Friday, 22 June 2012

Nothing can be said to be certain, except death and taxes

Benjamin Franklin (1706-90) is reputed to have stated -
"In this world nothing can be said to be certain, except death and taxes."
 The Daily Mirror (22nd June 2012) published "Jimmy Carr gets roasted over 'dodgy' tax arrangements ...."  and also see BBC 21st June - "Jimmy Carr and the morality of tax avoidance"

The Mirror's headline followed a remark by Prime Minister David Cameron that comedian Jimmy Carr was "morally wrong" with regard to certain of his tax arrangements.  Subsequently, Mr Carr issued an apology for using the tax avoidance scheme in question.  Hardly surprisingly, the Daily Mirror commented about others whose tax arrangements might also be considered by some to be "morally wrong."

Few people ‘enjoy’ paying tax even though many recognise the necessity to pay some tax as the price of achieving and maintaining a civilised society. There is also a feeling of general unfairness when
some are able to arrange their tax affairs so as to pay relatively minimal amounts on large incomes and this creates a feeling that the nation is being run by the wealthy (as many in government undoubtedly are) for the wealthy.  According to an article in the New Statesman (25th November 2011), tax avoidance costs the UK economy £69.9 billion a year.  However, let us try not to stray into politics.  What of the law?  Whatever one's view of "morality", it is the law which determines tax liability.  I offer a few general observations.

1.  Tax liability comes from statute law made by Parliament.

2.  Tax legislation is very detailed and complicated- see, for example, the list of "Manuals" issued by Her Majesty's Revenue and Customs

3.  It was once said - ""No man in this country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores. The Inland Revenue is not slow - and quite rightly - to take every advantage which is open to it under the taxing statutes for the purpose of depleting the taxpayer's pocket. And the taxpayer is, in like manner, entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Revenue" - Lord Clyde in Ayrshire Pullman Motor Services & Ritchie v Commissioners of the Inland Revenue (1929) 14 TC 754.

The man in the street will often state - "Tax evasion is illegal: tax avoidance is legal."  Even those terms lack precision but unfortunately life is not even that simple!

It would be an unwise man who relied on this approach today since the courts no longer read tax legislation as literally as perhaps they did back in 1929.  Under the so-called "Ramsay principle" - based on W T Ramsay Ltd v IRC ([1981] STC 174  - the courts take a more "purposive" approach to reading tax legislation.  This has been productive of a considerable volume of litigation.  Following Ramsay, the courts have been prepared to look for Parliament’s intention when deciding how tax legislation should be interpreted. The search is for the purposes of the legislation and to give effect to that purpose.

4.  Further, in recent years, the government has been bearing down on schemes - (usually invented using the ingenuity of tax lawyers and accountants) - which are forms of tax avoidance. The old distinction between avoidance and evasion is blurred and some tax avoidance now meets with the degree of disapproval normally attaching to evasion.  We have perhaps reached the stage where all actions taken to reduce a tax bill are viewed as suspect in some way, unless they are very clearly just taking advantage of a tax relief in the manner that was intended.  That raises the question of what did Parliament intend by the legislation in issue?


5.  Examples of the government "bearing down" are:

  • Tax Avoidance Disclosure (TAD) rules introduced by the Finance Act 2004 and a variety of Statutory Instruments.  This brought in a framework for early disclosure to the tax authorities of planning that falls under certain headings.
  • The setting up, in December 2010, of a review led by Graham Aaronson QC  to examine whether a General Anti-Avoidance Rule (GAAR) would deter and counter tax avoidance, whilst providing certainty, retaining a tax regime that is attractive to businesses, and minimising costs for businesses and HMRC.   The report was published on 21 November 2011 and the Government accepted the recommendation that a General Anti-Abuse Rule targeted at artificial and abusive tax avoidance schemes would improve the UK’s ability to tackle tax avoidance. The Government plans to bring forward legislation in the Finance Bill 2013.
Enough has been said here to indicate the complexity of the modern taxation system.  Evasion will continue to be illegal but there is now acceptable and unacceptable avoidance.  Unacceptable schemes will be struck down.  Nevertheless, I have little doubt that the "cat and mouse" tactics will continue and that many tax "loopholes" will continue to be available to those with the means to take advantage of them !!

One final thought - " ... for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle" - Winston Churchill.

The Guardian has a separate section on Tax Avoidance and see HMRC "Disclosure of Tax Avoidance Schemes" and Treasury/HMRC "Tackling Tax Avoidance"

Update 27th June:  Jersey threatens independence - tax backlash - "The UK tax code is horrifically complicated. It has all sorts of exemptions and allowances and schemes – and that's fertile ground for tax avoiders."



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