Monday, October 25, 2010

Do you have to organise your affairs to pay the maximum tax?

My attention was drawn to a Q&A in the House of Lords on 19 October. It was clearly an attempt to challenge the legitimacy of pronouncements by Government ministers that confuse tax avoidance and tax evasion.
Lord Ashcroft: To Ask Her Majesty's Government whether they expect citizens to organise their tax affairs in order to maximise tax payable.[HL2125]

The Commercial Secretary to the Treasury (Lord Sassoon): The Government expect citizens to pay tax that is due by law. The Government will take action against tax avoidance schemes that claim to produce results completely at odds with the intentions of Parliament. That is why the Government support the Code of Conduct on Taxation for banks and is asking them to adopt it by the end of November 2010.
On this blog I have taken an objective stance when sharing my views on the issue of legal but artificial tax avoidance schemes. I'm no fan and I'm skeptical of many of the claims made about the prospect of success of such schemes. But I equally understand the rationale for Lord Ashcroft's question (leaving aside his personal position etc). It comes down to the extent to which citizens can take action to reduce their tax bills as long as when doing so they remain within the law.

I don't imagine Lord Ashcroft expected a fully reasoned reply to his question. At it's simplest the answer has to be 'no'. Of course there is no legal or moral obligation to organise one's affairs in order to maximise the tax payable. And that then begs the question as to how far can one go to reduce the tax payable as long as one remains within the law?

I've explored previously the difference between tax evasion, legal but "morally questionable" tax avoidance and uncontentious tax planning. And I asked just last month: Doesn't everyone try to avoid or evade taxes? The problem is that different people will draw the line between what is acceptable or unacceptable in different places.

I know that many advisers struggle with this. The challenge is whether they can honestly and objectively advise their clients as to the risks and downsides as well as the prospective benefits of tax avoidance activities.


  1. Mark - you'll be familiar with the Ayrshire Pullman case: "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" - which has always seemed to me a reasonable approach for a tax adviser to take. However, on a related subject I did note a piece in the Sunday Times to the effect that the government are said to be considering bringing forward legislation to stop "the rich" from unfairly avoiding paying interest on student tuition fee loans by paying the fees upfront or by repaying the loan early. In other words it appears that the government now considers that avoiding payment of interest by not taking a loan is unacceptable conduct! On that basis I suppose I am avoiding Income Tax by earning less than Wayne Rooney; and avoiding VAT by spending less than Coleen. So I am now utterly bemused about what constitutes avoidance.

  2. I think that there's a lot of very woolly thinking here - much of it I suspect deliberate as that is the only way that the movers and shakers in our society can get people to believe that tax avoidance is morally wrong. One problem, as Mark rightly points out, is that different people have different ideas about what constitutes tax avoidance, so there is never likely to be a consensus on this. Certainly the Revenue and the accountancy profession are at odds in a number of areas, most notably on bed-and-breakfasting for Capital Gains Tax (hardly any accountants I know can see anything wrong with this, yet the fact that there is anti-avoidance legislation suggest that the Revenue does) and, perversely, on incorporation of small businesses, which most accountants see as a form of avoidance (albeit a legitimiate one) whereas HMRC for some reason does not except where disguised employment is at issue.

    There have been attempts recently in some quarters to equate tax evasion with benefits fraud. This is the result of some particularly sloppy thinking, which is likely to be counter-productive for those wishing to pursue this line. If benefits fraud and tax evasion were equivalents, and tax evasion and tax avoidance were equivalents, then it would follow that benefits fraud and tax avoidance were equivalents. I don't know anybody who would pursue that line, and I can't see them getting very far if they were to.

    So what is morally wrong with benefit fraud, tax evasion and tax avoidance? Benefit fraud is always a straight case of theft: someone is taking money to which he is not entitled from someone else (the Government). Tax evasion can fall into this category - for example if one were to claim a rebate to which one is not entitled (such as VAT carousel fraud). More often, though, it is a case of lying (putting in a false return in order to evade tax) or of failing to notify the authorities of a liability to tax. Lying is certainly a serious matter too, but we do ourselves no favours by saying that it is the same as stealing: it isn't. The difference is that, with stealing, someone is taking money that is not his, whereas with filing a false return the money does belong to the someone - he is preventing the Government from dipping its hands into his pockets.

    The third case - of failing to notify - is slightly different again. Lying and stealing are morally wrong in any circumstance, whereas failure to notify is only wrong where the state has imposed a duty to notify - if there were no law that said that one must declare a liability to tax by October 5th, one would be under no obligation to do so.

    We are all agreed (or I hope that we are) that tax evasion is morally wrong, whichever of these forms it takes. However, it is important to bear these differences in mind when one considers tax avoidance, if one is to come to a reasoned view of the ethics of that matter. Failure to pay Income Tax is only wrong because the law says that one should pay Income Tax at 20% or 40%; if there was no such law one would have no moral obligation to pay. It is, therefore, worth while looking at what the law does actually say that our civic obligations are here, and in my view quite legitimate to take advantage of any legislation that might say that one does not have to pay. One must always remember that it is the citizen's money that one is talking about here, not the Government's, until such point as the Government legitimately takes it. Probably the best analogy that I can think of is to using a device to get off a fine - most people I know would not naturally think that someone who finds a loophole to get off a fine was dishonest, whereas they would object to someone lying in court to do so.

  3. As a profession I think that we must keep hammering home the difference between evasion and avoidance and draw a thick black line between the two. The media seems to have lost sight of the difference and it is only a matter of time before the Treasury/HMRC will exploit this and follow suit.

    Yes, I accept that some avoidance schemes are morally questionable and not what parliament intended. Perhaps parliament would care to be more explicit via the legislation it drafts.

    The danger is that if we leave HMRC to decide were the line is it will be just to the left of everything it doesn't like the look of.