Tax and the court of public opinion

Get three tax advisers in the same room and they will come up with at least four definitions of tax avoidance: put in a couple of members of the public and the total will double.

There are a few purists who dispute that tax avoidance exists – either something is in accordance with the law or it is not – but most people would now accept that eventually there comes a point where a particular piece of tax planning is so artificial and removed from commercial reality that it becomes unacceptable. But unacceptable to whom? That is where the fun really starts. Let us look at a few possibilities.

Some parts of the legislation have a built-in test. So for example, you do not get the capital gains tax exemption on selling your home if you purchased it with the intention of reselling it. Similarly you do not get relief for certain share exchanges if you did them for tax-avoidance purposes. The trend in much recent tax legislation is to introduce these specific anti-avoidance tests.

Sitting on top of all of these is the general anti-abuse rule (GAAR). This applies across all of the major taxes (except VAT), and is designed to block abusive use of the legislation. There is an elaborate system of safeguards round the use of the GAAR and, perhaps because of these, it has not yet been used.

The courts are the final arbiters of tax disputes. This point needs stressing as often it is assumed that it is the government or Revenue & Customs that make the decisions. The courts do look at the anti-avoidance rules built into the statute, but they are also able to take a wider role in determining whether or not particular arrangements are effective.

Historically, the courts saw their role as, at least in part, protecting the taxpayer from the state – expressed most famously in the following quote from the 20th-century politician and judge, Lord Clyde:

“No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in 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 purposes 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 Inland Revenue.”

But over time the pendulum has swung back and forth between this view, and by contrast, the view that the role of the courts is to protect the tax base and ensure that tax which ‘should’ be due is in fact payable. At one time the courts adopted an approach which allowed them to ignore steps inserted for tax-avoidance purposes, but things have moved on since then.

Now the approach is to view the facts ‘realistically’ and then apply the law to those facts taking into account the ‘purpose’ of the legislation. This all sounds very fine – but what does it actually mean? Although this method has enabled the courts to strike down many schemes, others, which seem equally artificial, have survived. It is really difficult to see any coherent policy underlying the courts’ approach – the cynic in me sometimes thinks we could all save a lot of time and money by allowing judges to toss a coin instead.

The real difficulty, and the reason why this is such a controversial area, is that the man or woman in the street has a very different view of all of this. In the current mood this can lead to very strange outcomes. For example, I have seen howls of protest when it is reported that a UK company has paid no tax on the disposal of a foreign subsidiary along the lines of ‘Outrageous avoidance’, ‘Send the directors to jail’, and so on, whereas in fact this is precisely how the tax rules are designed to work and is the result of a deliberate government policy decision.

Even in most of the widely publicised examples of ‘tax avoidance’ by multinationals there seems little evidence – and I speak with no inside knowledge – of companies doing anything more than organising themselves to take advantage of legally available reliefs or exploiting different definitions of taxable activity in the various countries in which they are operating. It is all too easy to put up a diagram showing a very complex group structure with arrows showing fund flows in all directions to ‘prove’ that avoidance is going on.

We do have a public mood that ‘something must be done’. This is understandable – at the margins there is some highly aggressive avoidance. But the perception that ‘everybody is at it’ is just plain wrong.

Although you would never think it from the way things have been represented, Revenue & Customs has actually been quite successful in tackling avoidance. A promoter who goes to see a FTSE 100 company with a convoluted tax scheme is likely to be shown the door very quickly.

There is one very worrying trend coming out of all this. There seems to be a growing acceptance that low-level evasion – that is, not declaring income or deliberately overstating expenses – is somehow less objectionable than the sort of tax avoidance I have discussed in this article: ‘If it is okay for XYZ plc to fiddle their taxes by shifting profits offshore, it must be okay for me to make a bit of money on the side without telling the taxman.’ This is a road we simply must not go down.

The present mode is not far short of a witch hunt. There is a feeding frenzy to flush out well known people who have done something which can be described as tax avoidance.

Quite often what is described turns out to be perfectly ordinary business transactions or plain vanilla tax planning of a type which is described in all of the consumer tax-saving guides. Yes, sometimes more questionable planning schemes emerge, but they will nearly always have been done years ago, in a very different political and legislative world.

So by all means let us have a debate about whether or not there should be limits to tax planning and whether the courts should have the power to overturn schemes. But please do not let us ever get to the stage where politicians are making the decisions on individual cases.

In the outrage over the HSBC data theft, fingers were pointed at the chancellor as to why he had not instigated prosecutions. The last thing we want is this – or any other chancellor – having any influence over the way that the tax affairs of particular individuals or companies are dealt with. That would be opening the door to corruption, which would be an absolute disaster for the integrity of our tax system. It could also lead to taxation by public opinion – which would be equally disastrous. The courts, for all their delays and shortcomings, are the right forum for such matters.

Andrew Hubbard is a partner at Baker Tilly

Key points

Sometimes a particular piece of tax planning is so artificial and removed from commercial reality that it becomes unacceptable.

Some well-publicised cases of “tax avoidance” involve companies taking advantage of available reliefs.

There is a desire to publicise well-known people who have done something that can be described as tax avoidance.