HMRC published their Consultation Responses Document to its draft Charter last week.The consultation attracted an unprecedented 1900 responses:
– 124 online,
- 1748 youth (aged 15-24 years), and
- 54 written responses from representative bodies, businesses and individuals (including HMRC staff).
I am surprised that 15 year olds have even the slightest understanding/interest in matters concerning taxation.
Two phrases:
- "pursue relentlessly", and
- "bend or break the rules"
caused some angst amongst the respondents. HMRC have modified them accordingly:
"3.31 The phrase 'pursue relentlessly' is part of the HMRC Vision. The language is appropriate for internal use and it accurately reflects our role. Given the concerns expressed we have changed the term to 'tackle' in the Charter, however the sentiment remains the same.
3.32 The phrase 'bend or break the rules' is also part of the HMRC Vision. Internally HMRC staff understand the difference between evasion and avoidance.
We have amended the wording in the Charter to make a clearer distinction for an external audience between 'deliberately break the rules' and those who 'bend the rules' And the additional notes make more clear our approach to tax avoidance as compared to tax evasion."
Given this change in the Charter is not also appropriate that the HMRC Vision is also changed to reflect this, lest it cause confusion internally?
I would also note that the revised version now states:
"distinguish between legitimately trying to pay the lowest amount and bending the rules through tax avoidance".
Tax avoidance is legitimate, the above implies that it is illegal.
BTW am I seeing things, or is that Barack Obama in the top right hand picture on page one?;)
Tax does have to be taxing.
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'pursue relentlessly' has to be, at some point or another, disproportionate and therefore a warning that HMRC will act outside the law.
ReplyDeleteWhat are the unspecified "rules"? If we don't know what the "rules" are then how do we avoid breaking them? What is the legal basis for having us comply with the unspecified rules?
ReplyDeleteTrevor Scott
"Tax avoidance is legitimate, the above implies that it is illegal."
ReplyDeleteNow I know I shouldn't rise to this, but surely the phrase you quoted implies that avoidance is illegitimate, not that it's illegal. HMRC's line is that, where a scheme is within the letter of the law but goes against the spirit of it (i.e. what parliament intended), that may be legal (though if the courts agree with HMRC that a particular avoidance scheme doesn't work it's hard to see how such a scheme can be described as legal) but it's not legitimate.
I'm really at a loss to understand why you're determined to stand up for people who engage in tax avoidance, Ken. You have talked in the past about people using ISAs and personal allowances. When I (or HMRC, the courts and most sensible tax practitioners) talk about avoidance it is nothing whatsoever like people using that sort legitimate planning (the personal allowance isn't even planning - it just happens!). I'm talking about pre-meditated and often massive raids on the taxpayer by extremely high-earning individuals and huge corporations. Often, business that has nothing to do with the UK and brings us no economic benefit (save, perhaps, some legal fees) will be routed via nothing more than a paper-trail through this country in order to obtain a tax benefit that arises as a result of a tax incentive that was brought in (often not even by the present government, believe it or not - capital allowances, for example, are about 130 years old!) to stimulate a particular aspect of the UK economy! Many of these schemes cost us, the taxpayer, hundreds of millions in one fell swoop!
You seem to feel aggrieved that HMRC puts resources into tackling this. As a PAYE taxpayer myself, I find it impossible to see why you would feel this way.
As an aside, in the past you've suggested that this would be irrelevant if the system were simpler. This opens up a huge can of worms and I'd love to debate the suggestions put forward by you to simplify the system - thanks for drawing my attention to that post a couple of weeks ago - when I get the time. For now, part of HMRC's strategy for tackling avoidance is to introduce new legislation to close loopholes used by avoiders. Often this has the result of lengthening legislation, but not necessarily making it more complex - you'll end up with both sets of rules on the statute book but one sub-paragraph will have the effect of disapplying the old code after a given date. In some cases, the new rules will actually be simpler. An example would be the long funding lease legislation which replaces the overseas leasing legislation and a host of other anti-avoidance rules.
Your use of “extremely high-earning individuals and huge corporations” suggests you are jealous of wealthy, successful people who are part of the capitalist system...the system that pays your wages.
ReplyDeleteYou state “I'm really at a loss to understand why you're determined to stand up for people who engage in tax avoidance”. Perhaps because Ken believes in the rule of law and therefore wishes people to keep their hard earned cash by using laws, an element of these laws being to protect the citizen, to avoid unnecessary taxes. Don’t blame the citizen for abiding by these laws, if you think the laws are wrong or badly written then blame the politicians.
