in which to reside, invest, or litigate. The Judicial Office boast:
- The Rule of Law represents the cornerstone of liberty and democracy, and is one of the main reasons that the UK attracts global businesses and investors.
- Laws in the UK are:
- public (so that everyone knows what they say)
- certain (so that everyone knows where they stand)
- prospective rather than retrospective (so that they cannot be broken before they exist)
If only! Rule of law principles are challenged, or breached, in various aspects of taxation; and the conflict with tax avoidance is particularly deep. Anti-avoidance is facilitated by techniques which breach the rule of law:
(1) Administrative discretion
(2) Vague legislation
(3) Retrospective legislation
It is desirable to recognise that:
(1) There is a trade-off between two policy aims, the rule of law and the combat of avoidance, rather than to fudge the matter by saying, or pretending, that these techniques are consistent with the rule of law.
(2) There is nothing in the idea of government by majority to show that the majority will always respect the rule of law.
Then one can face the choice aware of the consequences of one choice or another. Craig says:
- ... the rule of law in the above sense is only one virtue of a legal system, and may have to be sacrificed to attain other desired ends. We may feel that the rule of law virtues of having clear, general laws should be sacrificed if the best or only way to achieve a desired goal is to have more discretionary, open-textured legal provisions. This may be so where it is not possible to lay down in advance in the enabling legislation clear rules in sufficient detail to cover all eventualities. Modifications to the rule of law in this manner are not somehow forbidden or proscribed. Given that it is only one virtue of a legal system it should not prevent the attainment of other virtues valued by that system.
In 1974, Lord Simon put the rule of law above the need to combat tax avoidance:
- Disagreeable as it may seem that some taxpayers should escape what might appear to be their fair share of the general burden of national expenditure, it would be far more disagreeable to substitute the rule of caprice for that of law.
The cure could be worse than the disease. In contemporary UK debate it is rare to find a statement in such strong terms. An exception comes from the Joint Committee on Statutory Instruments, discussing this provision:
- (a) a person enters into any arrangements; and
- (b) the main purpose, or one of the main purposes, of the person in entering into the arrangements is to avoid any obligation under these Regulations,
- these Regulations are to have effect as if the arrangements had not been entered into.
The Committee said:
- ... people who are satisfied that the terms of the regulations do not apply to them will be at constant risk of HMRC initially concluding that they have attempted to avoid the regulations and that the regulations therefore apply anyway – that being the default position in the absence of an appeal. It is unclear that such a result, which breaches the principle of certainty, would be within the contemplation of enabling powers that do not contain express provision for the type of anti-avoidance provision used.
- The fact that Parliament has, notably in Part 5 of the Finance Act 2013, [the GAAR] enacted anti-avoidance provisions which are similarly imprecise or discretionary is irrelevant to the security of such provisions in subordinate legislation, in the absence of express enabling powers.
- The Committee accordingly reports regulation 21 for a doubt as to whether it is intra vires.
But this example also illustrates the weakness of the rule of law in the UK:
(1) Regulation 21, whose validity is in doubt, remains in the legislation.
(2) Identical wording is found in:
Tax avoidance is an issue of international tax as well as domestic tax, and in the US, the rule of law may perhaps be more highly valued. Bob Stack (US Treasury Deputy Assistant Secretary for International Tax Affairs) criticised OECD BEPS reforms, and UK diverted profits tax, for breaching the rule of law and international tax law principles:
- Rather than producing administrable rules, the BEPS negotiators seemed to be opting instead for giving wide discretion to tax officials. This brought into question the whole international tax system. Do the international tax rules even matter anymore? Do we really need a standard setter to say, 'Tax administrators can use the pornography test to catch tax avoidance. We know it when we see it. And we will get you if we want to'?...
- [Diverted Profits Tax] ... took us further down the road in which a taxpayer is at the mercy of whatever a tax auditor decides is the right amount to pay. What made this particularly perturbing was that these measures emanated not from the usual suspects such as India, China, Brazil and South Africa, but from strong traditional residence countries [UK and Australia] that happened to be two of our closest friends.
Breach of rule of law: Consequences
- ... the consequences of breach of the rule of law in the sense considered in this section. The fact that a law is vague or unclear, and that it therefore provides little by way of real guidance for those affected by it, will not lead to a statute being invalidated in the UK. The courts may well interpret such a statute narrowly, in favour of the individual in such circumstances. They might also read it down pursuant to the Human Rights Act 1998, if the particular statute would otherwise infringe rights derived from the European Convention on Human Rights. If the courts felt unable to read it down, they could issue a declaration of incompatibility under the HRA, and the matter would be sent back to Parliament for reconsideration. The courts therefore have considerable interpretive techniques at their disposal to ensure that legislation that fails to meet the requirements of the rule of law set out above is construed narrowly in favour of the individual. This does not alter the fact that UK courts have not traditionally exerted power to invalidate an Act of Parliament on such grounds.
In relation to secondary legislation (statutory instruments) the courts could in theory strike down provisions on the grounds of breach of the rule of law (which might be said to be ultra vires, in the absence of very clear or direct authority in the authorising act of parliament) but in practice as far as I know it has never happened.
In other words, the rule of law lacks full justiciability. Perhaps confusingly, or ironically, the Rule of Law is not in the strict sense a rule of law. But however deeply, inchoately, and inconsistently, the rule of law still to some extent affects tax policy and case law outcomes.
Tax rule of compliance
As the rule of law is a set of principles, this issue raises a set of almost impossibly broad questions.
In earlier editions of this book, I said:
- The UK tax system is largely based on the rule of law rather than informal practice and discretion.
By the 13th edition (2014) I qualified the boast:
- However, that is less the case than formerly, due to:
- (1) wide, complex, or vague anti-avoidance provisions mitigated by informal practice, HMRC guidance, HMRC discretion or oversight.
- (2) retrospective legislation.
In 2014 the City of London Law Society said:
- 2.4 ... tax policymakers are insufficiently conscious of the importance of the rule of law – that is, the constitutional right of a citizen to determine the law applicable to him at any given date. Related to this is a similar problem of lack of respect for legislation as the only proper source of law, and over-reliance on guidance.
In 2015 the Law Society makes the same point:
- ... in recent years, there has been a tendency on the part of government to allow the rule of law in taxation to risk being eroded in the interests of making the executive more effective, in particular in seeking to combat avoidance...
The following examples draw on the lists of these bodies supplemented by my own:
(1) The absence of a right to appeal so obligations are determined by HMRC discretion:
- (a) The Banking Code of Practice on Taxation; there is no right of appeal against HMRC determination of a breach of the code.
- (b) Follower notices: there is no right of appeal against the issue of such a notice on a number of important grounds.
(2) Retrospective taxation.
(3) Uncertainty in tax law. Sometimes this may be deliberate. For instance, Jim Harra, Director General, Business Tax at HMRC applauds the uncertainty of the proposed GAAR:
- It will also create an additional level of uncertainty for the promoters and users of schemes. I believe that that will be a deterrent.
(4) Anti-avoidance legislation drafted widely and then cut down by HMRC concession mislabeled as guidance. Examples include:
- (a) s.30 FA 2014 (avoidance by transfer of corporate profits)
- (b) The CGT loss TAAR and the same is true of most TAARs, which are standard in new legislation.
TAAR/unallowable purpose test
TAAR stands for “targeted anti-avoidance rule”. It is used to describe unallowable purpose tests in specific UK tax codes (as opposed to the GAAR, which is an unallowable purpose test which applies throughout taxation).
As far as I know, the term “TAAR” was coined by HMRC and first used in a press release of 5 December 2005. The term “unallowable purpose” was first used by Parliamentary Counsel in 1996, in the context of loan relationships.
