HMRC have gone on another one of their regular fishing trips.
This time they have written to 600 offshore account holders, asking them a number of questions about how their accounts operate and to inform on their advisers' involvement in tax avoidance.
The underlying rationale of the letter is to find out how offshore products are being sold, and if financial advisers are taking part in tax avoidance.
For the umpteenth time, tax avoidance is perfectly legal!
Answering the letter is of course not compulsory.
Lawyers are warning that if people answer the questions, and raise points that are of "interest" to HMRC, the answers given may one day be used by HMRC against the persons who responded.
Under no circumstances answer this letter, throw it in the bin.
Tax does have to be taxing.
Professional Cover Against the Threat of Costly TAX and VAT Investigations
What is TAXWISE?
TAXWISE is a tax-fee protection service that will pay up to £75,000 towards your accountant's fees in the event of an HM Revenue & Customs full enquiry or dispute.
To find out more, please use this link Taxwise
Tax Investigation for Dummies, by Nick Morgan, provides a good and easy to read guide for anyone caught up in an HMRC tax investigation. A must read for any Self Assessment taxpayer.
Click the link to read about: Tax Investigation for Dummies
HMRC Is Shite (www.hmrcisshite.com), also available via the domain www.hmrconline.com, is brought to you by www.kenfrost.com "The Living Brand"
Did they write to Mapley's?
ReplyDelete"For the umpteenth time, tax avoidance is perfectly legal!"
ReplyDeleteThe only difference between tax dodging and tax "avoidance" is that the latter hasn't been outlawed - yet. Ethically, they are the same thing.
"tax dodging" is not paying the tax you should.
ReplyDelete"tax avoidance" is using the rules to your advantage.
Now where does HMRC sit in this when it takes months to return funds to people who have paid to much tax. Is this "dodging" or "avoiding" the payment?
Personally I'd say that "tax dodging" is probably more of an umbrella term for activity which includes both avoidance and evasion. The way "dodging" is being used here sounds more like evasion to me.
ReplyDeleteSetting up an ISA is technically tax avoidance.....This scheme was set up by the government and the state own banks are on TV most nights promoting such products.....Again, tax evasion is illegal, tax avoidance is legal, and on the aforementioned evidence, encouraged by state owned banks.....How is setting up an ISA ethically the same thing as willfully evading tax?
ReplyDeleteIt seems Anon @ 14-26 has bought into the state's semantic's exercise hook, line and sinker.
"Setting up an ISA is technically tax avoidance"
ReplyDeleteNo it's not. It's tax planning. If we're being "technical", then:
"the hallmark of tax avoidance is that the taxpayer reduces his liability to tax without incurring the economic consequences that Parliament intended to be suffered by any taxpayer qualifying for such a reduction in his tax liability."
(Lord Nolan, CIR v Willoughby, 1997)
To support a definition of avoidance wide enough to include ISAs, it is necessary to reconcile this with such judicial (i.e. legal) statements.
While this is, on the face of it, a question of semantics, problems clearly arise when two sides of a debate are using the same term in very different ways.
Those who argue that avoidance needs to be tackled (e.g. Vince Cable or HMRC) clearly aren't arguing that users of ISAs should be investigated for tax avoidance. This is because ISA use doesn't fall within their definition of the word.
Equally, I can't imagine that those who claim that ISAs are a form of avoidance are seriously suggesting that a scheme like the one in, say, Robert Huitson's case (*) are in the same category as someone using an ISA.
(* - Details of this case can easily be found through Google, and in fact it's quite a controversial one for anyone with a regressive, libertarian attitude to taxation looking for another stick to beat HMRC with! As an aside, the fact that Huitson made use of an avoidance - not evasion! - scheme which HMRC defeated in court demonstrates that the phrase "tax avoidance is perfectly legal" is a rather strong statement. By definition, all /successful/ tax avoidance is legal, but not all avoidance works!)
ReplyDelete"the hallmark of tax avoidance is that the taxpayer reduces his liability to tax without incurring the economic consequences that Parliament intended to be suffered by any taxpayer qualifying for such a reduction in his tax liability."
