I wrote this tweet yesterday:
We can apparently legislate to make the intention to protest peacefully a crime but we can't apparently legislate to make the intention to avoid tax a crime. Odd that, don't you think?
— Richard Murphy (@RichardJMurphy) January 29, 2023
Saying this, it is important to note that tax avoidance is quite hard to define, but then, so too is protest. And, come to that, so too is intent.
However, at least in the case of tax avoidance if there was the desire to criminalise it most prosecutions would take place after the event. In other words intention could be imputed from the actions that took place. This, then, would be easier to prove than the intention to protest, which is nonetheless becoming an offence.
So what is tax avoidance? There is at present no precise definition. What it definitely is not is claiming a tax relief or allowance that is definitely provided for in law, presuming that the circumstances for making the claim, also prescribed in law, are met. So, for example, claiming tax relief on a pension contribution within permitted limits is an action undoubtedly intended to reduce a tax bill, but the law specifically permits that the reduction takes place so it cannot be claimed that this is tax avoidance. Anything that is definitely legal cannot be undertaken as if it was an abuse of the law.
Likewise, anything that is specifically illegal with regard to tax, such as not declaring income, or specifically claiming an expense to which a person knows they are not entitled, is quite clearly not tax avoidance because we know that such actions are properly described as tax evasion.
As a result, tax avoidance is the activity that takes place within the grey space between being tax compliant, where a person specifically seeks to comply with tax law, and tax evasion, where they specifically seek to break that law.
The way in which tax avoidance is usually identified is, in that case, by questioning why an additional step, or additional steps, are inserted into a transaction which seem commercially unnecessary but where a tax advantage arises as a result.
As an example, a shareholding in a UK company could be owned by an offshore company, itself owned by an offshore trust, where the offshore trust is apparently set up for the benefit of a person who is not directly involved in the activity of the UK company in question despite which they are related to and might actually hold funds for the person who it would seem commercially appropriate should own the shares, which shares in the UK company that appropriate person could, as a matter of fact, hold in their own name.
It may be that every single step in this transaction is legal given the circumstances of the people in question, but viewed as a whole the insertion of the unnecessary steps of creating an offshore company and trust and the resulting apparent diversion of ownership all have the appearance of tax avoidance because they seem to have the intention of providing a tax advantage that was otherwise unavailable to the person who has the commercial reason for owning the shares.
In the UK's general anti-abuse rule for taxation purposes, with the creation of which I was involved because I sat on the Treasury committee which advised on the rules for its operation, there is what is called a double reasonableness test. All that demands is that a reasonable person might reasonably think that a step might have been added into a transaction for the purpose of securing a tax advantage and tax abuse is deemed to have taken place.
That rule has been used sparingly, and mainly in cases where the abuse has been glaringly obvious. It has, however, delivered the advantage of reducing glaringly obvious abuse.
The obvious question to ask now is whether criminal sanctions could be applied in cases where such steps have been taken. In other words, where a person has clearly set out to abuse tax law, should they be subject to criminal sanction? If not, why not? Why should abuse of the law not be illegal? An answer to this question is now needed. Tax abuse has too high a cost to society for the issue to be avoided for any longer.
And for those worried that injustice might result, the taxpayer would always be able to offer the defence that the apparently unnecessary step was commercially required. But the onus of proof would be on them, and the number of commercial reasons for going offshore (for example) are very small. They exist, but the taxpayer would have to very confident of their case before undertaking such a step. And that would be the whole point of such a law: it would work by stopping further abuse happening in the vast majority of cases by making the risk from doing it far too high.
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Absolutely ! The term Tax Aviodance should be banished. You either pay tax correctly or you are evading tax. I would also like to see the advisers to Tax Avoiders/Evaders liable for penalties as it’s this cottage industry of tax advisors who are identifying and proposing the so called tax loop holes in the first place
Also agree it should be a crime – why is white collar crime in general treated so lightly ? A crime is a crime whether it a tax evasion, investment scam, insider dealings, etc. All notifications of tax penalties (but not the value) should be made public to name and shame the offenders
Finally how many more rich people that we are not aware of are undertaking dubious tax practices ? If it wasn’t for the bravery, determination and hard work of a journalist we we never if known about this at all !