Before then the term used was motive (or purpose) test. Those labels remain in use primarily for older TAARs, such as the ToA motive defence.
“TAAR” is best regarded as a technical term, detached from its literal meaning, so IFS can say without obvious irony that:
- TAARs need to be well targeted ... costs can outweigh the ... lost revenues when a poorly targeted TAAR is compared with a well-targeted TAAR.
“TAAR” is a tendentious, approbative term - who could object to targeted anti-avoidance provisions? Parliamentary Counsel rightly do not use it in statutory drafting. “Unallowable purpose test” is neutral, and more transparent, but more clumsy; so, slightly reluctantly, I use “TAAR” in its technical sense in this work.
Types of TAAR
The number of TAAR is very large.  Although there is a variation of wording, TAARs share a common framework, or perhaps 3 common sets of frameworks.
I would distinguish three types of TAAR, depending on the nature of the unallowable purpose test, and coin the following terminology to describe them:
|Style of TAAR||Unallowable purpose expressed as|
|Avoidance-purpose TAAR||Tax avoidance (in its strict sense)|
|Tax-advantage TAAR||Obtaining a tax advantage|
|Application/effect TAAR||Avoiding specified provisions application/effect|
A tax-advantage style TAAR is very wide, if one understands “tax advantage” to include cases where there is no element of tax avoidance.
An application/effect style TAAR may be wider still. The Joint Committee on Statutory Instruments said this wording is too wide and vague. But HMRC do not take any notice of that. It continues to be a common form (perhaps it will become the most common form) for new TAARs.
This section makes general comments. So far as TAARs are standard form(s), cases on one TAAR can shed light on others, though one must always allow for context. The most litigated is the TiS purpose test, though in recent years there have been many cases on the loan relationships TAAR. Instances where cases on one TAAR have been cited in cases on another TAAR include:
(1) ToA cases cited in TiS cases (& vice versa)
(2) Pre-2010 TiS cases may be relevant to the current IT TiS code
Here is a summary table of TAARs discussed in this book:
|Topic||Type of TAAR||Para||Test||Reasonable||Comm||Date|
|ToA||Tax avoidance||Identify and classify purpose: New conditions||Ops||Y Y||1936/2005|
|TiS (CT)||Tax advantage||–||Transactions in||1960|
|TiS (IT)||Tax advantage||52.14||securities||2010|
|SDLT group relief||Tax avoidance||Inter-group transactions||Transaction||2005|
|Capital-loss||Tax advantage||Capital-loss TAAR||Arrangements||2007|
|Mixed funds||Tax advantage||Mixed fund TAAR||Arrangements|| 2008
The expression “tax advantage” is used in (what I call) tax-advantage style TAARs. It is defined on each occasion. There is no single standard definition, but the definitions generally adopt common form wording, with minor variations, so it is helpful to consider the definitions together as a single topic.
Tax advantage: IT/CGT definition
The expression"tax advantage" was first used in the TiS purpose test in 1960. That definition survives in the current CT version of the rules and elsewhere. I set out s.732(1) CTA 2010 as an example of this form:
I refer to this as the “standard IT/CGT definition” of tax advantage. The actual tax referred to varies from place to place but in other respects this definition is standard.
This also derives from the original 1960 provision. It is hard to see what it adds, but as the precedent is there it has usually been followed
GAAR definition of "tax advantage"
Section 208 FA 2013 provides:
I refer to this as the “GAAR definition” of tax advantage.
The GAAR definition is wider than the TiS definition in three respects:
(1) It has become an inclusive definition. But since it is so widely defined, it is not easy to think of anything which is a tax advantage which does not fall within paras (a) to (f).
(2) Paras (e) and (f) are added.
(3) The word “tax” is widely defined. Section 206(3) FA 2013 provides:
Post-2013 anti-avoidance provisions often adopt the GAAR definition by reference (though generally with a narrower definition of “tax”).
