In response to the BBC Panorama programme last night the government has said:
The government is clear that tax avoidance or evasion is totally unacceptable, whether it is undertaken by businesses or individuals.
I think this statement is incredibly important. Tax evasion is, of course, illegal and therefore is bound to be unacceptable. But tax avoidance is legal: we know that. And yet they two are being bracketed together. And rightly so.
It’s important to explain the difference. I do this using my definition of tax compliance — which is acceptable tax behaviour. Tax compliance is:
seeking to pay the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes.
There are, therefore, four elements:
- Right amount
- Right place
- Right time
- Coincidence of substance and form.
Tax evasion usually relates to the amount of tax paid, largely because it is not paid contrary to the law.
Tax avoidance usually involves paying in the wrong place and / or at the wrong time because a structure has been adopted where the form and substance do not coincide for tax purposes.
So, for example, the Lloyds structure I commented on during the Panorama programme involving UK, Cayman and BVI companies resulted in the right tax being paid in the right place (the UK) at the wrong time because the form adopted allowed a tax deferral to take place. That was straightforward tax avoidance, no more or less. If legal it was not within the spirit of the law. It also required breaches of International Financial Reporting Standards requirements on coterminous year ends that are also reflected in company law and of which Lloyds must have been aware. The breach was pretty blatant, but legal.
And this is what is unacceptable now.
It so happens that this means just about every secrecy jurisdiction transaction is unacceptable. This is because by definition secrecy jurisdictions provide tax and regulatory privileges to those who do not conduct active business affairs within their own jurisdiction whilst allowing such affairs to be recorded in their domain even though they occur elsewhere. Hence, if one of the privileges provided by using a secrecy jurisdiction is to pay tax in that place (payment being somewhat notional of course if the tax is charged at zero per cent) this is, presumably, a only benefit because tax is not being paid (in full) in the jurisdiction where the actual economic activity takes place (or else, why locate offshore?). Hence the tax due onshore is being avoided, by definition.
The logic is obvious: secrecy jurisdictions are abusive by definition.
There are just two things to add. First, when I and others in the Tax Justice Network began to say avoidance was unacceptable people derided the idea. In 2007 we had to spell out what we meant and few saw its relevance. Now it is mainstream. Second, and as important, it has to be asked where this leaves the Big 4? Tax avoidance is the backbone of what they do. What now?
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The old one’s are the best:
‘No man in this country is under the least obligation, moral or otherwise, 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
store’ (Lord Clyde in Ayrshire Pullman Motor Services & Ritchie v CIR, 1929, 14 TC 754).
Alex
In 1929 we’d just completed the electoral mandate
Wives were their husband’s chattels
Divorce was exceptionally hard
Homosexual acts were illegal
I could go on
Thankfully we have changed
And that law is crass
So get real
Richard
[…] Second, banks of this sort are low grade activity. If they offer abuse then in more complex environments the abuse is simply more sophisticated. To argue that in higher grade activities the abuse is not present is to argue contrary to all we know about the way tax works: as complexity rises abuse does with it. I accept, the abuse may look more like avoidance and not evasion in these higher grade cases, but let’s also be clear, tax avoidance is also completely unacceptable and abusive. […]
There is an interesting and relevant (though not superficially) article in The Guardian today (http://www.guardian.co.uk/politics/blog/2009/sep/22/baroness-scotland-gordon-brown) about why Gordon Brown was right not to fire his attorney general for employing an illegal immigrant, in breach of a law that the AG herself was responsible for.
Here is one paragraph:
“The laws against employing illegal immigrants are designed to deter people who do it systemically — either in business or their own homes — to gain cheap, malleable workers who can’t complain much.”
And here is where it is relevant to the debate above. There are two ways you can treat the law: as either a text to be followed to the letter, as summed up by Alex’s approach above. The alternative is to treat it (and draft it) as a set of principles, as they do in France, and give the judiciary an inquisitorial role.
The problem with the approach that Richard advocates, and which is seen in the Guardian column, is that it disproportionately favours the government. In other words, regardless of what the law says, whoever is in power is able to say “well, it may say that, but it means this, so I’m fining you anyway”.
The article in The Guardian goes on to conclude:
“Labour is short of competent lawyers (they make so much money in private practice today). Scotland is a competent female, black lawyer. A second chance is called for.”
And there you see the other side of the logic. X committed an offence, but it wasn’t really an offence anyway because that’s not really what the law is about, even though she was responsible for it and anyway, she is one of “us” and therefore she should be given a second chance.
If you believe that the law should be applied impartially, regardless of wealth, priviledge or political influence, then you should oppose any idea that what is within the letter of the law but socially undesirable (according to who?) is the same as what is illegal.
