In July 2015 we reported on the blurring of avoidance and evasion that, now with particular relevance to the Panama Papers, may see the authorities come after those who advise on tax efficiency
‘If people help a burglar, they are accomplices too. Now it will be the same for those that help tax evaders,’ said former chief secretary to the Treasury Danny Alexander earlier this year. Alexander has since departed the green benches, but his rhetoric hasn’t: on the first page of the Conservatives’ election manifesto was the pledge that they would ‘crack down on tax evasion and aggressive tax avoidance’.
By blurring the line between the former (a legal issue) and the latter (a moral one), the government is using the menace it applies to the crime for the ‘sin’ it allows but condemns. While Parliament says it is going to offer equal harshness on both kinds of tax reduction, it is tax avoidance which has particularly enjoyed its ire of late. Recall Margaret Hodge MP’s ferocious scolding of companies such as Google and Starbucks for their (legitimate) schemes which passed profits around the world until they could no longer be seen and the corporate accountants got dizzy.
David Cameron bashed pop star Gary Barlow after The Times revealed his avoidance schemes, and he said what comedian Jimmy Carr had done was ‘morally wrong’ (which seems less severe than ‘morally repugnant’, as chancellor George Osborne had called it). In the public mind, avoidance is the new evasion.
They have had support from the courts in this effort to sweep up tax avoidance; the crushing defeats of film schemes show this. Historic rulings such as that of 1936 concerning the Duke of Westminster have been given less and less weight. In this case, which endorsed the aristocrat’s scheme to save tax by paying his gardener via a covenant, the judge 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.’
As our legal columnist Martyn Gowar has written, ‘I have never heard that statement being doubted as the word of the law, but it is certainly not the way that it is now being interpreted.’ With public, political and now judicial elision of evasion and avoidance, and consequent condemnation, does this mean that advisers are now wary of promoting avoidance? Does it even mean that they might go to jail?
‘It wouldn’t surprise me,’ says Simon Rylatt, head of private client and tax at Boodle Hatfield, ‘if those that are tempted to undertake overtly aggressive or “testing the boundaries” tax planning, and those that do advise alongside it and are cognisant of how provocative it may be considered, will be at risk of criticism and, potentially, prosecution in due course. It wouldn’t surprise me at all, and it has been seen already in the US.’
Stephen Camm, tax partner at PwC, says the majority of tax advisers are compliant with the new morality, although he adds a caveat: ‘That doesn’t mean to say some of them have not tried to understand where there might be loopholes and might have planned in a way the public see as quite aggressive.’ But he says that’s a ‘tiny, tiny minority’.
The penalties for evasion, which the government wants to suggest are now suitable for avoidance (even if they cannot actually be applied), are long established and well-known to advisers, says Camm: ‘We’ve had money-laundering rules in this country that have made it an offence not to report a client if you suspect tax evasion, and the consequences of that are you go to prison, so there’s already a deterrent on the books.’
But as an HMRC spokesperson told Spear’s, ‘Avoidance is not illegal.’ And here is the crux: how do you discourage something that you inherently oppose as a public body but is entirely legal? It turns out that you make it impossible to tell where immorality exists. The General Anti-Abuse Rule (GAAR), enacted in 2013, aims to be a guide to what HMRC considers ‘tax arrangements that are abusive’. (Note the move from ‘avoidance’ to the language of abuse.)
The difficulty in getting legal traction on the slippery concept of avoidance is reflected with a 191-page online guide and an independent advisory panel which ‘approves HMRC’s GAAR guidance, and provides opinions on cases where HMRC considers the GAAR may apply’. All this is nicely ambiguous.
Camm, who spent fifteen years working for the Inland Revenue (HMRC’s predecessor) before joining PwC, sees the method in the mandarins’ madness: ‘It probably does serve the Revenue well for people to assume tax avoidance and planning is going to be scrutinised and is unlikely to be successful. It diminishes people’s appetite for it.’
Simon Rylatt also believes HMRC might well have an interest in keeping certain tax areas opaque to discourage avoidance. He mentions the need to make sure ‘everybody understands the rules of the game’ but cautions: ‘Sometimes there’s a disincentive to doing that because the greyer it is, the more conservative people may be, because they’re concerned about whether they fall on the wrong side of the line. That can be more beneficial in terms of dissuading people.’
That’s something echoed by those working in the heavily scrutinised offshore world: ‘To some extent I think HMRC have been using this sea change in public opinion to their advantage,’ says Adrian Pilcher, a senior tax lawyer at Isolas in Gibraltar. ‘I understand from accountants who work with us in the UK that HMRC are very much aware that a lot of the big corporations that have a lot invested in their brand will do whatever it takes to keep their names out of the headlines.’
It’s important to remember advisers are hired for a reason: ‘It gets tricky. If you’re a tax adviser, your duty is to advise the client on what it is he needs to do to pay the least tax possible,’ says Pilcher. ‘It’s difficult to reconcile this with the morality issue. Ultimately the shareholders could claim against you because they’re paying tax they otherwise wouldn’t have had to pay, other than for your negligent advice.’ And there are further conflicts: another adviser pointed to the parallel demands of disclosure for HMRC and confidentiality for the client.
But is this just a self-interested profession closing ranks and blaming the bureaucrats for failures in tax transparency? HMRC certainly wasn’t opaque in making its position clear when Spear’s asked whether the unwelcome publicity of court was a threat it used. ‘HMRC does not threaten anyone,’ it told us, adding that claims of deliberate opacity were ‘complete rubbish’.
However, Chas Roy-Chowdhury, the head of taxation at the Association of Chartered Certified Accountants, says official consultation is ongoing between industry and the government on what the line should be on tax avoidance. ‘I don’t think HMRC are being opaque about this particular issue,’ he says, ‘but it’s something where the government have made a reaction to the background noise in this area before the election and they’ve published something without really necessarily thinking through what they mean by it.’
Perhaps clarity is not the priority. Between evasion and avoidance, any sort of distinction has been erased for political and economic ends. Now that a predatory HMRC has twice overturned the Hastings Bass ruling, which allowed trustees to ‘erase’ tax incurring moves, advisers look more vulnerable than ever. Can we doubt that the government, if it could, would start applying the penalties for tax evasion to those advisers who put their clients into extreme tax avoidance situations? It may be time for tax lawyers to start consulting their criminal-law brethren.