HMRC Is Shite

HMRC Is Shite
Dedicated to the taxpayers of Britain, and the employees of Her Majesty's Revenue and Customs (HMRC), who have to endure the monumental shambles that is HMRC.

Tuesday, 17 March 2009

Avoidance vs Evasion

BaitingI just know that one of my regular visitors will feel compelled to comment on this, as he always does when I use the "A" word:)

"Tax avoidance is legal, whereas tax evasion is illegal".

I am pleased to see The Times agrees with what I have been saying for so many months.

Tax does have to be taxing.

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  1. Thanks for the shout-out, Ken!

    However, I'm not quite sure what you're trying to prove. I've never argued that avoidance isn't legal. In fact, in my comment on your 17 February post I confirmed that it is technically true that avoidance is legal (though I also went on to say that it does not follow that all avoidance schemes work - lots of them are defeated in court!). I did admittedly make a typo in one of my comments on your 23 Feb posting (comment posted at 15:04 on 24/02/09), to which I have now posted an erratum. This typo may have confused, but it wasn't central to my argument and didn't contradict my acknowledgement that avoidance is legal.

    My argument with you on this one is that your crazy claim that ISAs and personal allowances are forms of avoidance is utter nonsense. I would once again refer you to my comments on your post of 23/02/09, where I set out the reasons why you're wrong on this and why, even if you decide to use an unusual definition of the term "tax avoidance", it's invalid to then argue that cracking down on avoidance is a precursor to abolishing tax breaks like ISAs because when HMRC talks about "avoidance" they're talking about the normal definition that most people (including judges) use!

    If anything, the Times article supports what I'm saying. "Tax avoidance is legal, whereas tax evasion is illegal - but avoidance is deeply frowned upon and each year the Treasury comes up with new efforts to close loopholes."

    Do you really think the Times is arguing that ISAs and personal allowances are deeply frowned upon or that they are loopholes?

    In your post of 29/1/09, you criticised HMRC for failing to respond publicly to a report. In my comments on your 23 Feb post I posed some specific questions to you on this subject. I would be very grateful if you would now practice as you preach and do me the courtesy of responding to my questions! (Preferably by actually answering the questions, rather than by citing an article with at best a passing relevance!)

  2. You were right about one thing, anyway. I was indeed compelled to comment.

    Hugs and kisses,
    Love from me.

  3. Why when there is clear EVASION do we not see prosecutions? I am thinking of off-shore accounts. HMRC had the evidence handed to them on a plate and there was no guaranteed amnesty for large or high profile cases.
    Rumour within HMRC is that MPs and ex HMRC officials are implicated - why is no-one pushimg this issue?

  4. If anything, the Times article supports what I'm saying. "Tax avoidance is legal, whereas tax evasion is illegal - but avoidance is deeply frowned upon and each year the Treasury comes up with new efforts to close loopholes."

    If the Treasury thought they could get away with ending ISAs and removing personal allowances, do you honestly think they wouldn't?

    With ISAs and personal allowances you can receive income and it not be taxed. In what way are they not State sanctioned tax avoidance schemes?

  5. busstop: how quickly do you seriously expect prosecution cases to get to court?

  6. Anonymous at 2124,

    In reverse order:

    "With ISAs and personal allowances you can receive income and it not be taxed. In what way are they not State sanctioned tax avoidance schemes?"

    The short answer is: err...because they're not!

    I will try to keep this as simple as possible, because if you have read my comments on Ken's 23 February nonsense then I obviously didn't make my point clearly enough. Tax avoidance is about finding and exploiting loopholes to get a tax break without incurring the commercial or economic consequences that parliament intended that you should incur in order to be entitled to that tax break.

    Clearly, if you benefit from getting tax free interest through an ISA, you are incurring the economic consequences intended by parliament - i.e. you're saving money rather than spending it.

    On the other hand, if you've got a better definition of avoidance than Lord Nolan, let's hear it!

    "If the Treasury thought they could get away with ending ISAs and removing personal allowances, do you honestly think they wouldn't?"

    That's like saying that the government would put the basic tax rate up to 90% if they thought they could get away with it. The answer may be that the government would want to increase the tax rate and do away with ISAs if they could (the fact that they probably couldn't – though with the economy in the state its in I wouldn't be surprised if they're taking a long hard look at ISAs – is what democracy is about!), but that still doesn't make using them avoidance!

  7. dont worry the new financial officer in hmrc will sort it out after all he did work with plenty of illustrious orgs before

  8. ‘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.’ Lord President Clyde in Ayrshire Pullman Motor Services v IR Commrs (1929)

    ‘Every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.’ Lord Tomlin in IR Commrs v Duke of Westminster (1936)

    Nice turn of phrase these judges have.

  9. Thanks for that, John. Those quotes back up what we all agree on: that avoidance is legal.

    Once again I refer you to Lord Nolan's words in the CIR v Willoughby case - over 60 years more up-to-date than the ones you refer to - for a definition of what avoidance actually is.

    Before we lose all sight of what my criticism actually is here, I'm saying that when HMRC talks about tackling avoidance, what they're referring to is nothing whatsoever like ISAs and personal allowances, as Ken and others curiously claim. Any changes to tax breaks like them are political decisions, not operational matters! Ken argues that for HMRC to have a strategy for tackling avoidance is the top (oddly ignoring the fact they've been working to tackle it for decades) of a slippery slope to doing away with the tax breaks we are entitled to. I posed a number of questions in my comments on the 23 Feb blog entry. I hold out little hope of getting answers to them, but could someone (either Ken or one of the others currently weighing in) please at least answer this one question: do you believe that HMRC should abandon any kind of strategy of investigating, litigating and legislating against avoidance schemes and if so why? (Please, for the sake of argument at least, accept that for the purposes of this question, the straregy includes dealing with the abuse of tax breaks - capital allowances, for examples, because oddly enough there aren't that many loopholes in the ISA code - rather than abolishing the tax breaks themselves!)

    By the way, an interesting aside about the Lord Clyde quote is that he went on to say that the then Inland Revenue was quite right to take "every advantage which is open to it under the Taxing Statutes for the purposes of depleting the taxpayer's pocket".

    It seems that, in spite of the Inland Revenue having had an anti-avoidance strategy at least as far back as 1929, ISAs somehow miraculously made it to the statute book nearly 70 years later. That's a pretty long slippery slope!

  10. Nolan's statement does not negate (or even disagree with) the statements of Clyde and Tomlin. Furthermore, just because the Clyde and Tomlin statements are more than 60 years old does not make them wrong. The argument that because something is old it is - by virtue solely of its age - rubbish (eg habeas corpus?) is not only mistaken, it's positively dangerous.

    The process is, I believe, that Parliament passes a tax act and we suckers assume that the words of the act mean what they say. Then along comes some bright lawyer and/or accountant who proves in a court of law (not the court of "public opinion") that Parliament got it wrong: the words used in the act mean something different from that apparently intended by Parliament. The conclusion is not that tax avoidance is either illegal or immoral but that if Parliament got it right in the first place then tax "avoidance" per Nolan would disappear.

    I agree that use of ISAs is not "avoidance" in Nolan's terms and, moreover, the words used in the act creating ISAs apparently fully reflect the stated intentions of the then Chancellor and no more than those intentions. However, had that bright lawyer/accountant mentioned above identified in the act's wording an opportunity for tax saving beyond that envisaged by Parliament then so be it: use of that opportunity would be both avoidance under the Nolan definition and a taxpayer's right under the Clyde/Tomlin principle.

    I've come late to this debate and I assume it concerns in part the muddying of waters concerning the interpretation and legitimacy of legislation: apparently a particular ambition of this favourite and grossly overrated son of the chattering classes. Mr Murphy and his friends might want to live in an Alice-in-Wonderland world where words (and law) mean only what he and they want them to mean (ie that evasion and Nolan-type avoidance are identical): I don't.

  11. "Anyone may arrange his affairs so that his taxes shall be as low as
    possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands."

    Does anyone know what the IRS thinks about Judge Learned Hand's dictum. (A name even better than his turn of phrase).

    Surely the art of taxation is to pitch it so that the reward of avoidance is less than the expense and effort involved. A view which I think was supported by Prof. C Northcote Parkinson.