You claim “Many of these schemes cost us, the taxpayer, hundreds of millions in one fell swoop!” and therefore confirm your failure to understand that with “tax avoidance” the money never belonged to the taxpayer (plural), it was and is the money of the taxpayer (singular) who exercised his/her freedom/right to legally avoided paying excessive and unnecessary taxes.
The phrase “spirit of the law” is an arrogant attempt to corrupt the actual laws passed by parliament. If parliament intended something in law then they should have passed a law to that affect, if they didn’t there must have been a reason and it isn’t up to political wanabees to reinterpret the law to suit.
Please don’t publish your name because the organisation you work, “managed” by “extremely high-earning individuals”, will pass your name onto Conduct and Discipline.
Trevor Scott
Anom
ReplyDeleteIt is not for HMRC to interpret what Parliament meant.
If the legislation drafted by our "respected" MPs is sloppy, then it is for them to "correct" it not for HMRC to do their dirty work for them.
It is every taxpayers' right to pro actively strive to minimise their tax burden within the letter of the law.
It is not for HMRC, or "hand wringing" pseudo politicians and journalists etc to try to criminalise that right via innuendo/negative spin.
Are you really so naive to believe that were the money that you claim is "illegitimately" (whatever that means) kept from the government's hands by legal tax avoidance schemes repaid to the government, that would result in a reduced tax burden for all?
Governments do not give money back, their prime function is to increase the tax burden to build up their power base to justify their existence.
I have absolutely no moral qualms about legal tax avoidance.
You and some others don't agree; but to repeat myself one final time, ISAs, personal allownaces etc are all forms of tax avoidance (albeit very modest ones).
OK, I'll bite. When I get the time I'll respond fully to your comments. Suffice to say, for now, I don't wholeheartedly agree.
ReplyDeleteBut in the meantime, Ken and Trevor, can you please answer a simple question: do you honestly believe that it is inappropriate that HMRC investigates avoidance schemes, challenges the ones that they consider not to work (and which the courts often agree do not work), and drafts legislation (which is subsequently voted on by MPs) to close loopholes in order to reduce the opportunities for tax avoidance?
It's not HMRC's role to interpret the "spirit" or "intention" of legislation.
ReplyDeleteEither a tax avoidance scheme is legal and complies with the letter of the law, or it doesn't.
HMRC is acting ultra vires to go beyond enforcing the law as it is drafted.
Yes or no?
ReplyDeleteI would have thought it the role of the National Audit Office/another organisations to report on the effect of taxes and produce reports to government with suggestions for change. No part of HMRC should get involved in drafting legislation, the most they should do is report “features” of the law with which they see issues that impinge upon the rights of citizens they should be protecting.
ReplyDeleteYou do not seem to understand that you have an unbalanced/biased approach to the whole matter. If there are any “loopholes”, not that it is HMRC’s place to decide such, then that is a “feature” of the laws passed by parliament. It is quite legal to use those laws to legally save tax and it should not be HMRC’s role to persecute people who use those laws passed by parliament to legally save unnecessary taxes. It is up to politicians to argue for higher taxes and if they agree on such, pass laws to increase the tax burden of citizens. If the laws are badly written, time after time, then the obvious thing to do would be to sack the persons responsible.
I know the pressure and kind of tactics used by HMRC in challenging schemes, hardly “fair” is it. You’d almost think they didn’t want a serious/well funded challenge to their claims about certain “schemes”. Sadly, “scheme” is a term usually used to try and portray the lawfully acting citizen as some Machiavellian character who is using an “artificial mechanism” to avoid paying his full whack.
I will pose a rhetorical question. If you discovered that your pension fund manager had failed to capitalise on legitimate laws that would increase your pension fund and as a result had paid too much tax, would you want them replaced? Of course, nothing wrong in avoiding unnecessary taxes.
The overall answer is simple. Fewer and simple laws for fewer taxes, no exceptions or incentives for this or that.
Trevor Scott
Hold on tight. This is going to be a long one. You guys have raised a large number of points – many of which are quite interesting – so I'm going to try to cover them one at a time. On the assumption that you're probably not going to agree with all of my points, I'll look forward to you doing the same with them!
ReplyDelete“Your use of “extremely high-earning individuals and huge corporations” suggests you are jealous of wealthy, successful people who are part of the capitalist system...the system that pays your wages.”
