Tax Avoidance? Avoid It
Martyn Gowar says tax avoidance ain’t what it used to be — a noble pursuit for dukes and earls. Today the government has a way of making it feel so, well, grubby
SOME YEARS AGO, the government of the day wished to encourage the film industry in the UK and introduced targeted tax reliefs to promote investment. Fast forward to early 2012, and we see HMRC win the case against Eclipse Film Partners No 35 LLP and defeat a scheme which would have secured around £400,000 in tax relief for a personal investment of £173,000. But what is particularly important about this case (which the investors are going to appeal vigorously) is that it underlines the difficulty in enabling a taxpayer to know what is permissible in tax avoidance. The point came home dramatically in the Budget, when the Chancellor described tax evasion and aggressive tax avoidance as being ‘morally repugnant’.
Now hold on: who has the monopoly of making such a subjective call? I was taught by a very wise lawyer that there is much truth in that saying, ‘I am determined, you are stubborn, he is pig-headed.’ In other words, one set of facts can justify completely different judgements, ranging from the supportive to the dismissive.
In the well-known case in 1936 of Inland Revenue Commissioners v The Duke of Westminster, Lord Tomlin said the following: ‘Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it would otherwise be. If he succeeds in ordering them so as to secure this result, then, however, unappreciative the Commissioners of Inland Revenue or his fellow tax payers may be of his ingenuity, he cannot be compelled to pay an increased tax.’
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. It is interesting to note that in the period since 1936 there have been very strong successive movements of the pendulum in both directions. First, when taxes rose dramatically in the Sixties and Seventies, judges felt very little compunction in supporting any attempts by taxpayers to reduce a burden which was generally considered excessive. Arguments by Revenue officials and barristers instructed by them received short shrift in the courts, and schemes to avoid tax achieved spectacular levels of ingenuity and unreality. It got so bad that the judges in the House of Lords in cases such as Furness v Dawson began to attack artificial schemes.
The tide turned particularly when the top tax rates dropped to 40 per cent. However, the tax-avoidance industry was in full flow. We then have the move towards the regime of DOTAS (disclosure of tax avoidance schemes) and to the GAAR, with continued extravagant anti-avoidance provisions in every Finance Act.
LOOK AT THE way the politics has changed. Thirty years ago, there was a clear distinction between tax avoidance, which was legal along the lines of the Duke of Westminster Judgment quoted above, and tax evasion, which was illegal and involved non-disclosure, deception or fraud.
It was during the time of Gordon Brown’s rule as chancellor that he tried to elide the definitions and turn avoidance into something akin to evasion. However, is avoidance that is unacceptable to include the claiming of any relief that the tax system puts in place for targeted reasons? Of course not. It is in that context that George Osborne has tried to introduce ‘aggressive tax avoidance’, which he equates with evasion because both are morally repugnant. But does it mean no more than making up what counts as aggression?
The Eclipse 35 case is an example of taxpayers starting out using a scheme which they were advised accords with the law and now finding that hindsight is being applied to attack it.
The real problem is not for the most seriously wealthy taxpayer — he or she will be advised specifically. The problem area is for those people for whom the saving of tax shows a real difference in the lifestyle they can afford, who are beguiled by tax advisers who sell them schemes, often backed up with the professional endorsement. They then find that the scheme (because it is marketed sufficiently often) is attacked and they, having signed up in all innocence, are faced with either massive professional costs in fighting HMRC or paying not only a tax amount they did not think they would have to reserve, but interest and penalties on top.
Tax avoidance is a dangerous game in the world of 2012. My view is that the pendulum has swung too far back in favour of the Revenue and against the subject, and it may well be that the increase in tax rates and the attack on the wealthy which has increased the amount that they contribute to the Revenue will start to engage the sympathy of judges, if not of the legislators, when they see that the tax system is becoming used oppressively and cynically.
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