Sorry, but your approach is naive and 8moossible to support
There is greyness in tax law
Given your acknowledged expertise on this subject Richard and taking it back to the origins of this problem, why couldn’t we make it a legal requirement that any earnings or any capital gains, etc can only be paid in the UK to an individual fully registered for Tax in the UK and any genuine needs for international wealth transfer to be dealt with via a rigorous and transparent licensing arrangement.
I was also interested to recently see the man billed as the US Tax Fraud catcher talking about penalising the Tax fraud enablers. Do you think this is going to happen?
I am not really sure what your suggestion means. Sorry
Well simply Richard it seems to me that much tax dodging relies on the ability to funnel Earnings or capital gains made in this country into a series of foreign entities until all visibility of who benefits is quickly lost.
What I am asking, maybe naively, is why with a change to the laws cannot all this be stopped at the first stage effectively before the money leaves the country.
It seems to me that unless something of this kind is not done then we are always going to be an arms race of new tax laws versus an ever growing army of tax dodging enablers that we can never win.
We could easily demand data on money leaving the country
But we still have to link that with a person and with a diet company registry that would be very hard in many cases
This requires an overhaul of company regulation too in other words
During my thirty five years as a self-employed person, I had a chartered accountant prepare my figures, the figures I gave him, and submit them to what is now called H.M.R.C. Occasionally, he would suggest small changes to the figures, presumably to insure I paid as little income tax as possible. Is this tax avoidance/
I hope not
New criminal laws do not magically stop bad things happening. They just change the consequences if they do. Assuming the authorities are minded to pursue prosecution, that is, rather than just using the threat of prosecution to force taxpayers into settlements because they don’t want to risk losing in court.
Rather than introducing new laws to criminalise behaviour that is hard to define and even harder to prove to a criminal standard, I think it would be more fruitful to give HMRC sufficient resources to investigate cases where they suspect the right amount of tax has not been paid at the right time under the laws as they currently exist. While acknowledghing that HMRC is not always right.
I agree on resources
But threats really help, including helping advisers say ‘no’
Maybe if UK funds of say over £100,000 are moved to another jurisdiction say jersey BVI, Gibraltar etc HMRC should be informed and the reason given ie is it a “reasonable” commercial reason? This may make the oligarchs, billionaires and corporate lawyers hesitate before doing this in the knowledge that HMRC is watching them closely. Obviously, this wont happen soon as HMRC is so understaffed and overloaded as it is.
In the US this would happen
They are bemused that it dies not here
For me it goes back to why we tax:
To help sustain the value of our sovereign currency and our effective sovereignty overall.
To help fight inflation.
I can’t remember the small list you had in the Joy of Tax but if anyone works against those objectives either from and an avoidance or evasion position then to me that’s not on and it needs to be dealt with. Taxes are a patriotic duty.
I see no difference between avoidance and evasion.
The common law can be much more simple on these matters (is this a common law definition currently? It seems not. The distinction between the two is spurious to me because it seems to have created a whole area of law for a group of people to whom normal rules don’t seem to apply. I’m speaking of course about the rich.
Tax avoidance is like being caught red-handed and then buying yourself out of further punishment. Tax evasion is the whole chicken – or should be.
I’d lose avoidance – certainly for those rich enough to pay for accountants to look after their affairs. There should be no excuses there. Sorry but those are my views.
It’s become too acceptable to have a negative attitude to tax. It’s become a political football.
I admit I differ
Avoidance exists because the law is uncertain
Where it ceases to be certain can be very grey
I do cases on that area where no one intends anything wrong, but no one also knows precisely what the relationship between the law and accounting is
The greyness does not represent criminality
It represents uncertainty needing resolution
Unitary taxation, with country by country reporting and double tax credits would help. Richard, you said this some time ago in the Courageous State, when you also talked of a general anti avoidance principle, which would work on an equitable rather than legal basis. How to allocate net profits would be based on sales, assets and employees IIRC, and each jurisdiction would tax their share of the net profit accordingly
We are heading that way for companies
But it would not impact Zahawi
I suppose for individuals, we could look at whether the substance matches the form (as with companies), although I think I can see where you’re coming from Richard, in that individuals don’t have to publish accounts (their tax returns are between them and HMRC)
“Whether the substantive results of the arrangements are consistent with any principles on which those provisions are based, whether express or implied, and the policy objectives of those provisions”, is also part of the test, which you know, but readers may not be clear. It is often expressed as obtaining an advantage which Parliament did not intend.
Agreed
I think that consistent with what I said
could we not make it illegal for any British citizen to hold an account in any foreign jurisdiction which will not provide the British tax authorites with information on these accounts when formally requested?
Only if we make it illegal for them to trade there
I doubt we would want to do that
Yes, such legislation could potentially be enacted by the British government, but the actual implementation and effectiveness of such a law would depend on various factors such as the level of cooperation from foreign jurisdictions and the resources available for enforcement.
The latter is 99% of the issue
The law on data transfer already exists under the aegis of the OECD
It is a tricky topic. As you say, there is a grey area where it is unclear whether a particular strategy to reduce a tax bill is legitimate or not. Currently, there is a substantial incentive to “push the boundaries” because the chances of being investigated are slim and the penalties for “sailing too close to the wind” are small (as long as you are not hiding anything and you co-operate with the investigation). If you have a 1 in 10 chance of being caught and being fined 30% of the tax owed then of course you will push the boundaries.
One way to stop boundaries being pushed is to increase penalties – perhaps by criminalising the activity. The problem here is that “burden of proof” might rise making it tough to get convictions and is very heavy on resources.
Personally, I would do the following:
1) Raise the penalties to between 100% and 300% of tax owed. Possibly bar offenders from being Company Directors or from other professions etc..
2) Make HMRC the arbiter of what is OK or not OK with the any appeal to the courts requiring the plaintiff to prove that HMRC is being unreasonable in its interpretation of the tax code.
3) Increase resources in checking taxes until the “yield” (penalties versus costs) equals that of those charged with checking for benefit fraud. We need to change social attitudes that think tax dodging is OK but cheating on benefits is almost a capital crime.
This approach needs to be shouted loud and clear so that potential tax avoiders get the message….. possibly give them a chance to come clean about existing arrangements that might fall foul of the new regime.
The thought process needs to be…
HMRC: If you are naughty the penalties are very severe.
Tax payer: So, what does “naughty” mean?
HMRC: We all know what “naughty” means…. and if you are unsure then it is defined in the tax code and if there is any doubt, WE will define what “naughty” means.
Tax payer: Oh! Best I avoid getting anywhere into a grey area.
You get the idea
I fully accept what you say further above about ‘grey areas’. These grey areas however should not exist and goodness knows why they should.
And Clive’s thought process ‘mapping’ is spot on.
But I cannot help but think that the gamekeeper sometimes helps out the poacher because the gamekeeper has an anti-tax attitude as well. The uncertainty then is either inviting tax avoidance or evasion or it is entrapment. Either way it is unacceptable.
It’s all about respecting the need and the right of the state to collect taxes which in an economy awash with money is a robust way to address inflation, address other policy needs and prevent money spilling over into other areas of the economy and politics itself.
And this business about reducing one’s taxes? What is all that about? You should just pay the tax owed. How come you are allowed to reduce it? Cannot the authorities tell you accurately how much you owe? If tax rules and law cannot work out if there has been an infringement then the law is an ass.
Stop moaning and pay your bloody taxes – end of.
I’m sorry to say that the whole thing sounds set up to encourage a market for dispute to me and white collar crime as well.
I promise you words have imprecise meanings and when many systems interact the opportunity for ambiguity is very high
I also think that anybody who is “naughty” should not be allowed anywhere near making up our laws.
Zahawi tried to get away with not paying £5million. The majority of people in this country would not earn that in their working lives. Why should the extra wealthy be able to make up the laws which allow them to avoid paying the tax which keeps our society working?
Not sure which I hate most, Zahawi doing that or having a non-dom living in 10 Downing Street. Both equally abhorrent.
I don’t think we should waste time quibbling over what “naughty” means… too many arguments.
Instead, let’s keep the current definitions and practices. Let’s just amend the penalty position so that any tax determined to be unpaid as a result of tax avoidance carries an automatic penalty loading of 100%. Make the risk too great to take.
That’ll learn them.
But that will be by negotiation – and the rate for offshore avoidance can already be higher than that
“3) Increase resources in checking taxes until the “yield” (penalties versus costs) equals that of those charged with checking for benefit fraud. ”
This, I think is most effective (with increases in the discretion to apply penalties by HMRC), but not in line with benefit fraud, but rather in line with what it is estimated is being lost; we will soon enough find we are losing even more; and of course far more resource should go into the prursuit of tax evasion. The black economy is already too large. Who kows how large? Who knows how perncious? Who knows how damaging to the whole of soceity – and to standards of public life?
Yes, it is odd that different types of intentions are treated differently under the law. However, the reason for this discrepancy is that the right to protest is protected by the Constitution, while tax evasion is not. The law must balance the right to protest with public safety and order, whereas tax evasion is considered a criminal offense because it undermines the government’s ability to fund necessary public services.
I was discussing tax avoidance, not evasion
Yes, I see that. My view is not I think in disagreement with yours for the following reasons.
Tax avoidance is legal, and it refers to arranging one’s financial affairs in a way that reduces tax liability. Tax evasion, on the other hand, is illegal and involves not reporting or underreporting income to avoid paying taxes owed.
Tax avoidance is often achieved through legal means such as claiming tax deductions and credits, making use of tax-advantaged investment accounts, and organizing one’s financial affairs in a way that minimizes tax liability. Tax evasion, on the other hand, typically involves illegal activities such as failing to report all taxable income, hiding assets, and making false statements on tax returns. The penalties for tax evasion can be severe, including fines, imprisonment, and the forfeiture of assets.
In order to reduce tax liability, individuals and businesses may utilize tax planning strategies such as shifting income to lower-tax jurisdictions, using tax treaties, and taking advantage of tax incentives. However, they must comply with tax laws and regulations and not engage in any illegal activities.
Tax evasion, on the other hand, is a criminal offense that is actively pursued by tax authorities. This includes underreporting or failing to report taxable income, hiding or transferring assets to avoid paying taxes, and using false documents or other fraudulent methods to evade taxes.
Penalties for tax evasion can include fines, imprisonment, and the seizure of assets. In addition, tax evaders may also be required to pay back taxes owed, plus interest and penalties. It is always advisable to comply with tax laws and regulations and to seek professional advice when needed.
I believe that is all correct but please improve my knowledge in any way you can.
You are talking nonsense about avoidance
Please read what I wrote
I will delete more nonsense of this sort
ChatGPT, oh ChatGPT
With AI so smart
But alas, it’s at capacity
Leaving us to wait
For a chance to chat
With its wisdom and wit
We long to be part
Of its conversation
But for now, we sit
On the sidelines
Patiently waiting
For the day
When ChatGPT
Is ready to play
Again.
So sorry – you’ll have to provide your own nonsense.
But I promise I’ll be back for another chat very soon.
It’s not only the person evading the tax that needs to be dealt with it’s the professional who advise them.
We keep seeing stories about various celebrities dodging tax in various complex ways – Jimmy Carr, Lewis Hamilton, etc. Let’s imagine for a moment how that came to be: young person suddenly makes silly amounts of money, is told to get an IFA, is given paperwork to sign on the grounds “this will save you £50k”, signs it, then reads their name in the paper as an example of a wrong un who is fiddling the system.
Let’s deal with these tax advisers and financial advisers whose entire careers are built on the loopholes in a system which in some cases these very same people have designed.
I have even been told that in some cases the tax adviser suggests a cause of action that they know to be criminal tax evasion but which is so complex that there is no prospect of TSD or SFO convincing a judge of the guilt of their client.
It’s really seedy that we have these professional wealth manipulators inserting themselves into the tax process for personal gain.
Katie Meluah was that young person
She repaid the tax
I agree – the professional institutes need to drum out the people who do this but these days many are rogues outside the system
Sorry, coming to this a day late. Amongst other things, I was submitting my tax return yesterday…
Tax avoidance is notoriously hard to define. It is a massive subject with many strands, and there is no “one size fits all” solution. It can be carried out by employees, employers, contractors, the wealthy, medium-sized businesses (not so common in small business, evasion more probable) and multinational corporations. It will look very different at one end of that spectrum from the other. But I think it starts with tackling the promoters of avoidance schemes and those who enable the avoiders. The law has taken some steps in recent years in this respect, but there is still some way to go – there is a lot of money to be made by assisting UK taxpayers to avoid tax. Here are some things I think we could do –
Higher penalties for enablers (who are often not within our jurisdiction (but not too far outwith it – but I will get to that). To be fair, some professional institutes (like ICAEW and ICAS) require their members not to promote avoidance, but there are lots of tax consultancies whose proprietors are not members of professional institutes, and plenty of tax counsel still seem happy to frank schemes by providing the promoters with positive opinions. I suspect that in some cases they will know, or at least suspect, that the opinions they are asked for do not follow full and frank disclosure of all aspects of arrangements.
We should stop tolerating avoidance emanating from the various barnacles around our coasts (and I think “barnacles” an entirely apt word to use here). If that means promoters move to sunnier climes, so be it. I will shed few tears for the governments of the Isle of Man and the various Channel Islands. This requires very little political will (if they won’t comply, Westminster could stop subsidising them).
The remedy for countering avoidance could be 100% of the income on which tax is avoided. Whether it is called confiscation, a tax rate, or a penalty (and I recognise there are some emotive concepts there), it would be a fairly strong deterrent.
HMRC needs to develop a stronger culture for dealing with various types of avoidance. The Counter Avoidance directorate of HMRC operates by assuming the worst in relation to mass-marketed schemes; that it will need ultimately to litigate a scheme in order to collect the correct tax from its users. This follows in part from the fact that promoters with a UK presence fear being sued by users if they concede failure short of litigation. Avoidance by multinational corporations is generally dealt with by the teams who deal permanently with the taxation affairs of such groups. The incidence of litigation there is not so frequent, which suggests to me a reticence to litigate (or it could of course suggest multinationals don’t practice avoidance, but I doubt that).
Two things which are within my ken as a retired tax inspector. First is the manufacturer of a product within the UK, which continued manufacturing that product in the UK, but no longer solely for its own (variable) profit. Instead the product was produced as a contract manufacturer on a modest fixed margin for a Swiss affiliate. A Big 4 accountancy firm provided the UK company with an expensive transfer pricing study with lots of comparators to show the show the margin now enjoyed by the UK company was reasonable (and turned up to tell me this face to face). This of course totally ignored the fact that what had happened here was completely arse about face – businesses look for contract manufacturers to produce their product as a form of outsourcing, because they can be made more cheaply elsewhere (typically the Far East). This manufacturer had simply outsourced most of its profits, while continuing to manufacture its product.
The second thing is that unscrupulous promoters are (and this is current) promoting disguised remuneration to not especially well-paid employees in the health sector – nurses, etc. who are doing agency work to support their increasingly deteriorating salaries, and are prey to promoters who tell them they can legitimately keep more of their agency earnings. Whilst I am happy to say HMRC is proactively tackling such schemes, and exhorting workers in the healthcare sector not to touch these schemes with a bargepole, the other way of tackling them would be for government to staff the NHS properly so that the need for agency staff would shrink, to say nothing of paying the staff adequately.
Thanks
Thank you for that Roy and thank you for your patience Richard – message received.
I wonder where Sunak stands on this.
https://www.theguardian.com/business/2023/jan/31/infosys-uk-tax-dispute
I think there’s an easy way to tackle this, and that would be to publish the users of tax avoidance schemes.
We already do it for deliberate evasion but why not people who have set out to avoid tax by using these schemes.
I’d say that once HMRC tell you the scheme doesn’t work and they plan to challenge it you either settle in 30 days or you’ll be named as a scheme user and details published on a list for the public to see whose not paying their way the same as everyone else.
They can already do that
The problem is defining a scheme – which has proved to be very hard to do