Absolutely not. However, I resent it when people in such a position of power use it to rip me off. You're touching on a whole separate argument about whether trickle-down economics works. My position is that it does, to a point, but not where a capitalist system is left entirely to its own devices. Some public-sector regulation is a necessary evil and tax is part of this. The exact mix of private and public-sector participation in the economy and the extent to which that activity is regulated are both political questions, and a debate on these would be a whole different topic. I don't suggest we go down that line here, but suffice to say that the political consensus has led to economic activity being taxed at a certain level, subject to incentives for particular things (e.g. research and development relief, ISAs, etc.). Avoidance is about this being subverted and that's where I have concerns.
“You state “I'm really at a loss to understand why you're determined to stand up for people who engage in tax avoidance”. Perhaps because Ken believes in the rule of law and therefore wishes people to keep their hard earned cash by using laws, an element of these laws being to protect the citizen, to avoid unnecessary taxes. Don’t blame the citizen for abiding by these laws, “
I'm not blaming anyone for abiding by laws. As I've made clear, I am trying to understand why Ken has such a problem with HMRC engaging with avoidance. As the judge in the Duke of Westminster case said, everyone has a right to arrange his affairs in such a way as to minimise tax. However, I think it was in the same case that the judge also said that the then-Inland Revenue had a right and a duty to ensure that people don't pay too little tax.
You talk about the rule of law. Remember that UK law lies only partly in the statute book. The body of case law is equally important. In the series of cases covering the Ramsay principle it was established that, in certain circumstances, a purposive view of statue (i.e. what parliament intended the purpose of that law to be) should be taken. Looking at the statute purposively is very definitely, therefore, part and parcel of the rule of law. I will come back to this in due course.
“if you think the laws are wrong or badly written then blame the politicians.”
I do. But like it or not, tax law is drafted by HMRC. That's because HMRC is where the government's tax specialists work. I'll probably comment on this more in response to your most recent message, but the way it works is that the government comes up with an idea for a tax effect it wants to achieve and how it would like to achieve it. They discuss it with HMRC, whose specialists then go away and draft it. There will also be consultation with business etc and a lot of lobbying goes on at this stage. Eventually the bill is put before parliament and voted on. There have been times during the early discussion stage where HMRC have looked at a government's proposal and said that it might lead to problems (i.e. creating avoidance opportunities). Sometimes these will be ironed out at this stage, but sometimes the government will put its foot down and force HMRC to do things its way in spite of the warnings. I would certainly blame the politicians in the latter scenario.
“You claim “Many of these schemes cost us, the taxpayer, hundreds of millions in one fell swoop!” and therefore confirm your failure to understand that with “tax avoidance” the money never belonged to the taxpayer (plural), it was and is the money of the taxpayer (singular) who exercised his/her freedom/right to legally avoided paying excessive and unnecessary taxes.”
ReplyDeleteFirst of all, we have schemes like the one I alluded to above, where a foreign business that is not contributing in any way to the UK economy routes a transaction through the UK in order to achieve a reduction in the cost of that transaction which is funded by a tax incentive which was put in place with the intention of stimulating an aspect of the UK economy. In a scenario like this, I would strongly argue that this was money that otherwise would have been the taxpayer's (plural).
By definition, if a tax avoidance scheme is legal (and I repeat that they don't always work; the ones that are held by the courts to not work surely cannot be described as legal!), then the taxpayer (singular) does have the right to mitigate tax liability. However, once again, HMRC has the right and the duty to ensure that people aren't paying too little tax.
“The phrase “spirit of the law” is an arrogant attempt to corrupt the actual laws passed by parliament.”
I can only assume you're joking here. The irony is simply jaw-dropping. Avoidance has been defined as obtaining a tax benefit without experiencing the economic consequences that parliament intended for a person to experience in order to get such a benefit. The sort of highly contrived tax avoidance schemes I'm talking about generally use complex structures of contracts specifically to ensure that a tax result is obtained without incurring the economic consequences parliament intended. If that isn't an attempt to corrupt the actual laws passed by parliament, I don't know what is!
“If parliament intended something in law then they should have passed a law to that affect, if they didn’t there must have been a reason and it isn’t up to political wanabees to reinterpret the law to suit.”
You seem to be unfamiliar with the way avoidance is dealt with, not to mention the way the legal system works. Either that or you are deliberately choosing to misrepresent HMRC's role in dealing with avoidance. Contrary to some of the suggestions on this site and others, HMRC is not judge, jury and executioner in these cases. The final decision on how the law is interpreted in these cases is taken by the courts! It is the constitutional role of the courts to interpret statute, after all. Is it the judiciary you are referring to as “political wanabees”?
As I've pointed out above, the concept of interpreting tax statute purposively is enshrined in case-law. In any case, long before Ramsay and the associated cases, there was an established concept that statute should be interpreted purposively in general (i.e. non-tax) law. One of the judges in (I think it was) Furniss v Dawson comments that he didn't consider the ruling in Ramsay to have introduced a new concept, rather that a general concept that applied to all areas of law had finally been applied and clarified in the field of tax.
