When I began working on tax there were only two available descriptions of tax behaviour. They were tax avoidance and tax evasion. There was no language for trying to do the right thing with regard to tax. So the term tax compliance was created. I defined it as seeking to pay the right amount of tax, but no more, at the right rate, in the right place and at the right time where right meant that the economic substance of a transaction accords with the form in which the transaction is reported for tax purposes.
The term has been useful. Like a number of other innovations in the language of tax from the tax justice movement (e.g. secrecy jurisdiction, country-by-country reporting) it has slipped into common terminology without many of those using it realising its origin.
Recent changes in tax behaviour have, however, challenged the relevance of the term when used as an arbiter for appropriate behaviour, as was always the intention. For example, it has been argued that if Barclays could legally shift their profits to Jersey and Luxembourg, as their country-by-country reporting clearly implies they have done, then how could I argue they aren't tax compliant when doing so?
The answer is provided by the definition noted above. Barclays' behaviour may be legal: I do not doubt that it is; but compliance as I define it is not about according with the letter of the law. All tax avoiders seek to do that. Tax compliance is about acting in a manner consistent not just even with the spirit of the law but also in a manner that is 'right' (hence the last part of the definition). Philosophically this is a deontological concept. That means it is morally appropriate because it is right within and of itself regardless of outcome.
Now I would stress that I think that there are occassions when deontological behaviour is not necessarily appropriate, but with regard to tax compliance I do not agree and nor, incidentally, does HMRC, who define the tax gap in a way consistent with my reasoning. And yet I often hear senior tax practitioners from left and right of the political spectrum arguing that the demand that companies do 'the right thing' (the 'Hodge demand' as they seem to term it) is inappropriate if that means companies are deterred from coming to the UK or tax yield is reduced (although how that might happen is not usually explained).
These arguments are consequential: corporate bad behaviour can be justified by what are perceived to be acceptable outcomes such as what is believed to be more business and employment in the UK. I don't accept this. These ends do not justify turning a blind eye to the corporate abuse that supposedly permits them. All that blind eye delivers is less revenue, if not immediately, then eventually, as the justification spreads. But the consequentialists seem to ignore that because it is beyond their immediate horizons.
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Utilitarianism is the favoured philosophical position of plutocrats. Just so long as they get to define utility, and to exclude all that does not accord with what they want to do anyway. It is a disingenuous fig leaf, IMO.
Indeed, Fiona. The model that everyone is dominated by maximization of profit and marginal utility is a perversion that has been projected onto populations by a class who only know how to think that way. They want everyone to dance to a tune that THEY are playing.
‘These arguments are consequential: corporate bad behaviour can be justified by what are perceived to be acceptable outcomes such as what is believed to be more business and employment in the UK.’
I’ve heard and had the same argument made to me about the “legitimacy” of bribery, Richard, and on more than one occasion by people who I’m pretty sure was personally involved. “What’s the least bad option”, went the discussion on one occasion, “either we grease their palms or the deal goes to the French, and then think of all the lost jobs back in the UK.” When I objected I was told I was not “being pragmatic”. (Another retort on another occasion was “Ok, you can be the one who tells people they are going to loose their jobs.).
I have no doubt that similar conversations have been and still are taking place within all sorts of organisations on a daily basis, despite all the laws that are supposed to deter such things.
And if it’s the choice of paying out a few grand (or even larger sums) to keep thousands in work in the UK or letting it go abroad (after foreign firms have paid the, err, commissions, agents operational expenses etc.) then get the damn commissions paid and secure UK jobs.
“Another retort on another occasion was “Ok, you can be the one who tells people they are going to loose their jobs.”” – and did you tell the workers that they were going to be put out of work?
You are clearly a person who could “be pragamatic” in such circumstances, Allan. For better or worse I’m not, and on the several occasions I’ve been party to what I consider to be corruption have left the organisations in question as soon as I was able. I’m happy to leave that work for those that can do it. However, I should add that one observation I did make was that once a precedent was set it was difficult for all concerned to draw another line in the sand.