(Lord Nolan, CIR v Willoughby, 1997)
Surly, taking the time to work what tax you can get away with not paying is also tax planning. The fact that people working within government and HMRC disagree does not make it wrong. In fact is it not the government who make the tax rules with advice from HMRC? So any loopholes are down to them anyway.
What is actually wrong with avoiding tax?
ReplyDeleteLets face it if everyone paid everything they ethically should do we would have even more money wasted on public sector IT projects, more people in call centers not managing to answer all the calls because we would have more people claiming tax more tax credits.
Those who work, pay taxes and get nothing handed out to them should avoid as much tax as possible.
Anon @ 18-16
ReplyDeleteYour response illustrates my point clearly; politicians and HMRC are trying to muddy the waters.....They appear to say that all avoidance of tax, however that avoidance comes about, is cheating the state.....That, using the politicians own definition would suggest that anyone that takes out an ISA would be doing just that.....Sensible tax planing is both prudent and commonsense.
It does not seem to me that when government/HMRC talk about tax avoidance, they are using the definition you gave in your posting. They appear to be pitching towards the readers of the Mail with their politics of envy; ie...We pay tax so should everyone else, which to some extent is true but, there is paying tax and being legally robbed by the state.
It seems to me that government want their cake, to eat it and have another piece.....Most people know the difference between avoidance and evasion.....Only a fool would not plan their affairs so as to pay as little tax as they LEGALLY could.
For me, although I am not in any way affected by it, what made me loose all faith in HMRC and its moral position, was when it paid an international criminal gang for a stolen list of off shore bank account holders....This is clearly aiding and abetting a crime because, with out those that handle/buy stolen goods, there would be no point for criminals to steal such items.
To see a post like the one above regarding possible links with organised crime concerns me greatly as someone who has never shied away from his tax responsibilities. If the post above is correct I would expect anyone defending HMRC to take a moment and think twice as you maybe no better than the people who took the decision to do this deal.
ReplyDeletehttp://www.theregister.co.uk/2008/02/26/hmrc_disc_tax/
ReplyDeleteIn fairness that was not a bad deal for HMRC. £100,000.00 for details about a possible £100M of unpaid taxes. How much did the new PAYE system cost in order to fuck up the codes and generate and extra £238M?
ReplyDelete18:16 here again.
ReplyDelete"What is actually wrong with avoiding tax?"
That's a very good question. As I've given this more thought over time I've been moving towards the view that it probably isn't immoral to seek to avoid tax.
However, if you do enter into avoidance schemes (i.e. like Huitson's; to be clear I'm not talking about anything like opening an ISA) in the full knowledge that your actions are contrary to the spirit if not - you argue - the letter of the law, then you have only yourself to blame if you find yourself in court. If you get away with it, good on you, but live by the sword die by the sword!
Furthermore, as a taxpayer, I would find it entirely unacceptable if HMRC did not take steps to address avoidance (as Lord Nolan and I have defined it), be it through litigating schemes that don't work or improving legislation (and right now a hell of a lot of simplification would be a good start, partly for the reasons that 18:55 touched on) to minimise it.
Compliments to 16 August 2010 23:23 for a thoughtful post.
ReplyDeleteAs a tax payer myself I would also appreciate it if HMRC to a harder look at where our taxes go as well. Tightening up on tax credit fraud may actually generate more funds than the people avoiding tax.
18:16 once again.
ReplyDeleteTonk,
For what it's worth, I also have significant misgivings about HMRC buying what appears to be stolen information for the purposes of tackling evasion and/or avoidance. However, I don't accept that this is relevant to my 18:16 post. While there are undoubtedly moral dimensions to the subject tax avoidance, the definition of avoidance is not one of them. To the extent that my posts here represent a "moral position" it is my own, not that of HMRC. As I've explained above, I do not consider that it is necessarily immoral to enter into tax avoidance; many in HMRC would probably disagree with that (whether the organisation officially considers avoidance immoral as a matter of policy is a more difficult question to answer and probably depends to a great extent on the government of the day). The department also seems to officially disagree with my misgivings about the stolen goods thing. We're talking about a very complex subject with all sorts of grey areas. To say that I must agree with HMRC on everything or nothing would be to try to reduce things to gross over-simplicity.
Anyway, back on-topic:
"It does not seem to me that when government/HMRC talk about tax avoidance, they are using the definition you gave in your posting."
I cannot speak for the government. I spotted an example in Hansard the other day of John Redwood asking a question which suggested he may have felt that ISA is avoidance. He was robustly corrected in the House.
I would be interested in any link you may be able to provide to official HMRC statements that define avoidance in any way other than the way I have set it out, particularly in connection with HMRC's strategy for tackling avoidance. I feel pretty safe in saying that neither published HMRC guidance, nor the training given to inspectors, includes definitions of avoidance that include the likes of ISAs.
Perhaps you are implying that rhetoric is being used to associate avoidance with evasion. My response to that is that at least the government/HMRC are still using two different words for it! If they started using the word "evasion" to refer to what we (Nolan and I!) define as avoidance, then it would definitely be time to worry.
Equally, however, promoting a definition of avoidance that includes (what I see as) vanilla tax planning (e.g. ISAs) can be seen as a use of rhetoric to undermine efforts to reduce the prevalence and impact of avoidance.
The way I see it, there are three ways to reduce your tax liability without actually reducing your real economic income: tax planning, tax avoidance and tax evasion. It's legally and (I tentatively consider) morally acceptable to seek to enter into either of the first two. However, it also acceptable (and, in fact, the duty of) fiscal bodies such as HMRC to take steps (within limits) to reduce the loss of tax caused by the latter two.
It's important to recognise that there are lines between each of the three categories, though admittedly they can be hazy enough as it is. Neither side of this debate should seek to remove one or other of them to facilitate their own political ends. I do not accept that it is HMRC policy to deny the existence of the line between avoidance and evasion.
Anon;
ReplyDeleteThanks for your interesting reply, much of which I would agree with.
I am neither an accountant nor a lawyer; merely a retired Psychiatric nurse and so I may well be out of my depth on this forum which appears to be a bit of a "trade only" forum.
I don't doubt that HMRC do not instruct their inspectors to go after those that put money into ISAs.....The point I was making is that politicians, and thus HMRC, as they are agents of the state, appear to me, an ordinary member of the public, to be clouding the issue and the dividing lines between evasion and avoidance. It may be very well for a lawyer or an accountant to believe they know exactly what avoidance is as defined by a judge but, most members of the public, including myself, do not know this.
If one puts money into an ISA for example, one does knowing one will AVOID paying the tax that one would pay if one had put it into an ordinary savings account. I agree, this is tax planning and a prudent move and can never be considered criminal nor morally wrong.
Those that flipped homes to avoid capital gains tax again did not commit a criminal offence but, I might agree that was morally wrong but again, not criminal; You can't prosecute people for being immoral, a bounder or a cad!!
I believe those that avoid tax; the tradesman that does work for folding money, those that use fake receipts, fake invoices or non VAT registered busineeses that charge VAT etc, should be prosecuted. These actions are both criminal and immoral.
As I see it, there are two main reasons why tax is evaded or avoided;
1) Our tax system is very complicated.
2) Legislation is badly drafted.
The government could simplify the system if they chose to and they could employ better suited people to draft legislation.
It seems to me, especially in relation to Number 2, judges are reluctant to apply the mischief rule when interpreting badly worded legislation.
Government use a compliant media to get over their messages in relation to their agenda, be that regarding tax, benefit claimants or the new religion of climate change.
Saint Vince of Cable and Mr Cameron have both been on TV saying that there are billions of pounds of "uncollected avoided tax" that is costing us all dear. As I say, I am neither an accountant nor a lawyer but, this statement must be an oxymoron because, if tax has been avoided, there is no tax liability and therefore no uncollected tax. This type of message stirs up a Daily Mail lynch mob based on envy and jealousy. People being put against each other by clever manipulation. If government wants to collect "tax" that has been avoided, then they need to close loopholes which make such avoidance legal. They then have a dilema; people will only willingly pay tax levels that they feel are fair and will use sharp lawyers/accountants to work out ways to legally avoid paying tax. Some academics, including my own MP John Redwood, suggest that the overall revenue increases when tax rates are lowered. This is the juxta position that government has.