“Please don’t publish your name because the organisation you work, “managed” by “extremely high-earning individuals”, will pass your name onto Conduct and Discipline. “
Thank you for the advice. I'm not sure if I'd describe a Permanent Secretary's salary as extremely high, but never mind. I have already set out my mixed feelings about my own anonymity in a previous comment. Please see: https://www.blogger.com/comment.g?blogID=29600742611858461&postID=4767580084577098571
“It is not for HMRC to interpret what Parliament meant.”
ReplyDeleteOnce again, the courts have the final decision, and they've frequently decided that a purposive interpretation of statute is appropriate in certain circumstances. In other words, they have agreed with HMRC's view of what Parliament meant the statute to achieve. In other words, the courts have said that, yes, it is for HMRC to interpret what Parliament meant.
“If the legislation drafted by our "respected" MPs is sloppy, then it is for them to "correct" it not for HMRC to do their dirty work for them.”
See my discussion above about the way tax law is developed. Do you really think MPs draft legislation themselves? They can't even fill out an expense form!
When HMRC investigates an avoidance scheme, they necessarily have to take a view on whether the scheme goes against what was intended by parliament. If they decide it does, they will look at how to challenge it. Often a scheme will be found not to work without it being necessary to look at a purposive interpretation of statute. Avoiders sometimes mess up! Implementation errors, etc., can mean that a scheme falls foul of the legislation in a (relatively) black-and-white way. There will be other times where HMRC concludes that they do not have a challenge to a scheme that will stand up in court. In this situation, the law is sometimes “corrected”, as you put it. The process for this will be along the lines of: HMRC goes to the politicians to say they've discovered a loophole which they think puts £x million at risk and they will recommend a particular anti-avoidance fix. If they agree, the government will tell them to go and do it, and a bill eventually goes before parliament. So it is the MPs who correct it, but again, because the MPs aren't tax specialists, they get their policy people in HMRC, who are, to do the drafting. That's how the civil service works and broadly the same procedure – i.e. civil servants draft law in accordance with the government's wishes – applies to other areas of law as well as tax. I surely don't need to tell you that!
It should be noted that it is rarely sloppy drafting that drives this (though, unfortunately, it does happen – HMRC policy people are human too). The people who design and market avoidance schemes commit a lot of resources to developing them, and they are very clever and well rewarded. It is very difficult indeed to anticipate in advance the wheezes they'll come up with!
There will be a small number of cases where a purposive interpretation of statute is required. It's important not to exaggerate the number where this becomes an issue. They often go to court. Sometimes the courts agree with HMRC. Sometimes they don't. It should be noted that this sort of argument is very, very hard for HMRC to win and they think very carefully before running it! We're not talking about the department going around freely coming to conclusions about Parliament's intention willy-nilly in hundreds of cases.
“It is every taxpayers' right to pro actively strive to minimise their tax burden within the letter of the law.”
We're back to the Duke of Westminster case again. Fine, it's a taxpayer's right to strive to minimise their tax burden, but it's also the right and the duty of HMRC to ensure that people don't pay less tax than they should. HMRC can't stop a scheme working JUST because it goes against the spirit of the law – there is much more to running that sort of argument. Read up on the Ramsay principle to find out more. The following article is quite good: http://www.freshfields.com/publications/pdfs/practices/external/bmsp.pdf
It's also the right and, I think most would agree, the duty of HMRC/the government to close loopholes that enable avoidance.
ReplyDelete“It is not for HMRC, or "hand wringing" pseudo politicians and journalists etc to try to criminalise that right via innuendo/negative spin.”
Who said anything about criminalising? Also, who are you quoting when you say “hand wringing”? Re journalists and negative spin, I feel that the way you associate things like ISAs and personal allowances with avoidance is also spin. You're a journalist, and you appear to be distorting what avoidance actually is in order to support your agenda of arguing that HMRC should not seek to tackle avoidance.
“Are you really so naive to believe that were the money that you claim is "illegitimately" (whatever that means)”
You're the one claimed in your original blog post that tax avoidance is “legitimate”. Are you saying you did so without knowing what you meant?
Apologies for the facetious rhetorical question, but it does underline the fact that we are talking about very difficult concepts here (for more of a taste, read the Freshfields article). There are grey areas within grey areas when we start talking about avoidance. The media likes to portray everything as being black-and-white as possible because it makes things easier to understand and more dramatic. Unfortunately when you're looking at the spectrum of tax planning and avoidance nice clear demarcations of what constitutes a particular class of behaviour simply do not exist. Even telling the difference between avoidance and evasion can be difficult. The courts identified the existence of “sham” as a hallmark of evasion a while ago, but since then there's been ongoing debate about what that word means.
