Say the words “Tax Avoidance” to almost any one and they will conjure up visions of champagne-swilling toffs, gaming the system from their yachts anchored off Monaco shovelling millions into bank accounts in various Caribbean islands and ensuring that as little of their wealth reaches the national coffers as possible.
H M Revenue & Customs (HMRC) certainly see it in a similarly dim light, with their recently introduced General Anti-Abuse Rule (GAAR) having the stated aim of making sure “that all taxpayers should pay their fair contribution”. This wide ranging piece of legislation gives HMRC the power to counteract any piece of tax-planning which they can convince the courts is “abusive” and goes against the intention of parliament when the relevant legislation was passed. On top of this, in the most recent Autumn Statement, Chancellor Philip Hammond proposed the introduction of a new penalty which would apply to anyone deemed to have “enabled” another to take part in a tax avoidance arrangement which was later defeated by HMRC, even if they had done so in good faith and under the understanding that the arrangement was currently accepted by HMRC. Understandably, many professional bodies are deeply concerned at the effect that this legislation may have on them.
Before going any further, I would just like to clarify some terms to save any confusion:
Tax Planning – The use of a tax relief specifically intended by legislation – for example an ISA
Tax Evasion – Paying less than the law says you must, this can be a criminal offence and is universally accepted as A Bad Thing.
Tax Avoidance – That area in the middle, where one is acting completely legally but not always within the stated intention of parliament, something that is increasingly easy to do as the UK tax code stands at around 20,000 pages, having doubled in size since 2009!
Let’s now look at this odd notion of tax avoidance being a right.
The basis for this goes back to 1215 and Magna Carta, a foundational document for British liberties and which stated (amongst other things) that the King may not impose tax except through law, this leading soon to the creation of the parliament of England in 1254.
For hundreds of years, this fundamental rule has endured, that a taxpayer need only pay that which is demanded of them by the law of the land and neither force nor the arbitrary notion of a “fair share” could compel them to pay any more than this.
This concept was famously set out in case law by Lord Clyde in 1929:
“No man in this country is under the smallest obligation, moral or other, so as 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 Inland Revenue.”
This statement encapsulates the fundamental relationship in a free society, the responsibility of the individual to abide by the laws of the land and the undertaking of the government not to interfere in any activity outside of this.
It is therefore concerning when the government moves away from this principle in taxation and decides that it can raise funds on the basis of concepts rather than law. This opens a great deal of ambiguity in legislation, making it increasingly easy for business and individuals to fall foul of the law, which in turn increases both financial and reputational risk to taxpayers.
Now, this is not to say that our tax system does not need changed. It is out of date and can be exploited. However, the surest way to counter this is to simplify it, starting with a clean sheet for the modern age rather than tacking on new principles to a patchwork array of legislation, already so complicated that no one person can understand it.