Questions have been raised about how I define the difference between tax avoidance and tax compliance.
Following my blog on the ethics of tax avoidance it was, for example, said:
I am a little puzzled by something you have written and wonder if you explain a little further.
You say:
“‚Ķand the law does provide alternative choices in the way in which transactions can be constructed, with the deliberate intent that the tax payer take advantage of those choices and these an and do have tax consequences. So long as they are clearly complying with the law the tax payer can exercise those choices, legitimately. This is not seeking to tax avoid, it is seeking to comply with the law.”
My understanding was that what you have written above is a concise description of tax avoidance that would be understood as such by many, including, academics, HMRC and tax advisors.
In addition, if a choice is made between the alternatives envisaged by the law as being possible (and summarised by you in the extract above) then assuming disclosure by the corporation of what has been selected and the consequences of that selection (non disclosure would possibly be a case of tax evasion), “the right amount of tax” would be payable “and no more”. Therefore the corporation would be tax compliant (if I understand you definition of tax compliance correctly).
If corporations behaved in such a manner what label would you give to such behaviour? Is this for example “tax mitigation” or “tax planning”? And such behaviour is to be distinguished from something you call “tax avoidance”? Reading through previous blogs you associate tax avoidance with what appears to be the metaphor of “going round the law”. Is the substance of this metaphor the key to understanding what you mean by tax avoidance? If so, can you provide me with any guidance on what you mean by “going round the law”.
My suggestion is that if what I have suggested as tax compliant behaviour is understood to be tax avoidance by academics, HMRC and tax advisors then they are using the wrong language. Please don’t get me wrong: this is not a persona;l criticism. It is a statement of fact. If the Inuit need large numbers of words to describe snow then we need more than one word to describe the spectrum of all behaviour deigned to reduce a tax bill when the range extends for claiming a personal allowance to complex regulatory arbitrage through offshore structures.
I have explained these differences as follows:
Tax avoidance
Tax avoidance is seeking to minimise a tax bill without deliberate deception (which would be tax evasion) but contrary to the spirit of the law. It therefore involves the exploitation of loopholes and gaps in tax and other legislation in ways not anticipated by the law. Those loopholes may be in domestic tax law alone, but they may also be between domestic tax law and company law or between domestic tax law and accounting regulations, for example. The process can also seek to exploit gaps that exist between domestic tax law and the law of other countries when undertaking
international transactions.The tax avoider faces uncertainty when pursuing their activities. That uncertainty focuses mainly on their not really knowing the true meaning of the laws they seek to exploit and taking the chance that either a) they may not be discovered to be tax avoiding or b) that if they are the interpretation placed on the law that they seek to exploit is favourable to them. Their risk of penalties arising as a result of their actions depends upon what the outcome of these risky situations might be.
Tax compliance
Tax compliance is different from tax avoidance and tax evasion because it is defined as 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. The significant difference between tax avoidance and tax compliance is the intent of the taxpayer. A tax avoider seeks to pay less than the tax due as required by the spirit of the law. A tax compliant tax payer seeks to pay the tax due (but no more).
Tax planning
Tax planning is a part of tax compliant behaviour. It is not a part of tax avoidance. Tax law reflects the complexity of modern life and the multitude of choices and options available to all taxpayers when legitimately seeking to structure their affairs. This necessary offer of options within tax legislation creates the opportunity for choice on the part of the tax payer and means that determining the right amount of tax (but no more) that they seek to pay does necessarily requires the exercise of judgement on occasion.
So long as the exercise of that judgement seeks to ensure that the taxpayer makes choices that exercise options clearly allowed by law and that they do not exploit unintended loopholes created between laws then that process of a taxpayer choosing how to structure their affairs is the process of tax planning, which is a legitimate, proper and socially acceptable act.
As example, a taxpayer choosing to save in an ISA (Individual Savings Account) is exercising an option made available to them in law that is entirely tax compliant so long as all the published conditions for saving in that way are met. As a consequence no one can accuse a person using an ISA of tax avoidance. Those who say they are tax avoiding can safely be said to be wrong.
And for the sake of the record:
Tax evasion is the illegal non payment or under-payment of taxes, usually resulting from the making of a false declaration or no declaration at all of taxes due to the relevant tax authorities, resulting in legal penalties (which may be civil or criminal) if the perpetrator of tax evasion is caught.
Let’s put it another way. If there is no tax to pay you can’t avoid it. Putting money in an ISA can’t be tax avoidance: the law says that this option is only available to UK taxpayers (right place) and there is no tax to pay as a result (right amount, right time).
The same with personal allowances. Anyone who says claiming them is tax avoidance is just plain wrong: parliament fully intended that people have such allowances and it is not in the business of promoting tax avoidance, which is the act of getting round the law parliament promotes.
But go to another extreme and a great deal of offshore activity is be definition tax avoidance. That’s because by definition nothing happens offshore — the substance of the transaction is never in the place in which it is recorded when working offshore and therefore cannot be paid in the right place. It’s as simple as night follows day.
The same therefore follows that offshore treasury management functions, Dutch interim holding companies, offshore holding of intellectual property and all that goes with it — plus the distance selling arrangements so beloved of IT companies using Ireland where the deal never goes near the place — are all tax avoidance.
There are other flags. For example, artificial income shifting between family members. And turning income into capital gains. Using companies to avoid national insurance is also tax avoidance. A great many uses of trusts for tax purposes represent tax avoidance.
But the use of trusts to protect children and the disabled does not represent tax avoidance. And nor does the use of limited liability per se mean that someone is doing something wrong. I use an LLP to organise my affairs but pay no less tax than I would if self employed as a result — a fact that influenced my choice, I admit.
That is the key point in all this — it is choice. Ends never justify means but looking at ends to ensure that the means used can be justified is necessary and appropriate in tax. In some cases - like most offshore structures — it is reasonable to presume the end purpose and condemn the means. But there are also grey areas. This is shocking to the libertarian right of the corporate world who demand certainty even when surely they know that this is impossible except in their fantasy world of politics where the assumptions they make eliminate all causes of doubt that might question their abuses. For the rest of us in this middle area we have to look at motive.
It’s OK to use a limited company for commercial purposes.
It’s OK to claim the expenses the law allows if you incurred them and did so for your business.
You can use a trust to protect children or to run a charity.
No one should criticise you. It’s all don to motive — or the ends of your action.
And it’s that which lets us draw a line in the sand. Do you intend to cheat or not? Tax avoiders and tax evaders alike cheat. I stress — both are alike in motive in that they don’t want to pay tax that is due — and they cheat as a result. And it’s tax cheating that I despise, whether its ‘legal’ or not. Paying the right amount of tax at the right time in the right place (and no more) is fine. But cheats don’t do that. And that’s what annoys me. And a lot of other people. Because more morality is much more important than the law — and the cheats know that too — which is why they find it so hard to justify their actions.
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“For example, artificial income shifting between family members. And turning income into capital gains. Using companies to avoid national insurance is also tax avoidance.”
You do have a cheek Richard. Fulcrum Publishing Ltd and the Tax Gap Ltd. Income shifting and NI avoidance.
Tsk.
“There are other flags. For example, artificial income shifting between family members.”
So would you say that if a husband and wife are joint shareholders of a company that publishes material, where the husband does most if not all of the writing and if the wife (who, say, is a full-time GP bringing up kids) more than likely does next to nothing for the company, then any dividends paid out are not reflecting the economic substance of the transaction? Is this tax avoidance?
@Tim Worstall
and
@Howard Philipot
Oh what silly boys you are
Yes I’ve run companies and there is nothing to stop me doing so
And yes my wife has owned shares in them
Fulcrum Publishing was set up to publish her articles and my software. It was owned 50 / 50 as a result
It turned out – I agree – software made more. She decided that writing was not for her. It’s one reason the company stopped trading. But the intention was right throughout. It’s why |I now argue that limited companies are not suitable for use in such situations.
The Tax Gap and its successor – Tax Research LLP – have both had massive input form my wife. She reads much of what I write, comments extensively, edits, helps make strategic decisions, is fully aware of financial activity and more besides. The real question is why she has been underpaid.
Except as you note she’s a part time GP – but GPs are rightly well paid and do pay NIC and so income was not shifted to secure tax advantage but reflected work done and NIC was not paid as the alternative measure was self employment where NIC was being paid in full as required by law – a point I have made before
So all in all your perpetual claims don’t stack – as ever
I seek to walk the talk and think I do
I will not be debating this further
It is clear that there are many tax arrangements and tax transactions of which you disapprove, but it is your blog and you are entitled to voice your disapproval, even though I assume that you want readers to understand you not just agree with you.
However, in order to keep matters grounded and not ask you to address abstract matters (which you appear not to like) I will ask a question about one of the examples you offer as an instance of what you call (remember the Cheshire Cat also named things at will), tax avoidance (I thought the person making the comment that you quoted was asking a number of very reasonable questions which you answered not by addressing the questions asked but by providing a set of your defintions) , that is, the case of “treasury management functions” located outside the UK in what is a lower tax jurisdiction than the UK.
Cadbury operated its treasury management function outside the UK. Having considered how the tax law operates in this area, it was judged by the highest relevant court, that what Cadbury was doing was not reprehensible for two main reasons, (1) the treasury function operated in an EU country (and as you know the UK is now part of the EU on so many levels) and (2) there were employees actually doing things in the country in which the treasury function was located related to the treasury function.
In your view (I accept that you are entitled to your views even if such views are somewhat unique), is what Cadbury did a case of tax avoidance? If so then I assume that, in respect of the treasury function, you consider that Cadbury in some manner deserves the title of “cheat”. Is my assumption correct?
Part of me does not expect a direct response, that does not appear to be your style. It would however, help to clarify your position to others (as well as to me) if you did provide a direct response.
Augustine
@Augustine
Were Cadbury cheating in the sense that they were tax avoiding?
Yes of course they were
And by the finest of margins they got away with it
Law and ethics are not the same thing, remember
It was ruled they acted legally – but it was a close thing
But I still think it was cheating
And I think the same of much other corporate activity
And so do millions of others
Winning on a technicality is not the same as being right
The problem is that in practice what you claim to be unethical is only unethical according to your current standard … it is, it appears, not ‘ethical’ to seek to find the line between what is tax avoidance and tax evasion. It is, however, ‘ethical’ to rely on others’ discovery of where that line lies …
And yes, I tease a little: but your difficulty is, it appears to me, that you rely too much on the subjective – what is the spirit of the law – where the problem is the objective – what does the law say and what do those words mean.
@Evan Price
Let’s repeat a comment I made elsewhere today:
Let’s use a little analogy. I drive along a road with a 30mph limit. I don’t have to drive at 30. Sometimes it may be wise to stop. It could be dangerous not to stop. Or it could simply be right to do 10 mph. But you say such judgement is not allowed. You say 30 is permitted so 30 shall be done. And a child who steps out dies. Legal you say. Try telling that to the judge if you took no steps to stop.
Judgement is the bedrock of society – the subjective as you call it
Your question reveals your lack of it
“Winning on a technicality is not the same as being right”
Richard, you must be aware that there are any number of ‘technical’ offences where the perpetrator has gained no benefit from breaching a law, maybe has been unaware of the law & no-one has suffered as a consequence but is still prosecuted & convicted.
If your saying that pleading that it’s not “right” is a workable defence then I can assure you, from personal experience, courts does not share your view.
@Richard Murphy
Richard,
Thank you for the prompt response.
I think I now understand what you mean by “cheat” a little more fully than I did before, although I am still a little confused. I had thought that for you a defining characteritic of tax avoidance was to engage in cheating. That is, it is a necessary condition of an action to be classified as tax avoidance that the parties engaged in the action are engaged in an instance of cheating. In your words:
“Do you intend to cheat or not? Tax avoiders and tax evaders alike cheat. I stress — both are alike in motive in that they don’t want to pay tax that is due — and they cheat as a result. And it’s tax cheating that I despise, whether its ‘legal’ or not.”
But in your response you appear to be making tax avoidance a necessary condition of cheating. That is Cadbury were only cheating if they were engaged in tax avoidance.
I am never quite certain what is being claimed if there appears to be an element of circularity present. I know these are difficult topics and you have been commenting on them for some years so sorry if I have misunderstood your position. Any chance of enlightenment? Is cheating a necessary condition of tax avoidance or not?
I do know that law and ethics are not the same. To use a well worn example: it is not illegal to commit adultery but it is immoral/unethical to commit adultery.
However, not all decisions are analagous to the legal/ethical nature of adultery. If I plan to travel to Town B from Town A and I have two routes, one is 25 miles long with a 30 mph speed limit and the other is 25 miles long with a 60 mph speed limit, I have difficulty seeing how I am being immoral in choosing one route rather than another.
I thought that this was the point the commentator was making when he referred to your statement:
“…and the law does provide alternative choices in the way in which transactions can be constructed, with the deliberate intent that the tax payer take advantage of those choices and these an and do have tax consequences. So long as they are clearly complying with the law the tax payer can exercise those choices, legitimately. This is not seeking to tax avoid, it is seeking to comply with the law.”
Using your words, how is choosing one arrangement that clearly complies with the law OK but choosing another arrangement that clearly complies with the law cheating? Is it that on occasion you believe that the law as declared by a court in its judgement is simply misdeclared? To return to the example used in my orignal comment, in the Cadbury case, did the highest relevant court simply declared the law incorrectly? Is your position that on the basis of what the law should have been declared as being, the actions of Cadbury would not have been effective for tax purposes, therefore Cadbury was cheating and therefore Cadbury were engaged in tax avoidance?
Your views and comments would be welcomed.
Augustine
@peter
I was discussing a moral issue and saying that being legally right is not necessarily a moral defence
I am not sure that was what you were discussing so I think we are on different wavelengths
@Augustine
You seem to wilfully miss the point
The very fact this case was taken showed that HMRC were quite sure that the transactions had no economic substance in Ireland
Lord Denning would have agreed, I am sure
But the law found otherwise
And my argument is “so what?”
The transactions still lacked substance to the common man and so are abusive
The law does not determine what is ethically right or wrong
And what is lawful is very definitely not always right. I mention apartheid in South Africa as one example
I define tax compliance as an ethical standard and provide a test – 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.
That’s what we’re discussing
Your reliance on law is the defence of the guilty in this case
@Richard Murphy
Richard
I am afraid I am still confused and I am certainly not intending to wilfully miss the point. I only made the point about the law because of the quote of your comment provided by the previous commentator.
I am trying to make sense of your position because many of the topics you address are so important.
To put words in your mouth would the following be a reasonable summary your position (my additions to your comments are in bold) based on what you said in your original blog:
“…and the law does provide alternative MORAL choices in the way in which transactions can be constructed, with the deliberate intent that the tax payer take advantage of CHOOSING BETWEEN those MORAL choices and these [c]an and do have tax consequences. So long as they are clearly complying with the law AND EACH OF THE ALTERNATIVES AVAILABLE WITHIN THE LAW AND CONSIDERED BY THE TAXPAYER IS A MORAL ALTERNATIVE the tax payer can exercise those choices, legitimately. IN CHOOSING BETWEEN MORAL ALTERNATIVES THE TAXPAYER [This] is not seeking to tax avoid, it is seeking to comply with the law. IF HOWEVER ONE OR MORE ALTERNATIVES AVAILABLE WITHIN THE LEGAL SYSTEM ARE NOT A MORAL ALTERNATIVE (EVEN THOUGH THE ALTERNATIVE IS A LEGAL ALTERNATIVE) AND THE TAXPAYER CHOOSES A NON MORAL ALTERNATIVE EVEN THOUGH THIS NON MORAL ALTERNATIVE MIGHT PRODUCE THE BENEFICIAL TAX CONSEQUENCES DESIRED BY THE TAXPAYER BECAUSE THE ALTERNATIVE IS NOT A MORAL ALTERNATIVE THE TAX PAYER IS ENGAGING IN TAX AVOIDANCE (WHICH IS UNACCEPTABLE)”
The cheating bit comes in because the taxpayer is seeking to pay less tax than would be payable if he had entered into a moral alternative.
Am I beginning to understand?
Augustine
Except that is a horrible analogy as that circumstance is specifically dealt with in the highway code:
“125
The speed limit is the absolute maximum and does not mean it is safe to drive at that speed irrespective of conditions. Driving at speeds too fast for the road and traffic conditions is dangerous. You should always reduce your speed when:
– the road layout or condition presents hazards, such as bends
– sharing the road with pedestrians, cyclists and horse riders, particularly children, and motorcyclists
– weather conditions make it safer to do so
– driving at night as it is more difficult to see other road users”
Not only is such judgement allowed, it is explicitly required.
@Richard Murphy
“The very fact this case was taken showed that HMRC were quite sure that the transactions had no economic substance in Ireland”
So now you are saying that anything HMRC attacks automatically renders that arrangement unethical/cheating/tax avoiding? Even if a court dismisses HMRC’s case?
“And what is lawful is very definitely not always right”
I fail to see what this adds to your argument, if anything surely it detracts from it?
What you are saying here is that a taxpayer may not have to comply with the law (e.g. by paying the correct amount of tax), if it violates someone’s code of what is “right”. Of course, that person’s code may not coincide with yours. Unless you are claiming that you and you alone have a monopoly on ethics and anyone who disagrees with them is unethical/immoral/a cheat (which, I have to say, does feel like it reading your blog on occasions).
Richard,
“Let’s use a little analogy. I drive along a road with a 30mph limit. I don’t have to drive at 30. Sometimes it may be wise to stop. It could be dangerous not to stop. Or it could simply be right to do 10 mph. But you say such judgement is not allowed. You say 30 is permitted so 30 shall be done. And a child who steps out dies. Legal you say. Try telling that to the judge if you took no steps to stop.”
This is a false analogy. A driver, whilst having to comply with a speed limit, also is bound to drive with due care and attention. If he obeys one he might be breaking the other.
This is not the case when faced with a commercial situation. There are alternative ways to structure transactions which have nothing to do and cannot be compared with the fact that someone is required to obey more than one law in a totally different scenario.
There is also confusion over your assertion that one must not only do what the law says but also do what you deem to be ethical. But you then go on to say that what is lawful may sometimes be wrong (in your opinion). This throws into complete disarray your attempt to link tax compliant behaviour to something called the “spirit of the law”.
Regards,
Neil
@Augustine
As a lawyer, you would understand that a criminal court (and I’m not referring to Caburys) is only interested in the degree to which a defendant is guilty of the charge, particularly when it comes to sentencing. A court does not determine the degree to which the defendant is not guilty. We all know there can be some ‘near misses’ through insufficient evidence, mistakes in preparing the case, etc. but accept the presumption of innocence.
However, when it comes to the court of public opinion, consumer choice and the right to protest peacefully, we are allowed to be guided by definitions such as tax cheats. Do you not agree?
oops … Cadbury’s, mustn’t forget there’s a cad in there 😉
@RichardSM
“However, when it comes to the court of public opinion, consumer choice and the right to protest peacefully, we are allowed to be guided by definitions such as tax cheats. Do you not agree?”
So we are now to be governed by the rule of the mob, and not the rule of law?
“To leave the crucial obligation to pay tax to be dealt with by such difficult and ill-defined concepts as morality and the spirit of the law would be an abdication by government of this key responsibility.”
Prof Judith Freedman (who, as the originator of the GANTIP concept stated that: “A GANTIP attempts to make the law and the spirit of the law one and the same thing, so that there is no need to look outside this to obtain an answer.”)
I note the observations made by those opposing the idea of tax compliance and note their similarity and will deal with them as a whole.
I note also the fact that, yet again, the attempt is made to make a rule of what is a principle that I am proposing
They are, of course, not the same thing.
We do not have a General Anti-Avoidance Principle as yet – unfortunately – but we do have companies and individuals capable of seeking to comply with the spirit of the law. That’s my point
And I have made the point time and again that it is advantageous for a company to do so because:
a) tax minimization is usually artificial and can impact on profit making activity
b) a company is under no obligation to minimise its tax bill
c) A company can rightly think it appropriate to minimise tax risk
d) A company can rightly think it has a responsibility to the places in which it operates and seek to pay the right amount of tax there
e) It can think that it does have an obligation to all stakeholders
f) It can seek to balance these objectives
And as a matter of fact I argue many companies do this
In which case all the arguments presented make little or no sense – the behaviour I describe is practised
The discretion to work within the law is exercised – and good practice (the analogy of the Highway Code reinforces the importance of good practice) suggests this is desirable
The hysteria of arbitrariness or lynch mobs or whatever is just hysteria – and wholly inappropriate
I am suggesting a principle – and one I would, I admit like to see in law and which I think would be of considerable advantage if it were in law
But that’s it. And on the basis of a principle it is possible to say that some are acting legally but in an unprincipled way
I’m really not sure what else there is to discuss on the issue – except that the sooner was have a General Anti-Avoidance Principle the better
@Richard Murphy
A GANTIP while perhaps preferable, will require a large degree of redrafting of the tax laws as you cannot apply a principle to somewhat incoherent tax laws. It will also, likely see the removal of Specific Anti-Avoidance measures (or TAARs).
My guess is that if the government is going to make any move towards anti-avoidance legislation after Aaronson, they will see a GAAR as a quick and dirty fix. It will be interesting to see how closely the Treasury follow the Australian GAAR review.
@Nigel Hughes
It’s against the law to riot. It’s not against the law to protest. (except, ironically, outside Parliament. No wonder people have to take their protests elsewhere.)
Prosecuting for riot is quite difficult, since to be classified as a riot, it has to meet a series of tests, all of which require proof. A protest doesn’t constitute a riot, even if it meets all the conditions bar one. That’s the law for you; loopholes everywhere. Still, what’s good for the goose …
Mmmm. I watch with interest the actions of people like UK uncut on the telly and couple these people with the general trend I see in the UK these days.
To explain, I probably agree with the finer points of the tax avoidance argument but the much broader direction seems to be that these people are always more concerned with “humanrights”,”elitism”, “equality”, “health and safety”,”multi culturism”, “welfare state” the list goes on and on. Whereas no-one seems to be concerned with how we (the UK) makes our living. Words such as “business”, “commerce” and of course “profit” rank in the four letter variety.
I might have a deal more sympathy for these people if I had any inkling that they knew where the money comes from for all the things listed above. Its patently obvious that the West in general and the UK in particular has priced itself out of most markets and continues to so do.
The social structure of the UK as we know it is unsupportable in the long term. More and more people demand more from the state provided by fewer and fewer people creating tax revenues. This trend will not be reversed by closing tax loopholes. Closing loopholes needs to be done as a tactic not as a strategy against all of the financial ills of the UK.
The country needs to be hugely more attractive to business providing sustainable jobs instead of making anyone thinking of investing in the UK who looks at the antics of the weekend think “I’ll go somewhere else” .
@Tom Malcolm
Wrong
You saw anarchists on television
Not the same thing
And your economic analysis is simply wrong…
Wealth is not built on profit. It is built on labour
“Wealth is not built on profit. It is built on labour”
Do you intend to sound like a Marxist when you say that?
@Jed Christiansen
Marx was an economist I’ve read
Along with others of his genre
Perhaps you should read him too
But I am not a Marxist – I said what I know to be true
If he came to the same conclusion, so be it
No doubt I agree with others on occasion too