“kept from the government's hands by legal tax avoidance schemes repaid to the government, that would result in a reduced tax burden for all?”
Perhaps not, but you surely cannot deny that avoidance either increases the tax burden for the rest of us, makes less money available for public spending, or (most likely) a bit of both. Public funds are exactly what they say on the tin – it's our money! You seem to have this cynical outlook that leads you to forget that fact. In spite of your blog's logo, believe it or not the chancellor doesn't take our tax money and line his pocket or stuff his mouth with it. There are obviously political disagreements over how best to raise and spend public money – that's what democracy is about, after all – but it's our money, it's spent on us, and when people dodge contributing to it that leads to US having less available. It amazes me that you don't seem to see that.
“Governments do not give money back, their prime function is to increase the tax burden to build up their power base to justify their existence.”
I find it sad that your cynicism leads you to feel this is the prime function of a government, though I realise many MPs have done a lot to foster such cynicism recently! Anyway, this is back to a broader political point which I feel is pretty far off-topic. Even if you're right, I don't think this undermines my main point (which I've tried to sum up in the next paragraph...). Feel free to explain why if you disagree.
“I have absolutely no moral qualms about legal tax avoidance. “
I noticed. I've given this some thought and I think, on balance, I probably agree with you there. I think where we differ, however, is that I feel it is important that work is done to tackle avoidance. I would probably go so far as to say that it is a moral obligation for this work to be done on behalf of the taxpayer (plural).
“You and some others don't agree; but to repeat myself one final time, ISAs, personal allownaces etc are all forms of tax avoidance (albeit very modest ones).”
ReplyDeleteI'm sorry to see that we're probably never going to agree on this. I suppose you are free to define a word in any way you wish (though I do feel that to define avoidance in this way is highly misleading – if you're going to say that personal allowances are avoidance then you might as well say that quitting your job is avoidance, as that also leads to a reduction in your tax bill). Are you at least prepared to accept that, when HMRC talks about tackling avoidance, it is categorically not referring to the normal use of ISAs and personal allowances?
By the way, can I hold you to the “one final time” bit? :)
“I would have thought it the role of the National Audit Office/another organisations to report on the effect of taxes and produce reports to government with suggestions for change. No part of HMRC should get involved in drafting legislation,”
ReplyDeleteSee above for my discussion of how tax legislation is produced. The thing about HMRC is that it's where the tax specialists happen to work. This is an interesting idea, though. You could take the policy people out and stick them in something like the NAO (an odd choice) or a new separate organisation that exists solely to draft tax law. This would arguably create more independence between the legislators and those who investigate avoidance (though I'm far from convinced that this is necessary and I don't see what difference it would really make – both departments would still report to the government). On the other hand, doing so would have a number of significant drawbacks. Just off the top of my head:
it is good for policy people to have recent experience of working on the front line, dealing with the taxpayers for whom they are drafting rules. You need policy people who have an idea of how businesses work and how they engage with the tax system. All HMRC policy people will have served their time dealing with taxpayers of various sizes and types. One of the consequences of this is that they have a better idea of what would be overly onerous.
For the people on the front line, it is extremely useful to be able to pick up the phone to the person to wrote the bit of statute they're dealing with, in order to be able to check their understanding of it.
The government consults with businesses and other taxpayers when tax rules are being changed. It makes sense that taxpayers can engage on this with a single organisation, which has responsibility for both policy and operational delivery.
“the most they should do is report “features” of the law with which they see issues that impinge upon the rights of citizens they should be protecting.”
As an aside, the way I see it is that citizens have a right to expect that the tax system is as level a playing field as possible, and that none of their fellow citizens are unfairly ripping them off through avoidance.
“You do not seem to understand that you have an unbalanced/biased approach to the whole matter.”
Please do not patronise me. I am well aware that my views are formed by my experiences. Similarly, I think the extraordinary cynicism of some people can prevent them from accepting any sort of reasoned argument. If you disagree with the points I'm setting out here, by all means explain why. Please don't try to dismiss them by accusing me of biased. I've used this analogy before, but that's like saying that every criticism that David Cameron makes of the government must be wrong because he happens to be biased. One side-effect of my experience is that I happen to know a bit about this subject. I hope this comes through in what I'm writing. As a result it strikes me that a lot of misconceptions (notably about what avoidance actually is) being put forward here.
“If there are any “loopholes”, not that it is HMRC’s place to decide such, then that is a “feature” of the laws passed by parliament. It is quite legal to use those laws to legally save tax and it should not be HMRC’s role to persecute people who use those laws passed by parliament to legally save unnecessary taxes. It is up to politicians to argue for higher taxes and if they agree on such, pass laws to increase the tax burden of citizens. If the laws are badly written, time after time, then the obvious thing to do would be to sack the persons responsible.”
ReplyDeleteAgain, you are underestimating the ingenuity of the tax avoidance industry. Please also see my discussion, above, about how tax law is developed.
“Persecution” is a very strong accusation and bears no relation to anything I've come across in relation to HMRC's anti-avoidance strategy. It certainly is not HMRC's role to persecute anyone, and investigating avoidance definitely does not come into that category. I've tried to explain above how HMRC deals with avoidance. Could you please explain how you feel that checking whether an avoidance scheme works constitutes persecution?
Are you also trying to say that laws should not be updated to fix loopholes? Oh, and it very definitely is HMRC's place to identify such loopholes. See Section 1 of the Taxes Management Act 1970. How else can loopholes be identified than by the people whose job it is to look at people's tax returns?
“I know the pressure and kind of tactics used by HMRC in challenging schemes, hardly “fair” is it.”
Could you please explain what you're talking about, specifically with regards to HMRC's anti-avoidance activities? In doing so, please be careful not to confuse HMRC's tactics for dealing with evasion. I'd be quite happy to discuss these with you too but it's way, way off-topic. In my experience, HMRC's tactics when challenging schemes mostly involve sending a strongly-worded letter threatening another strongly-worded letter if the taxpayer doesn't cooperate.
“You’d almost think they didn’t want a serious/well funded challenge to their claims about certain “schemes”. Sadly, “scheme” is a term usually used to try and portray the lawfully acting citizen as some Machiavellian character who is using an “artificial mechanism” to avoid paying his full whack.”
ReplyDelete“Artificial mechanism” hits the nail on the head for the sort of schemes I'm talking about. Machiavellian is a bit strong (and a strange analogy in this case – I've never heard challenging a government being described as Machiavellian before), but we're not talking about some sort of Robin Hood-type here. You accuse HMRC, me and others of trying to portray lawfully acting citizens in a negative light. I believe you're trying to portray tax avoiders as some kind of benign crusaders for the rule of law. Have a look at the Freshfields article I linked to above. In particular, the Barclays Mercantile Business Finance case which is described in there. That's the sort of totally artificial mechanism that I'm referring to when I talk about avoidance. Actually, the taxpayer won that one in court, thanks in part to a serious and well funded challenge. Again, the fact that the taxpayer won reinforces the point that HMRC is not judge, jury and executioner in these cases. It also highlights again that we're talking about grey areas – it's entirely disingenuous to reduce the argument to: avoidance = legal, evasion = illegal. In some of the cases that go to the Lords, the High Court and Court of Appeal will have reached the opposite conclusion that the Lords do. Often, too, judges will reach the same decision on a case but for very different reasons.
“I will pose a rhetorical question. If you discovered that your pension fund manager had failed to capitalise on legitimate laws that would increase your pension fund and as a result had paid too much tax, would you want them replaced? Of course, nothing wrong in avoiding unnecessary taxes.”
Are you familiar with a straw man argument?
It would of course depend on the facts of the matter (just like investigating avoidance does). If the fund manager had failed to take advantage of a tax incentive that was introduced to benefit funds doing what the fund in question was doing commercially anyway, some pretty searching questions would have to be asked. If, however, the fund manager turned down an avoidance scheme promoter who approached him to try to sell a scheme involving, say, exploiting a difference between the legal status of Dutch partnerships in the US and French tax systems, when the fund had no activities or investments in Holland, America or France, the situation would obviously be very different.
I don't think I would be baying for the fund manager's blood if he had failed to take advantage of a scheme like the one in the Scottish Provident Investments case (see the Freshfields article again), for example. Again, I feel you're twisting the meaning of avoidance in order to paint it in a rose-tinted light. To repeat myself (again) the type of avoidance that HMRC seeks to tackle involves highly artificial mechanisms.
“The overall answer is simple. Fewer and simple laws for fewer taxes, no exceptions or incentives for this or that.”
We all want simpler laws and less taxes. It is true that many opportunities for avoidance that goes against the spirit of the law do rely on exemptions and incentives (though many, many schemes do not; many rely on the differences between the tax regimes of different countries, for example). I disagree that the answer is to do away with exemptions and incentives, though. Capital allowances, for example, are a form of incentive for investing in equipment, etc. It would be patently unfair to businesses to get rid of them just because some people seek to exploit them in a way that was not their intended purpose.
Phew. Sorry for the length of that! I hope a few people will have a chance to wade through it and at least somebody will find it interesting. I look forward to it being ripped apart... :)
ReplyDeleteRegards.
"Are you at least prepared to accept that, when HMRC talks about tackling avoidance, it is categorically not referring to the normal use of ISAs and personal allowances?"
ReplyDeleteAny chance of at least responding to this one bit, Ken?
A fortnight away and I come back to this. The reason for a word limit in a reply is to avoid people becoming boring, hint, hint. I have no intention of replying to all your misrepresentations and “points”, I would end up repeating myself, but ... for your information, Wikipedia has the correct definition between legal tax avoidance and illegal tax evasion.
ReplyDeletehttp://en.wikipedia.org/wiki/Tax_avoidance_and_tax_evasion
Reading your views of tax law “loopholes” and the people involved in using them you appear to have a few strange ideas. It is often within seconds, if not within a single second, that an opportunity to legally save tax is identified from a government announcement. Sure you have to check the law and a few decisions, but it does not take any real brain power. Surely the real question, especially considering HMRC’s dislike of people using the law to legally save tax, is how HMRC personnel can’t see (what they regard as “loopholes”) issues before they even suggest laws to the government!
Trevor Scott
Trevor,
ReplyDeleteI'm disappointed that you didn't feel able to address more of my points fully, or answer the questions I posed. I would have been particularly interested to hear more about what you consider I have misrepresented. I know my post was very long, but I was responding to a number of points - not all of which were spurious - that had been raised by previous posters including you, and tax avoidance is a very complex subject that doesn't lend itself well to reductionism. I am sure you will agree, however, that resorting to name-calling ("boring") and then refusing to address counter-arguments that have been raised probably doesn't present your point of view in the best light. If you are concerned about repeating yourself, may I suggest that you number your points? You can then cross-refer back to them.
We seem to have become side-tracked by our disagreement over the definition of "avoidance" and I think we're going to have to agree to differ over it. If you recall, the original point of discussion was whether and how HMDC should respond to avoidance. Thank you for posting the Wikipedia link. I note that the article includes the following:
"Latterly the term [tax mitigation] has also been used in the tax regulations of some jurisdictions to distinguish tax avoidance foreseen by the legislators from tax avoidance which exploits loopholes in the law."
(and I also note from the page's history that it included this before you posted the link so you must have seen it too.) I think this illustrates well what I have been trying to say. HMRC's anti-avoidance activity is intended to address behaviour which exploits legal loopholes, as opposed to tax mitigation. Again I would refer you to the judicial definition in CIR v Willoughby, but in the interests of brevity (and because I suspect you'd be unlikely to directly comment on this definition of avoidance which is part of UK law!) I won't reproduce it here.
As I don't think we're ever going to agree on the definition of "avoidance", I will try to set out my argument as a series of points without using the A-word. Perhaps you could indicate which of these, if any, you disagree with and why. If nothing else, assuming you don't disagree with ALL of them, this may allow us to establish some common ground.
Again, apologies that this is necessarily going to run to more than one comment, but by bullet-pointing I think I'm making it as easy as possible for you to respond to the specific bits you disagree with.
1) Tax law is designed to tax people (individuals & companies) in proportion to certain economic benefits they receive (i.e. their tax rate). This rate is determined after taking into account certain allowances/reliefs (e.g. ISAs) designed to encourage or reward certain behaviour (e.g. saving) which has pre-tax economic consequences for that person (e.g. if you save money it's not available to spend today).
ReplyDelete2) The rate at which people are taxed, and the pre-tax economic consequences people should experience before being able to benefit from allowances/reliefs are political decisions taken by parliament & therefore (in theory) subject to democratic scrutiny.
3) When someone deliberately acts outside the letter of the law in order to reduce tax liability & conceals this from HMRC, this is evasion, which is illegal.
4) There is some behaviour which is not evasion, but which nevertheless reduces tax liability by breaching the letter of the law. This includes mistakes, like forgetting to include a sale in your turnover figure or accidentally depositing too much in your ISA in a year. It also includes circumstances where a taxpayer & HMRC disagree over the interpretation of how legislation applies to a given transaction and the court agrees with HMRC - the taxpayer's liability is found not to have been assessed in accordance with the letter of the law, yet this isn't considered to be evasion.
5) There is a broad spectrum of behaviour intended to reduce a person's tax liability within the letter of the law.
