This week, Cambridge Tax Discussion Group member, Dr. