Starting shortly after WW1, coincidentally about the time that women got the vote, the general public’s attitude to tax avoidance has evolved considerably up to the present day. John Maynard Keynes, the English economist and philosopher, famously said in 1944: “The avoidance of taxes is the only intellectual pursuit that still carries any reward.”
Keynes was a recognised expert in his field and his views fundamentally changed the theory and practice of macroeconomics, and the economic policies of governments. However, what did Keynes understand by the term “avoidance”, and how has the public’s view of this changed over time?
Two case studies
- In 1929 Lord Clyde, presiding judge in the case of Ayrshire Motor Service vs CIR, said: “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.” And thus, the right to “avoid” paying tax was effectively legitimised.
- In 1936 Lord Tomlin in the case of the Inland Revenue vs Duke of Westminster, further cemented the right to “avoid” paying tax, when he said: “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 may be of his ingenuity, he cannot be compelled to pay an increased tax.”
Lord Tomlin’s judgement effectively upheld the strict interpretation of the “letter of the law” rather than the doctrine of the “spirit of the law”, in determining a transaction’s tax treatment. As a direct consequence of this, an industry emerged that specialises in marketing highly contrived tax planning schemes to avoid tax using the words of the legislation, even if this was not how the law had been intended to be used when enacted.
Commonsense forward planning
Tax avoidance is now seen as part of a commonsense structuring of someone’s financial affairs, but this concept is, and has always been distinct from tax evasion, which has never been acceptable or legal. The former Labour Chancellor, Denis Healey, speaking in 1975, famously said: “The difference between tax avoidance and tax evasion is the thickness of a prison wall.” This was a great sound bite, reiterating the fact that tax avoidance was still seen as an acceptable practice, as opposed to tax evasion, which has the potential to land you in jail.
The market for tax avoidance products has been stoked by a combination of rising tax rates and the different tax treatments of capital and income. The first clear sign that the pendulum of change was swinging back towards the tax office view on tax, took place in 1981. In this year the Supreme Court ruled that when a transaction has pre-arranged artificial steps, that serve no commercial purpose other than to save tax, the proper approach is to tax the effect of the transaction as a whole. Thus, no longer was it possible to rely solely on the letter of the law; now the substance of a transaction also had to be considered.
HM Government take action
Despite this minor setback, tax avoidance schemes continued to grow, partly because HMRC only had the resources to take the more aggressive tax avoidance cases before the courts. This led the government to consider whether there was a need for a general anti-avoidance rule. As usual the legislation was fudged when in 2013, they enacted the general anti-abuse rule (GAAR), rather than an out-and-out anti-avoidance rule, but it was a start.
The primary objective of the GAAR was and continues to be, to deter taxpayers from entering into abusive arrangements, and to discourage would-be promoters of avoidance schemes from marketing such schemes. Tax avoidance may have involved operating within the letter of the law, but it was often not within the spirit of the law, and that was no longer considered acceptable.
Other measures
The GAAR legislation was subsequently buttressed by the disclosure of tax avoidance schemes (DOTAS) and promotion of tax avoidance schemes (POTAS). Tax avoidance is now seen as any scheme that involves bending the rules of the tax system to try to gain an artificial tax advantage that is contrary to the clear intention of parliament.
Whilst tax planning is still acceptable, artificial schemes to avoid tax are not. By the use of the POTAS and DOTAS legislation, HMRC has targeted promoters of tax avoidance schemes in an attempt to deter, disrupt and otherwise frustrate the marketing of those schemes and cut them off at source. However, with current tax rates at their highest level for decades and which do not appear likely to fall any time soon, tax avoidance schemes continue to be promoted, most noticeably around disguised remuneration.
HMRC has tried to educate the public about the risks of using these tax avoidance schemes and regularly publishes a list of tax avoidance promoters who are marketing them, but in reality, it is up to taxpayers and their accountants to do due diligence on these products.
Accountant’s view
Personally, I’m a big fan of minimising the amount of tax payable, wherever legally possible. My acid test, when advising a client on a tax avoidance scheme is (please excuse the mixed metaphors), if it seems too good to be true, then don’t touch it with a bargepole!