6) The vast majority of the behaviour at 5 is the straighforward use of allowances/reliefs. I presume this is the sort of thing you were thinking of when you mentioned opportunities to save tax that are identifiable within seconds. Certainly it would not take long to realise, for example, that from April 2010 it's possible to save tax on interest received by shifting more savings into an ISA than in the previous year, due to the ISA allowance increase.
7) Meanwhile, a small number of highly complex series of transactions ("schemes of arrangements") are entered into each year with the sole intention of reducing tax liability while staying within the letter of the law. In some cases, just one such scheme can generate tens of millions of pounds of legal and other advisory fees for the large teams of lawyers, accountants & tax specialists who design it. These very bright people earn these fees by identifying grey areas & loopholes in the law (sometimes the laws of several countries at the same time) and designing complex structures to exploit them.
8) There is, of course, a wide range of behaviour that falls between these two extremes.
9) There are some types of behaviour which, while intended to be within the letter of the law, produce a tax effect which is different from that which the law was intended to produce for persons experiencing the pre-tax economic conditions experienced by the parties to the scheme.
OK. Hopefully you're broadly in agreement so far. Now for the contentious stuff.
10) It is the right and the duty of HMRC to address the behaviour described at point 9, by investigating schemes, closing loopholes & challenging scheme users where it is felt that they breach the letter of the law (a bit like the example at point 4). This must be done to ensure that people pay tax according to the intention of parliament which, through the operation of democracy, is in accordance with the political consensus of society (points 1 & 2).
11) If the behaviour described at point 9 weren't addressed, it would be unfair to the vast majority of taxpayers, who don't have the opportunity nor resources to engage in such behaviour. It would also be undemocratic to allow those with the resources to do so to go against the political consensus of society which parliament (by no means perfectly) exists to represent.
I realise I may have opened myself up to charges of hypocrisy. I expressed my disappointment that you didn't answer the questions I posed above, yet I haven't answered this:
ReplyDelete“Surely the real question, especially considering HMRC’s dislike of people using the law to legally save tax, is how HMRC personnel can’t see (what they regard as “loopholes”) issues before they even suggest laws to the government!”
Setting aside the fact that I think the phrase about HMRC's dislike is misleading (this comes down to the difference between behaviour like that which I described at point 6, which HMRC has no concerns about, and behaviour like that at point 9, which its anti-avoidance strategy is designed to address), I would offer the following answers to your “real question”. In no particular order (and using letters rather than numbers to minimise confusion):
a) Often potential issues are forseen by the people (lawyers and tax specialists) who write the legislation and these problems will be flagged up to the politicians. However, businesses lobby government with a view to watering down certain bits of legislation. I'm sorry to say that this can sometimes lead to politicians demanding certain changes to the way that legislation works, in spite of their civil servants pointing out that loopholes will be created.
b) On other occasions where an issue is forseen, it is decided that the loss of tax created by the loophole is outweighed by the economic benefit of the change in the law (i.e. the government feels that the benefit to the economy of introducing a certain allowance/relief is greater than the loss of tax created by a small number of taxpayers exploiting the loophole without producing the wider economic benefits intended to be generated by the allowance/relief). The loophole may be deliberately left in because closing it would either negate the economic benefit or create another more serious loophole. In these cases, a “motive test” will often be included in the legislation, usually along the lines of: someone won't get the tax benefit if the sole intention of entering into the transaction was getting the tax benefit. We have touched on spirit vs letter of the law – here you could say that the spirit of the law is written into the letter of the law! Because such a test is necessarily highly subjective, such a fudge inevitably leads to a small number of very complex cases. If you have a suggestion of a better way of doing this, let's hear it.
c) Sometimes a loophole is created without any change of UK law happening. This may occur because of a change in accounting standards, or because a foreign country changes its tax law, creating a cross-border loophole as a result of a mismatch between the treatment of a certain transactions or entities.
d) There are, of course, a certain number of unforseen loopholes that arise from the way in which UK laws are drafted. You imply that this is a failure on the part of HMRC staff to see them. That is a way of looking at it and mistakes do happen. However, there is also a question of resources. I have referred above to the significant resources that professional services firms put in to identifying and exploiting loopholes. Far less HMRC and treasury people work on writing tax laws than there are people in the private sector working on tax avoidance (whether you take your definition of the word or mine!). It would simply be inappropriate for the government to throw massive amounts of resource at drafting legislation. If nothing else, it probably wouldn't work – issues would still inevitably arise for the reasons above and others. The current situation (draft now, patch holes as you go along) is a bit of a fudge, but it works reasonably well given the resources available.