Finally, anyone that believes in the rule of law can never support government or their agencies buying stolen information.
Again, I suspect we are not that far apart regarding the issues raised in this blog.
Have a good day sir.
Tonk,
ReplyDeleteThank you, too, for your reply. I've often tried to invite debate on this site about the complex issues which are often raised in an overly black-and-white manner. I've had mixed results, so it's refreshing to have such a constructive engagement. As you suggest, it is striking how much common ground there is.
Please accept my profuse apologies for the length of this post. The complexity of both our tax system and the moral and political issues around taxation, many of which you have touched on, mean that there's lots to comment on!
I am very interested to hear your expanded comments on about what you see as a government agenda to blur the line between avoidance and evasion. I do not see this, but I accept that may well be because of my own viewpoint – i.e. I am quite familiar with the concepts and jargon. I still strongly maintain that HMRC does not blur these categories in the material it publishes, but I agree that lines are often blurred in the way they are reported. I'll return to this.
You mention home “flipping” and I assume you are referring to MPs. This is an excellent point and can be used to clearly illustrate the difference between planning and avoidance. You don't pay CGT if you sell your main residence, but you generally do if you sell a second property. Some of the MPs used a tax break, introduced after the early 90s house price crash to help people who weren't able to sell their home straight away, which (effectively) gives people extra time after moving during which they can treat the old place as the main residence and therefore be exempt from CGT if the place is sold during that time.
Using this tax break to exempt the sale of your main residence from CGT when you sell it after moving into a new one is tax planning, not avoidance, as the intention of parliament in passing the exemption was to help people out in just that situation.
However, some (though not necessarily all!) of the MPs who benefited from this exemption used it to avoid tax on homes that were never their main residence purely to pay less tax. Going back to my 1816 post yesterday, it should be clear that this use of the tax break falls into the Lord Nolan definition of avoidance. I hope that even those who do not agree that there is a semantic difference between “tax planning” and “tax avoidance” will at least agree that there is a difference between the above two ways of using this CGT exemption, even if they consider both to be acceptable.
I have said that I do not think that tax avoidance is immoral, and I would even say that it may not always be immoral for all MPs to engage in it. However, I would make an exception for MPs who have claimed to stand against tax avoidance. Like Ken, I believe this is thoroughly hypocritical and therefore immoral for someone promoting such an agenda in public office.
In your paragraph starting: “I believe those that avoid tax; the tradesman...”, I would replace the words “avoid tax” with “evade tax”. Otherwise I agree. Some commentators on the Left argue that avoidance and evasion are equally immoral, but I'm not convinced. The key dividing line is what the courts have referred to as the element of “sham”. Basically, evasion means lying. Some avoiders often come close, for example through the use of offshore accounts in secrecy jurisdictions, but a line is crossed both legally and morally when people start telling direct lies.
(cont...)
(...)
ReplyDelete“As I see it, there are two main reasons why tax is evaded or avoided”
If by this you mean there are two main reasons why evaders and avoiders are able to get away with it, then I agree that the reasons you cite are very important. However, I also think it's useful to dig deeper and look at why.
The tax system is indeed very complicated in certain areas (though I do not believe it has become significantly more complicated for the vast majority of taxpayers who do not enter into highly complex transactions). Part of the reason for this is that successive governments have introduced more and more tax reliefs over the past 30 years. Another reason, however, is that since the 1986 financial services ”Big Bang”, the rise of globalisation and computerisation, big business has got more and more sophisticated at finding ways round regulation (witness, for example, the contribution of Asset Backed Securities to the credit crunch), including tax regulation. The considerable anti-avoidance legislation that has had to be enacted to counter this growing appetite for sophisticated avoidance has added to this complexity of the system and has led to a vicious cycle by creating additional loopholes, thereby enabling more avoidance.