With all due respect, crediting yourself with coining the term ‘Tax compliance’ is somewhat of a stretch. It only takes a quick google search to find it in common usage, in academic works going back many years, and even in a long-standing IRS procedure in the USA.
In professional circles, at least those I’ve moved in, ‘Tax Compliance’ still means exactly what one would expect given a plain reading of the two words. It’s like regulatory compliance, H&S compliance etc. It means ‘following the rules’.
I wouldn’t argue that ‘tax compliance’ necessarily means the strict application of the law (i.e. I don’t think the word ‘compliance’ precludes your own interpretation, it doesn’t have to mean, as some would argue, that all ‘legal’ behaviour is de facto ‘compliant’) but these are moot points. You’ve no more right to assert such a claim on the language as anyone else.
Of course the term tax compliance existed
But not in the way we deigned it – which markedly differs from your use, which is an apology for abuse in too many cases
Firstly, I didn’t express an opinion about what it means.
Secondly, your post states that you ‘created’ the term. Before redefining the meaning of ‘compliance’ did you also redefine the meaning of ‘create’?
Your interpretation of what ‘tax compliance’ means is as valid as any other. That’s not what I commented upon. My point was that you can’t claim to have created a term that you didn’t create, nor claim that your definition of a term is of any greater truth than anyone elses.
Like Microsoft did not create Windows, I guess
OK, so we can have scenarios where acting within the spirit of the law is non-compliant. OK. Here’s a scenario:
The state decides to change a tax rate with effect from the start of the new year. Understanding that businesses will have to spend some time making the required system change, and not wishing to inconvenience revellers by interrupting the supply of drinks, they introduce a rule allowing drinks sales in the early hours of the 1st to be reported for tax purposes as occurring on the 31st.
Although publicans who take advantage of this are clearly acting according to the spirit of the law, they are nonetheless not tax compliant (the “right time” test is failed, as the economic substance of the transaction (beer sold on T) does not accord with the form which is reported (beer sold on T-1)).
We cannot argue that this accommodation is reasonable on the grounds that it is a sensible pragmatic approach to furthering a legitimate public policy objective, as we have rejected the validity of consequentialist approaches in this area, so we must condemn any barman who sells a partygoer a post-Auld-Lang-Syne top-up.
I am not sure this is a useful approach.
Angels
Pinheads
And pedants
It seems to me that over the last few weeks, you have had a lot more posts trying to discredit you and your work. It strikes me that is a back handed compliment to your influence-not that that is very comforting. We are in the run up to the election. Sadly, I think it will one of the dirtiest for years. We can expect a 2015 version of the Zinoviev letter issued just before the 1924 election.
Thanks, and I think you are right
The corollary, not seen here, is an increase in the number of invitations etc from people who seek my opinion
I think the invitations are genuine
I am nit sure all the objections are: some would be wise to recall I can see IP addresses. Duplicates have been submitted under different names
Identifying the spirit of the law further complicates matters.
So tax advisors, managers, directors, in house counsel will not now only have have to be able to interpret the law through use of legislation and precedent, now they will be required to add a further skill which is to ascertain what the law probably ought to be in circumstances where the law may or may not reflect what the legislators may or may not have intended
Such an inexact science, you might as will flip a coin.
Oddly, I always found it remarkably easy
“I always found it remarkably easy”
This is only evidence that you find it easy to identify what you believe is the spirit of the law. The world is full of people who find it easy to answer questions, occasionally some of them are even right.
What would constitute a test to differentiate correct and incorrect identification of the spirit of the law?
Graham Aaranson offered one
I have offered another
It is judgement
We presume people have it. Its exercise is a characteristic of maturity
“Oddly, I always found it remarkably easy”
Good for you, in which case your talents were wasted as you would clearly have managed to provide definitive judgements and opinions on some of the most complicated tax cases in UK history, unanimous agreement on which has escaped judges, Counsel, taxpayers and advisors for well over a century.
“seeking to pay the right amount of tax, but no more, at the right rate, in the right place and at the right time where right meant that the economic substance of a transaction accords with the form in which the transaction is reported for tax purposes.”