The only way to fairly achieve the goal that Richard proposes is to have a strong judiciary that is empowered to investigate and to compare it to legislation that is broadly principals based. A legal system that is adversarial and based on hierarchical precedent is invariably unable to dispense principals based justice.
But what it can be is consistent and fair to everyone.
You take your choice: a system that allows manipulation by those minded to manipulate it (usually the wealthy with their tax advisors and lawyers), or one that can be manipulated by the state (and one only needs to look at recent French presidents to see how some are more equal than others).
Since then the world has seen the atomic bomb, Nazi concentration camps, Chinese and Japanese death marches, Russian gulags and Islamic fanaticism, none of which would lead one to believe that we live in more enlightened times.
In fact modern judges continue to refer to Lord Clyde, and until 20 years ago to the Duke of Westminster’s gardener, and some of the most highly esteemed members of the House of Lords still refer to Learned Hand’s dictum in the US courts (the last case I can find it mentioned is MacNiven v Westmoreland, and I am not aware of much happening since then in tax avoidance case law apart from the HMRC crashing and burning in the BMBF leasing case):
“Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike 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.”
—Honorable Learned Hand, U.S. Appeals Court Judge, Helvering v. Gregory, 69 F.2d 809 (1934
Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike 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.”
—Honorable Learned Hand, U.S. Appeals Court Judge, Helvering v. Gregory, 69 F.2d 809 (1934
@Alex
The perils of cutting and pasting. He only said it once.
Good reason for a general anti-avoidance principle
This is the one I drafted tabled in the Commons this year:
“1 If when determining the liability of a person to taxation, duty or similar charge due under statute in the UK it shall be established that a step or steps have been included in a transaction giving rise to that liability or to any claim for an allowance, deduction or relief, with such steps having been included for the sole or one of the main purposes of securing a reduction in that liability to taxation, duty or similar charge with no other material economic purpose for the inclusion of such a step being capable of demonstration by the taxpayer, then subject to the sole exception that the step or steps in question are specifically permitted under the term of any legislation promoted for the specific purpose of permitting such use, such step or steps shall be ignored when calculating the resulting liability to taxation, duty or similar charge.
2 In the interpretation of this provision a construction that would promote the purpose or object underlying the provision shall preferred to a construction that would not promote that purpose or object”.
“Good reason for a general anti-avoidance principle”
No reason at all. Your draft demonstrates two weaknesses. First of all it is only applicable in a limited number of “inserted step” arrangements and secondly relies on immateriality of an alternate economic purpose. Not only are they both susceptible to easy circumvention, but their application by the authorities is likely to be challenged because of the woolliness of the provision.
GAAR’s go against the general principles in tax law that the legislation should provide a “bright-line” test of when a tax liability arises.
What a strage notion – a quote from an unattributed treasury spokesman is now government policy. All it really does is confirm that the treasury spokesman does not understand the law. Bodes well for government policy don’t you think!
Alasatair
Clearly you did not read Stephen Timms’ speech yesterday
I suggest you do
This is HMG policy – and I guarantee it will survive under the Tories if they get into office
Richard
The Timms speech says little that is new. The worst aspect of current policy is “Principles based legislation”, which seems to have the chief advantage to the Treasury and overseas tax collectors that it is “flexibility in application”, or in other words that perfectly normal business transactions may be subject to attack where previously tax payers could be certain of the likely tax treatment absent a change of law.
Is your guarantee gold plated? Are you David Cameron in disguise? I would suggest to you it is neither HMG policy nor Treasury policy. HMRC seem to be banging on about it, but just hot air. I have not seen any proposed or passed legislation which outlaws tax avoidance. The best they do is yet more complex legislation to try to plug (their perceived) holes.
I wonder why you are clinging on to the “if they get into office” sentiment. I would imagine the bookmakers have stopped taking bets.
@alastair
There have been initiatives from the Revenue in the past which have implemented what they now term “principles based legislation” or anti-avoidance legislation that is general in its application but limited in its scope (i.e. gives HMRC the ability to challenge of the basis of commercial substance, but only in particular areas). Examples would be interest for unallowable purposes in FA96 and the financial instruments legislation in FA05. There has been a similar consultation on interest, but I have issues with that.
For example, suppose I agree with a friend that I will invest £100 in his company some time next year when he has set up his business, but six months later he comes back and says he is ready to go, but wants to start operating six months early, so he will sell me the same shares for £96 if I fund him 6 months earlier. Under the new “anti-avoidance” rules, does that mean I really earned 6 months discount/interest or did I simply acquire the shares with a lower base cost? Do I want to let HMRC have any say in the matter?
@Alex
discount to what? Surey the original agreement has no basis in law – your friend could not sue if you chose not to invest the £100. The whole conversation was purely speculative. £100 may not have been the price even if 12 months had elapsed.