Monday, December 14, 2009

What is meant by 'the spirit of the law?'

Many people feel that there is little merit in MPs arguing that their more outrageous expenses claims were within "the rules". Even if the rules were lax (and I've addressed that in earlier posts here) we tend to feel that what matters is the 'spirit of the rules'. And, as with the proverbial elephant, we can easily recognise what is within or outside the spirit of the rules in this case.

By arguing that the letter of the rules takes precedence over the 'spirit' I think MPs have lowered the bar as to what is acceptable behaviour. Certainly they would be hypocritical if they argued that we should all abide by the spirit of the law when it comes to tax planning and tax avoidance. Most tax experts are quite clear that what matters here is the letter of the law.

Regular readers will know that I am uncomfortable with the idea of aggressive avoidance schemes. These tend to rely on a strict interpretation of the letter of the law. As is commonly pointed out in the professional press, the contrary argument, to avoid breaching the spirit of the law, is not easy due to a lack of clarity as to its definition. To date it has been assumed that, in the context of tax laws at least, the spirit of the law equates with the intention of Parliament. This then leads to the observation that such intentions will rarely be clear when it comes to the issues under debate even in the context of tax avoidance.

Well, now there is a new definition of the spirit of the law. It was contained in one of the documents published on the day of last week's Pre-Budget Report.

Protecting Tax Revenues 2009 explains HMRC’s methodology for estimating the shortfall in revenue between the tax collected and the tax that which should be collected (the theoretical liability), commonly referred to as the tax gap.

At para 3.2 we are told that:
“The theoretical tax liability represents the tax that would be paid if all individuals and companies complied with both the letter of the law and HMRC’s interpretation of the intention of Parliament in setting law (referred to as the spirit of the law).”
This phrase, which is repeated later in the document, is an important admission and clearly differs from more traditional definitions of the spirit of the law as simply being in accord with “Parliament’s intention.” That is often difficult to discern. On the other hand HMRC's interpretation can often be gleaned or will be well publicised.

I note also that a similar point arose in the Consultation document on a Code of practice on taxation for banks. According to the response document published last week, many argued that:
"the interpretation of “spirit of the law” and “intention of Parliament” should remain with the courts. HMRC should not become responsible for legal interpretation, as this confers a quasi-legislative and judicial function on them that contravenes the principle of separation of powers."
HMRC's response was to agree that they:
"should not become responsible for legal interpretation. Banks [and once presumes all taxpayers] will continue to be taxed in accordance with the law."
The Code of Practice on Taxation for Banks itself now requires compliance:
"with the spirit, as well as the letter, of tax law, discerning and following the intentions of Parliament"
I predict that there will be more debate about this phrase and approach in the coming months.
What do you think?

1 comment:

  1. Is HMRC's argument circular? In practice much of the detailed legislation is drafted within the Revenue, and presented for discussion by Parliament, who frequently do not fully understand its full meaning. The Courts rightly interpret the words, following the fiction that the words used by Parliament mean what they say. Now HMRC are saying that what "was intended" was intended by Parliament, when of course it was intended in the first place by HMRC.

    So HMRC are saying that if 'we', that is to say HMRC failed to draft the legislation as we meant it to work-too bad, it should be interpreted that way.

    Mr Justice Lightman put it brilliantly in A Pardoe [HMIT]v.Entergy Power Development Corporation, saying "....This may leave a yawning gap to the protection available to CIR which ought to be filled, but whether the gap ought to be filled and how it should be filled are matters for the legislature , and not for the Court"-and , although he did not say so, by administrative fiat of HMRC !