  12. Umbongo,

    I did not say in my 23:49 message yesterday that Nolan's statement negates or disagrees with those of Clyde and Tomlin. I was trying to make the point that they are concerned with slightly different things. While the quotes (including the American one) Mr Stryge has set out give judicial support for the fact that tax avoidance is legal (which we all seem to agree with) – back then the Inland Revenue seemed to be trying to arguing that it just wasn't cricket! Nolan, meanwhile, offers us a definition of what avoidance actually is. I'm not quite sure, but I think John Stryge was trying to use these quotes as counter-examples to my Nolan one, so I was trying to demonstrate exactly what you say: that they aren't contradictory.

    I fully accept your point about the age of the cases. I didn't actually say that the age of the Clyde and Tomlin quotes made them less valid, but I did clearly imply it, for which I apologise. To be honest I included that aside purely to be facetious – in my defence this was probably due to frustration at the feeling of banging my head against a brick wall.

    At risk of getting side-tracked, there are clearly areas of tax law where previous judicial decisions have lost relevance due to later developments. Off the top of my head, I can think of the relationship between accountancy and tax in things like the allowability of provisions as an example.

    The other point with the relationship between Nolan, Clyde and Tomlin is that case law builds on what has gone before and the reason cases become important is because they clarify something that hadn't previously been tested. Because of this, I think the 60-year gap is relevant because clearly Nolan expanded upon had gone before (though without negating or disagreeing with it); having accepted the previously-established principle that avoidance is legal, he then refined the definition of it.

    Your description of “the process” sounds about right to me, though the purposive approach (what Parliament intended) isn't necessarily always followed by the courts. Sometimes the loopholes are so glaring that they just find for the taxpayer and tell HMRC to go away and draft it properly next time, even if the avoidance clearly goes against the spirit and purpose of the legislation.

    Murphy's arguments, meanwhile, do have a lot of flaws. I think that to say that he claims that avoidance and evasion are identical is pushing it a bit, though. It leads on nicely to questions about the morality of avoidance, though, as this is something about which Murphy is particularly outspoken. If we can accept (for the purposes of this question, at least) that there are three distinct ways to reduce tax liability: planning (e.g. using an ISA), avoidance (legally using loopholes) and evasion (out and out lies/deception), to what extent is it moral to do so and how and to what extent should government (i.e. HMRC) work to tackle it?

  13. "Surely the art of taxation is to pitch it so that the reward of avoidance is less than the expense and effort involved. A view which I think was supported by Prof. C Northcote Parkinson."

    Sounds reasonable. This doesn't just apply to setting the tax rates, but also applies to the way you police the system and penalise non-compliance.

    On the subject of the expense involved in avoidance, there is a judicial quote relating to the situation where, as a result of losing in court over an avoidance scheme, the taxpayer ends up getting charged double what they would have if they haven't tried the avoidance. This sort of thing can happen with the unallowable purpose legislation, which disallows a deduction for the interest paid on borrowing money where that money is used to enter into avoidance. There is a case (whose name escapes me but I'll look it up at some point), where the company lost on both the scheme and the unallowable purpose and so got effectively taxed on (roughly) double. The judge said something to the effect of 'live by the sword, die by the sword'!

  14. For fark's sake... get a life!!!

  15. Nobody's forcing you to read it.

  16. For fark's sake... get a life!!!
    I did, but my Tesco 'Bag for Life' tore so it fell out and got lost.

  17. Anonymous 21:05

    I think we're in (almost) complete agreement. My opinion (and it's only an opinion) is that there is no "grey area" where tax is concerned: if the letter of the law says you don't have to pay, you don't have to pay - no morality is involved in seeking to minimise your tax even if you are taking advantage of the shortcomings of those drafting the Finance Acts. It goes without saying that the reverse also applies - if you're caught, you're caught. Tough? Of course it's tough, but the moral (!) is that the tax system should be much simpler and underpinned by clear legislation; not the complex, barely understandable wibble we have now which is only slightly mitigated at the edges by Revenue Concessions (ie extra-legal legislation by the executive).