I was interviewed by a journalist yesterday who wanted to know why I was not worried about the erosion in the distinction between tax avoidance, which they suggested to be legal, and tax vision, which they suggested to be illegal. This is, of course, often presented as if it is fact.
As I explained though, this is only one logic of UK law and appears to have its origins in a ruling given in the House of Lords in the United Kingdom in 1869 (Partington v. Attorney-General (1869), L.R. 4 E. & I. App. 100, per Lord Cairns at p. 122) that said:
If the person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be. In other words, if there be admissible, in any statute what is called an equitable construction, certainly such a construction is not admissible in a taxing statute.
On the basis of this and other such rulings UK tax law was for a long time given a legal construction i.e. the form of words used to impose a tax charge was paramount. This, however, grossly simplifies modern tax jurisprudence and there have been substantial changes in modern tax law, and yet for the purposes of the argument that the journalist put to me the above 1869 opinion remains true: the difference between tax avoidance and evasion is based on a strict interpretation of what the law says and avoiders are wholly within their rights if they can find a way around that legal construction. When it comes to the morality of tax law this is the construct of law the defenders of tax law use.
I made three points. The first is that this is not the way tax law actually is now. The General Anti-Abuse Rule (and much else besides) makes that very clear. In other words, those who make this claim that the law must be paramount are basing their argument on law that no longer exists.
Second, it is a moral judgement to base your argument on a law that no longer exists: in other words those who are saying morality must be kept out of tax law are doing exactly what they condemn.
And third, this legal basis of interpretation of law is not, anyway, the only basis for interpretation of law we have in the UK: we have a whole model of equitable interpretation of law that is purposive in intent and so seeks to (broadly speaking) look at the conduct of the person to whom the law is being applied and interpret the application of law in that context. This forms the basis for the new concept of the abuse of tax law, where the intention of the taxpayer to cheat the system is what matters. This has a long legal tradition all of its own, of course, and is entirely legal as a result: it just does not produce the result that the tax avoiders want and so they ignore it. But, once again, that is moral judgement on their part and to claim otherwise is just wrong.
Which is why the old divide between avoidance and evasion is disappearing. Legally and ethically it is now recognised to have no use. It is inconsistent with modern tax law. It contravenes the morality of society that underpins our concept of equity. As such it has no place in modern tax debate and it's immoral to use it.
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I struggle with this. The amount and nature of the tax we (individuals and companies) pay is a significant factor in our relationship with the government.
Complying with law is another.
You seem to be saying that as far as tax is concerned complying with the law is not enough and we need, in some way, to be obedient to the spirit of what government intends, and that spirit will depend on the arbitrary interpretation of intent. I use the word ‘arbitrary’ because if there was a systematic interpretation then it would itself be part of the legal framework.
It is essential that people understand what rules they are expected to follow, and to understand the rules themselves. Obeying those rules is what is required of citizens. Otherwise we will drift into Kafka’s Trial.
Of course tax must be collected in accordance with the law
I did not say anything else
All I am saying is that the law is a flexible beast
Isn’t that obvious.
We all do our best to comply with the law.
We do not, however, conspire with others (and it always is a conspiracy) to scour the tax laws in order to produce a construct (which always relies on the prevalence of form over substance) that gives us an exclusive advantage. We do not game the legal system wagering that the construct (if it is detected and questioned) will be deemed “legal”.
I take issue with the mantra that Tax Avoidance is Legal. It isn’t. It’s just not illegal… there’s a significant difference.
To highlight what I mean, there isn’t a rule which makes it illegal to walk down a street at midnight, screaming like a banshee, but if you were to do that and someone complained to the police, you would be arrested… not for wandering down the street screaming like a banshee – there isn’t a law against that – but for Breach of the Peace.
Same with Tax Avoidance. There is no law against a company arranging its affairs in a way which makes the most effective use of tax laws around the globe, however UK tax statutes regularly deny relief for losses arising from transactions whose only or main purpose is to gain a tax advantage. There’s no law against the activity, but there’s a statutory prohibition to the outcome.
It’s absurd to say that Tax Avoidance is legal therefore it’s OK. I suppose the simplest way to illustrate it is this – if Tax Avoidance was legal and OK, HMRC wouldn’t win any cases. HMRC are currently successful in around 80% of the avoidance cases taken to tribunal. QED, I think.
Thanks
Good analogy
10 out of 10 in my view Geearkay!
If there was absolutely certainty in tax law I assume there would be no challenges by HMRC in the Courts. Patently, this is not the case. I like your notion, Richard, that the law is a flexible beast.
We are a long way from an appreciation of our moral responsibility to pay tax. For 35 years I was exhorted to bend my will to the cold statement “I am paying too much tax”.
I never promoted the more extreme tax schemes that led, eventually, to the GAAR. But I did calculate the maximum that could be paid into pensions, arranging capital purchases to maximise AIA claims, and so on. Perhaps, as you indicate in your excellent book, The Joy of Tax, we need to transform our attitude to the payment of tax as a celebration rather than a painful necessity.
We have a long way to go. When the President Elect, Mr Trump, was heard to swipe in a televised debate, that his non payment of federal taxes for an undefined period made him “smart”, the message to his supporters was pretty clear.
I think the point is that tax evasion is criminally unlawful, whereas tax avoidance isn’t.
That point is rather uninteresting: the more interesting question is what constitutes acceptable tax avoidance (“mitigation” / “planning”) – e.g. making use of specific reliefs in the way intended by Parliament – and what constitutes unacceptable tax avoidance, e.g. taking untenable views of the law, creating highly artificial structures, etc.
That line is not at all clear but it is where HMRC is making big inroads e.g. by introducing the new enablers of tax avoidance legislation and widening the scope of the DOTAS rules. There is a stubborn marketed schemes industry that do not seem particularly interested in the distinction, and there are other firms that want to be on the right side of the line but are no longer sure where it is in all cases.