So what happens if the spirit of the law does not accord with the economic substance of a transaction? Your definition appears to assume that the spirit of the law (however one determines that) and the economic substance will always coincide. That is clearly not the case in all tax law.
By and large I find those who can’t find the spirit of the law are those who don’t want to
And by and large the same is true with those who have difficulty with economic substance
The exceptions are lawyers – and they just don’t get it because it pays them not to
The spirit of the law is a social and moral consensus of the interpretation of the letter of the law.
What is your definition?
You seem to be confusing the enquiry into Spirit of the Law with the enquiry into the intention of the legislature.
I have offered my interpretation: it is to ensure that reporting matches substance so that the law is clearly complied with
In doubt clearance is sought: for large businesses at least this is always possible
For small another course of action is almost invariably available
But what of a circumstance where a mismatch between substance and reporting is the legislative intent?
If that is clearly the intent then the taxpayer has a choice available to them.
Deontologically they do not the the law that might be available to them
The taxpayer invariably has that choice
Within the spirit if the law – which you say is clear – they might
So, the law says I might smoke. I very clearly choose not to do so. Is that so very difficult to understand? Actually, we make such choices all the time
So you are saying that the taxpayer can always achieve tax compliance by refraining from activity where the law has such a mismatch?
I see how this works if the mismatch is confined to some narrow circumstance, but what if the mismatch was in something fundamental, like the definition of employment income? I suppose the taxpayer can opt not to work, but that is less like the choice not to smoke, more a choice not to eat.
It isn’t
Despite the belief of many, most tax legislation works
“Graham Aaranson offered one (method of identifying the correct intepretation spirit of law)
I have offered another
It is judgement”
So you have just admitted that the spirit of the law is not black and white, it can vary between people. Aaronson can legitimately have one version of the spirit, you can have another.
Of I course it is judgement
How have you reached adulthood and not realise judgement impacts almost everything?
“How have you reached adulthood and not realise judgement impacts almost everything? ”
On the contrary, it is you who is suggesting that identifying the spirit of the law is easy, that there is only right answer (i.e. yours), that anyone who can’t identify the spirit of the law is a lawyer etc.
My point (and you now belatedly appear to be agreeing with it) is that two people may have differing intepretations of the spirit of the law. A third person, of course, might assert that the spirit of the law cannot be deduced at all. I am pleased to see you are now in agreement with that.
Every day barristers go into court and differ on what the law means
What does in any way surprise you that there is then a difference of view on how to interpret the law
I am utterly baffled as to what your argument is
Who judges whether a person has been compliant with the spirit of the law?
They need to give enough information so their stakeholders can do that – including tax authorities, of course
So HMRC determine how much tax a person should pay?
No
We self assess and have since 1997
The courts arbitrate
But in a tiny proportion of cases
Because most people choose to comply
HMRC find those who don’t
“If that is clearly the intent then the taxpayer has a choice available to them.”
Try running that line of argument past HMRC when one of those “choices” produces a lower tax charge to the taxpayer.
Of course, the idea that the taxpayer has a “choice” in these circumstances is nonsense. HMRC will assert (and to be fair, correctly) that the letter of the law is to be followed.
Just to be clear here, we are talking about a situation where the economic substance of a transaction is clearly different from the legal form, but the law nevertheless stipulates that the transaction is to be taxed on its legal form.
But you use an example where you make clear the letter let alone spirit is not being complied with
And you expect me to say less should be due?
Why?
I accept very rarely the scenario you suggest happens (graham Aaranson suggested one)
And in that case I would suggest there should be the possibility of equitable relief
But it is once in a blue moon
No, I am saying that the “spirit of the law” (however that is defined) is being complied with, but the letter of the law is not.
In that case HMRC are quite within their rights to charge the taxpayer according to the letter of the law, which they most likely would if it produced a higher tax charge.
Which makes a complete mockery of the notion of the “spirit of the law” – a concept I have always believed to be balderdash. As you know, there is no such thing.
I have already answered this point, comprehensively