I do not accept that the specialists in HMRC and the Treasury who draft legislation are ill-suited for the job. However, given they operate in this environment of sophisticated avoidance of an overly-complex tax code, they are often woefully under-resourced and yes, partly as a result of this, legislation is sometimes badly drafted. Another reason for legislation that doesn't do what was intended, however, is the influence of lobbying from (mostly business) groups with an interest in tax legislation being watered down, some of which is cynically intended to keep loopholes open for avoidance. Some believe that the resistance among tax practitioners to the use of purposive legislation is an example of this.
The use of sticking-plaster solutions to plug avoidance loopholes, rather than more fundamental reform, for which there is little political will, contributes to both complexity and the issues with drafting.
Yes, judges are reluctant to apply the Ramsay Principle) (which is similar to the Mischief Rule but is the analogous authority generally looked to in tax litigation) where legislation is clearly badly drafted and it is quite right that they are. Just as I have said of avoiders: “live by the sword, die by the sword”, the same must apply to the government in a democracy.
Courts are more likely, however, to use these principles where users of highly contrived schemes attempt to wriggle through legislation that is reasonably well drafted and broadly works as intended. The fact that there have been relatively few decisions on these lines could reflect either that avoiders are sailing less close to this particular wind, a reluctance by HMRC to litigate on Ramsay lines, or that so much of the legislation is badly drafted that they don't have a chance in court and have to concede these cases! Probably a combination of these.
(cont...)
(...)
ReplyDeleteI don't agree that “uncollected avoided tax” is an oxymoron. It is perhaps a truism. “Collected avoided tax” would be an oxymoron. Nor do I agree with your comments about a “compliant media” promoting an anti-avoidance agenda. The only thing papers in this country really care about are selling papers, which many of them do by trying to stir up outrage in whichever way suits them during any given week. The fact that many proprietors of newspapers are frequently accused of tax avoidance would tend to suggest that, if anything, they would be likely to have a bias in favour of avoidance. You use the example of the Mail. While there have no doubt been some Mail articles criticising avoiders, there are very often articles in the same paper accusing HMRC of a heavy-handed approach in dealing with avoidance. Some such articles have been linked to by Ken.
One thing I do agree the media is consistently responsible for is blurring the boundaries between the definitions of planning, avoidance and evasion, and I also agree that politicians tend to go along with this when it suits them. However, I think this blurring is often down to ignorance and/or laziness on the part of journalists rather than any conspiracy. With the exception of writers on publications such as The Economist and the FT, journalists are for the most part after all a bunch of humanities graduates who don't have a clue what they're talking about with these things. A fine example was a thisismoney.co.uk (owned by the Mail group) article Ken once linked to. The writer persistently misused the 'a' word while advising readers on how to do it (in reality, giving very straightforward and – I hesitate to say this in a relation to the Mail group - sensible tax planning tips).
One of the few sustained anti-avoidance campaigns in the media that I know of was the Guardian one last year. However, in what I read from that they were very careful to draw lines between planning, avoidance and evasion.
Finally: “Some academics … suggest that the overall revenue increases when tax rates are lowered.”
This line of argument can be traced back to the work of Arthur Laffer. He developed a theory which became known as the Laffer Curve, which postulates that, as tax rates rise (from zero) the total tax yield will also rise (from, of course, zero) until a point at which the yield peaks, beyond which any further increases in the tax rate lead to reduced yield, through a combination of increasing temptation to avoid and evade tax and the higher tax being a disincentive for working.
Some governments (starting with the Raegan administration) and other thinkers haver, however, simplified this to saying that lowering taxes (generally for the rich, as these people tend to be strong proponents of trickle-down economics) increases tax yield. This is true, but only if the current rate of tax is above the peak of the curve!
The (huge!) challenge is figuring out which side of this optimal level of taxation the current rate is on. This is extremely difficult because the optimal level depends upon, among other things, the state of the economy at a given moment, the interaction of other types of tax, the ease with which the tax can be mitigated through planning, avoidance or evasion, and the attitude to taxation of the population (Scandinavian taxpayers, for example, are probably willing to tolerate a higher level of taxation than residents of Lichtenstein!).
I would tentatively suggest that an upper tax rate of 50% probably is above the peak due to the psychological barrier of half one's income disappearing in taxes, but it's hard to tell.
All the best.
"For the umpteenth time, tax avoidance is perfectly legal!"
ReplyDeleteIf HMRC didn't want us to avoid tax, they wouldn't give us a tax code, would they? But hang on - maybe some jumped-up post-graduate wanting to make a name for him/herself is figuring out a way to abolish them...
"If HMRC didn't want us to avoid tax, they wouldn't give us a tax code"
ReplyDeleteIf you're suggesting that the use of a tax code is tax avoidance then you might at well say that any part of your salary that you don't pay out in tax (i.e. because the tax rate is less than 100%) is avoidance.
The tax code isn't even tax planning - it's just the way tax is calculated!
I used to just get on with my work, record my income and pay tax on the income (less my expenses of course).
ReplyDeleteI always thought that rather than spending lots of time and effort looking for more ways of reducing my tax bill I would just get on with my work and earn more.
How things change, I now realise how stupid I was to think like that when I see how much of my tax is wasted and just handed out to layabouts/fraudsters. I now use an advisor to help me cut down on the money I hand over. I am probably no better off once the fees are paid but I feel a damn site better for not chipping in for peoples widescreen tv's and Sky subs etc.
Anon @ 22-36.
ReplyDeleteMany thanks for your clear, long but very informative reply.
The links you provided were very interesting, especially the one relating to the Ramsay principle.
In that case, clearly the defendant pursued a course of conduct that was mainly, if not entirely, for the purpose of not paying tax due. Their Lordships used commonsense to reach their conclusion. I would hope that most right thinking people, with any sense of morality and fairplay, would back their conclusions.
I wonder if it is actually possible to codify this Ramsay principle and how the drafter that wrote the legislation would be able to codify at just what point, a course of conduct becomes dishonest or criminal....It sounds like a difficult job to me. With age, comes insomnia, and I spent about an hour last night trying to think of a set of phrases that would somehow codify the principle; I failed but, as previously stated, I am neither an accountant nor a lawyer.
It must be difficult to criminalise a series of transactions that, on their own are perfectly legal.....At which point do these legal transactions, taken as a whole, become criminal. I can see from your previous postings just what the government and their agency, the HMRC, are up against, my fear is that the only people that would benefit from legislation as previously described, would be lawyers and tax accountants.
I have enjoyed our exchange; it is not often that a layman like myself, has an opportunity to discuss technical matters of taxation with an apparent expert without being handed a large bill afterwards;-)
Again; many thanks.
Here is a link, illustrating my point in relation to government muddying the waters between avoidance and evasion.
ReplyDeleteIf you take the time to read the comments from readers, you will see clearly the two points I have made regarding stiring up DM readers lynch mobs and how those that are neither professional tax accountants nor lawyers can be manipulated into confusing the specific meanings of avoidance and evasion.
http://www.dailymail.co.uk/news/article-1304387/Nick-Clegg-faces-growing-anger-Lib-Dems-Sir-Philip-Greens-role.html
Another link to another example of muddying of waters, this time HMRC appear to confuse avoidance and evasion as well; If HMRC confuse the meanings, what chance have we non accountant/tax lawyers members of the public got?
ReplyDeletehttp://www.dailymail.co.uk/news/article-1304628/Well-softer-tax-avoiders-says-Revenue--Customs-boss.html
Tonk,
ReplyDeleteFirst of all, my apologies for taking a while to get back to you. Secondly, further apologies because you're going to have to spell this out for me. Could you please tell me which bits of these Daily Mail articles you feel are evidence of a government attempt to confuse avoidance and evasion?
I've looked through the comments on the Philip Green article. There is a great deal of the usual nonsense, of course. This is the Mail, so it's only predictable that Europe, immigration and benefit dodgers are cited as the "real" problems. Several commenters seem to be doing the same thing Ken does, i.e. confusing avoidance with ordinary tax planning, but I'm actually quite surprised by the lack of commenters who seem to confuse avoidance and evasion.