IHT definition of "tax advantage"
Section 162A(8) IHTA defines tax advantage:
I refer to this as the “standard IHT definition”.
Retrospective tax legislation
This topic deserves a section to itself.
Retrospective legislation: Extent
(1) Retrospective reversal of avoidance schemes; for examples see:
(2) Legislation not retrospective in its wording, but retrospective in effect in that it is designed to affect arrangements carried out under old law, or (deliberately or otherwise) lacks fair and appropriate transitional provisions. Examples include:
(3) It has also become common as second thoughts to (what the need for retrospective legislation shows to be) ill thought out legislation; but insofar as retrospective legislation favours the taxpayer, perhaps it is less objectionable on rule of law grounds.
Retrospective legislation: Protocol
In Budget 2011, the coalition Government published a statement (grandly labelled a "protocol") on retrospective legislation. The most important part provides:
 restoring the UK tax system's reputation for predictability, stability and simplicity(!) and  preserving its ability to protect the Exchequer by making changes where necessary. In particular, changes to tax legislation where the change takes effect from a date earlier than the date of announcement will be wholly exceptional.
The attempt to formulate the principles behind a decision to enact retrospective legislation is to be applauded. But the sanction (if any) for ignoring the protocol is political only. It is not enforceable in the courts. That is self-evident; but if authority is needed:
I think it as it should be: this is a matter for parliament and not for the courts.
The 2011 statement does not purport to bind future governments. The Cameron administration (May 2015 - July 2016) did not resile from it, but whether the current or subsequent administrations will follow it remains to be seen.
Retrospective legislation: Validity
All authorities discussing the rule of law agree that it includes a prohibition of retrospective legislation, so there is no doubt that such legislation breaches the rule of law. As noted above, it is not for that reason rendered invalid as the rule of law is not justiciable as such. Human Rights challenges have not been successful.
Retrospective legislation: Politics
Various reasons have been given to justify retrospective legislation.
One is that the scheme will fail (or so the Government believe). If that is true, the change is unnecessary; if not (and it is generally debatable) it is not a good reason.
Another is that the scheme is abusive (however that flexible term may be understood). Whether that justifies retrospective legislation is ultimately a political question on which views differ depending on how much one values the rule of law. It is arbitrary and unfair in that a few particular schemes are retrospectively stopped and others – no less elaborate, artificial and abusive – are not. Pragmatists (to whom the rule of law is of little interest) should bear in mind that retrospective legislation increases the "legal risk", a measure under which the UK falls low on international surveys, and the lowering of the UK's reputation in that regard has a significant albeit intangible cost. I suspect a major factor in picking on some arrangements may be the amount of money involved.
Retrospective legislation: Future
How often will retrospective legislation be used in the future? What advice can anyone give to taxpayers seeking to know their position? Prior to the enactment of the GAAR, I said:
The compatibility of the GAAR with the rule of law is open to debate, on the grounds of vagueness in particular. But one positive consequence may be (and should be) to end the practice of retrospective anti-avoidance legislation altogether; wholly retrospective legislation should no longer be necessary. But partially retrospective legislation, in the form of unfair commencement rules, will no doubt continue.
Naming and shaming
"Naming and shaming" covers a variety of arrangements. The FA 2014 provisions to name and shame the promoters of tax avoidance schemes and the Code of Practice on Taxation of Banks raise concerns, but the greatest concern is the practice in the media.
The OUCBT paper provides:
No-one has taken any notice of that! Naming and shaming is at present common for various purposes (more than one may be present at the same time):
(1) In marketing: To sell newspapers with exposures of celebrities who have been involved in tax avoidance schemes.
(2) In politics, to knock the opposition by alleging that politicians, or other party supporters, are guilty of tax avoidance. In this respect, anything goes and some stories have been farcical. Thus in 2015 Mandelson was berated for taking a loan from a UK company. Ed Miliband was accused of avoiding tax by means of a deed of variation. The allegations are so off-target as to cast doubt the good faith of those who make them and newspapers which uncritically promote them.
(3) As a scandalisation technique, to promote the view that avoidance is immoral; often combined with juxtaposition of avoidance and evasion and the suggestion that there is little or no difference.
When these allegations are made it is impossible to defend oneself.
So public debate is not uninformed but misinformed. It is a yeasty mingling of dimly understood facts with vague but deep impressions, and images, half real, half fantastic. It has more than its fair share of misunderstanding and jejune polemics.
In these circumstances, public naming and shaming may quickly lead away from the rule of law. Starbucks paid £20m following the threat to occupy its cafes. If one calls that payment "taxation" at all, it was certainly not taxation imposed by law. A hostile commentator would call this taxation by mob rule. Google and Amazon, who do not have public premises vulnerable to the same threat, have paid nothing.
Avoidance by multinational companies
Much attention has been given to multinational companies. The Public Accounts Committee looked at Starbucks, Amazon and Google. The verdict was guilty.
It is not possible to comment sensibly on the taxation of any multi-national group without knowing the relevant facts, which are not usually in the public domain. The claim that these companies have avoided UK corporation tax is often based on the size of their UK sales or UK staff, set against the corporation tax actually paid. But all well-informed commentators know that corporation tax is not a tax on sales, or the size of an establishment, and large sales/staff does not mean large profits. The OUCBT paper provides:
Likewise the fact that relatively little CT is paid proves nothing. The OUCBT paper provides:
The IFS say:
HMRC make the same point:
Unusually, the facts are known in relation to Apple as a result of US congressional hearings (I suspect, better conducted than the UK equivalent). These have been well analysed by Antony Ting. In short, there is no reason to think that Apple have avoided UK tax. The group has avoided Irish/US tax by Irish/US hybrid companies; and, perhaps, it has reduced Irish tax by informal transfer pricing agreements with the Irish Revenue.
It is often said that multinationals engage in avoidance through transfer pricing. For instance, Christian Aid say:
Transfer pricing is not strictly avoidance. It is in principle in the category of ineffective avoidance:
The fundamental problem is not terminology, but that the facts needed to assess these claims are not in the public domain. Robert Maas says:
If transfer pricing is conducted with the consent of the tax authority concerned, it is not avoidance, though it may be unfair tax competition. The EC are currently pursuing state aid rules; it will be interesting to see what results.
The GAAR guidance provides:
In my terminology, these issues are non-avoidance, and in some cases, tax avoidance, but not tax abuse.
But where there is abuse, one country's domestic GAAR cannot resolve the issue. Apple's planning, for instance, turned on a hybrid entity:
(1) transparent under Irish tax law, and so not paying tax on its profits in Ireland;
(2) opaque in US tax law, and so not paying tax on its profits in the US.
It seems to me that planning with a hybrid entity may properly be described as tax avoidance if it is the case that:
(1) The intention of Oireachtas is that the entity's income should be taxed in the US, and
(2) The intention of US Congress is that the entity's income should be taxed in Ireland.
One might refer to it as international tax avoidance (though there is of course no such tax as "international tax"). The tax advantage is not contrary to the tax policy of either country in isolation; it is the result of a gap between the two. However the gap may in fact be intentional, in that both Ireland and the US deliberately chose to facilitate the planning; in which case the planning should not be called avoidance at all.
Whatever the terminology, CIOT are right to say that the tools to deal with multinational planning/avoidance will not be the same as those used for domestic tax avoidance. It is an international problem which only international consensus can resolve.
OECD has been tasked with doing something on the taxation of multinational companies, and has produced an "Action Plan on Base Erosion and Profit Shifting" and a raft of reports and proposals. It will be interesting to see what emerges. The difficulty of achieving international consensus is considerable: