Skip to content

In Defence of Tax Avoidance

January 27, 2013

INTRODUCTION

Claiming that someone has committed an act of “tax avoidance” has now become the sort of insult previously reserved for bigots, racists and criminals. This post seeks to redress the latest assault on the “law abiding” and turn the tables on the accusers. I argue that “tax avoidance” is a perfectly acceptable activity and in fact our country would be positively harmed by those who sough to do otherwise. I realise this position might in the first instance seem a tough task, but in fact as this blog demonstrates – it is an easy argument and self evidently true.

The real villain that the press (and the current collection of political Muppetry) appear to have a problem with is the UK tax code and the phenomenal opportunities left for tax professionals in accounting and law to take advantage of. I propose two solutions to these problems – either reduce the complexity of the tax code or recruit/ enfranchise the experts to design tax law.

WHAT IS TAX AVOIDANCE

We have heard in recent times that sensible tax planning is fine, but “(aggressive) tax avoidance” is not. We are also told that whilst tax evasion is a criminal activity (typically carried out by those that don’t reveal to HMRC how much they have earned), tax avoidance is not, tax avoidance is perfectly legal. The question is therefore, why are we getting hot under the collar about something that is legal? Further, what is the use of the word “aggressive” doing in the debate?  Is it possible to “aggressively walk the dog” or “aggressively go for a jog”, how about the moral repugnance you might feel if someone were to “aggressively go shopping for milk?”.

The fact remains that people in the UK, at least for now, are only due to pay tax if Parliament has passed an Act which requires them to do so. We don’t have to pay more. The idea that the State or Crown is prohibited from taking your assets  in the form of tax at will was stopped in 1215 at Runnymede in a document known as the Magna Carta. In it, the State/ Crown promised it would only take your property (and liberty) if it followed due process of law. So, unless there is a law that allows the State to tax, you are legally entitled to keep your property. Simple – or so it should be.

The term tax avoidance came about as a result between a gap between what Parliament had actually said it was going to tax (in an Act of Parliament) and what some people feel Parliament meant to tax. This is a very interesting gap. In the UK when Parliament pass an Act (Statute Law), the Statute is typically written in general terms. The role of working out what the Statutes mean in practice is a matter for the Judiciary through the Courts. So in trying to work out whether a particular transaction is taxable, it is for the Judges to work out whether it complies with the Statute, or not. Typically HMRC will attempt to say that transactions are taxable (or not eligible for tax relief) and accountants/ barristers/ tax lawyers will try and argue the opposite. The Judges decide.

Probably the most sensible thing said about tax avoidance was the statement made by a Law Lord, Lord Hoffman who sat in the House of Lords decided on, among other things, tax cases:

“…tax avoidance in the sense of a series of transactions successfully structured to avoid a tax which Parliament intended to impose should be a contradiction in terms. The only way in which Parliament can express an intention to impose a tax is by a statute that means that such a tax is to be imposed. If that is what Parliament means, the courts should be trusted to give effect to its intention.”[1]

In the words of Lord Hoffman, tax avoidance is a contradiction in terms. It doesn’t actually mean anything…. why is there so much debate about the subject and where did the fuss come from?
AGGRESSIVE AVOIDANCE
The tax code is very complex. It currently runs to over 12,000 pages and appears to double every decade. Who is responsible for this extreme complexity? The answer is the people that pass new tax laws – i.e. politicians. As a result of the amazing complexity of the tax code there are many ways in which transactions can now be structured to minimise exposure to taxation.
How do the loopholes form? Although a politician might want to achieve a particular tax effect, due to the collective inadequacy of HMRC officials, politicians and the second rate consultation processes the law is badly drafted. In other words Parliament passes bad law. The loopholes that get created from this process are then exploited by some of the finest minds in the UK – e.g. senior tax solicitors at the Magic Circle (the top 6 law firms in the UK) are paid often in excess of £1-2 million p.a. The top paid tax barristers in the UK can command fees in excess of £5,000 per hour for advice.
On the other side of the fence at HMRC the starting salary for a tax inspector is £25,000 p.a. :
The system we have in tax argumentation is a little like Manchester City v Accrington Stanley. The only way in which Accrington Stanley can win the game is by cheating (apart from the once-in-a lifetime FA cup giant killing matches!). Cheating is exactly what HMRC try to do by simply moving the goal posts during and after the game and sometimes just after the goals have been scored.
Of course, to move the goal posts after a goal has been scored is a breach of the rule of law (as set out in the Magna Carta) but then HMRC don’t like losing so this is how the UK tax has tended to proceed since the famous case of Ramsay in 1982. In the Ramsay case the House of Lords decided that although what the tax payer had done was legal and worked within the Acts of Parliament, the Courts would still tax the transaction on the basis that Parliament hadn’t meant what it said. This grandly named “purposive jurisprudential analysis” of tax law has persisted ever since and makes tax planning difficult.
Tax professionals have become used to trying to work out “purposive analysis” since Ramsay – and arguably Ramsay isn’t a breach of the rule of law on the basis that the Courts underwrote that approach, not the executive (HMRC). Despite this, however, the latest assault on the rule of law is coming…
GENERAL ANTI AVOIDANCE RULE (GAAR)
George Osborne, a Conservative Chancellor, no less, has proposed introducing a rule in the next Budget which will almost certainly become law. The GAAR will say that HMRC will now be able to tax someone if they think the transaction undertaken is “unreasonable” – REGARDLESS OF PARLIAMENT. This change in the law is probably the biggest challenge to the rule of law since 1215, but the press have missed it. Probably because the technical detail is a bit too tricky and probably because they have become lost in the real debate and the implications. So we are clear here –
GAAR will allow HMRC to tax an individual or a business who operated in accordance with the law – when HMRC accept there was no tax – but tax them anyway because they don’t like the effect at a later stage – even acting against the law from Parliament!!!
 We are told that this will only apply to egregious/ aggressive tax avoidance, but as we have seen above, this expression simply means legal minimisation of tax. It is possible therefore that any tax planning might become a target for retrospective taxation including pensions planning, ISAs, VCT, EIS or any other form of activity that uses tax relief. Clearly not a rule that is going to promote investment, saving or business.
THE IMPACT OF TAXATION THROUGH THE MOB
As set out above – tax should always be a function of law. People should know in advance what tax is due before they act. Tax should never be retrospective i.e. imposed afterwards. This basic right is being undermined. Why? The answer lies in the fact that wealthy people are typically the recipients of tax planning and advice. There is now a consensus that the only people who will be affected by “anti-avoidance” provisions are the uber rich….
To abandon the rule of law, however, is a dangerous game to play. We don’t abandon the rule of law when it comes to the protection of Abu Qatada or other accused terrorists and for good reason. We value the law, we value the rules and we don’t believe that you can sustain and grow a modern economy without a sensible tax environment.
Starbucks, Google and Amazon have now found to their peril what happens when a nation wants to tax by mob rule. The implications of the disgraceful scene of a UK politician bleating on to business people that they should pay more than they legally have to was misunderstood. International businesses watching that scene who might have thought of the UK as a business friendly place will have been warned off. Businesses don’t typically withdraw with a fanfare, they quietly slip away, they don’t expand or recruit in unfriendly environments.
By attacking businesses and entrepreneurs through ex-post, retrospective taxation, by whining about the law that Parliament has passed, by endlessly complaining about success, we harm our own economic prospects. Good business maximises profits for shareholders – that is their function. A director of a company (under the Companies Act 2006) is employed solely to further the economic interests of a business. If they pay more taxation than is legally due to the State, they can be sued by their shareholders. If the shareholders want to make voluntary contributions to HMRC – that is fine, but we are in a bad situation where the directors feel they need to go above and beyond the law to comply with mob taxation and that is the state we are currently in.
The current anti-avoidance debate is having a harmful effect on the UKs ability to generate growth, jobs, wealth investment and encourage risk taking. The people we need to think about the UK as a place to do business must be looking at us in horror as we attack the very entities we need to grow our economy. As angry mobs sit outside shops in London complaining about the lack of tax being paid by organisations that contribute £100 millions to HMRC, the journalistic myopia is stunning. We are not only biting the hands that feed our state, we are snarling at those that might have done.
Starbucks employ more than 8,500 people in the UK and have contributed more than £160 million in tax.
See:  http://news.starbucks.com/article_display.cfm?article_id=709
We need more of these businesses in the UK, not less. We need to wake up and recognise who is paying the bills in this country – it certainly isn’t the feckless whingers outside the shops – or Richard Murphy.
SOLUTIONS
The solutions to the problem of “tax avoidance” are simple:
1. Work out how to hire very clever people to work at HMRC to close down loopholes. This will ensure that the laws Parliament think they are passing actually work. This might involve paying more money for the current advice, but at the moment we are in a “pay peanuts get monkeys” situation.
2. Simplify the tax code. This can be easily done by moving towards a flat rate tax system which has worked wonders for every country that has enacted it. Tax revenues have significantly risen and the costs of administering the tax system have been decimated. For those people worried about “relative poverty” which would potentially arise, see my last posting on the “Village of Billionaires”.
Our current political and civil service class – fronted almost exclusively by people with only a journalistic understanding of complexity is unlikely to change, but at least this post has provided the reasons for our current situation.

[1] Hoffman, L “Tax Avoidance” in British Tax Review No. 197 (2005) p203

Advertisements

From → Uncategorized

One Comment
  1. In this Socratic dialogue I will be Polemarchus rather than Glaucon : Polemarchus had 8 ‘O’ levels whereas Socrates has, to date, attained 8 degrees. I shall simply, therefore crave your indulgence, not crave your pardon.This may well be like watching Boris Spassky play chess with a newborn child.

    Clearly, the rhetoric of ‘bashing the bankers’, trashing the Tax Avoiders’ ‘soaking the rich’ in times of Austerity is music to the ears of the ‘Occupy’ and UK Uncut types, the classic ‘Ad Captandum Vulgus’. which serves to divert attention from the other side of the balance sheet, namely that during The Reign of Terror 1997-2010, Gordon Brown increased Public Spending at a phenomenal rate.
    These government deficits must now be reduced, the Debt Mountain must be cut down. If the Chancellor is to succeed, he must attack spending plans but also, to be seen to be fair, he must raise revenues. As Jean Baptiste Colbert (French Economist and Minister of Finance under King Louis XIV of France. 1619-1683) observed,“The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing”. However, the World has moved on since the times of the Sun King and French plutocrats can hop on the Eurostar and settle in lower tax regimes such as London.

    David Cameron recently joined in the chorus of clamours of those denouncing the ‘legal but unethical’ ( aggressive ) Tax Avoiders with some success Jimmy Carr apologises for ‘terrible error of judgment’ over tax scheme.
    The Act of Taxation through the Mob’ seems to be making inroads into government thinking; of course, politicians have always got one eye fixed on opinion polls and all politicians want to be in government…

    I agree that the sensible route out of this dilemma is to drastically simplify the tax code. In Britain, when the top rate of income tax was lowered to 40% between 1988 and 2010, the share of income tax collected from the wealthiest percentile rose from 14 to 27%.. Flat taxes work,; look at places like HongKong where flat taxation has created wealth, and not armies of personal tax advisers.. You wouldn’t have to fork out £ 82.95 for Tolley’s Tax Guide 2013-14 either.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: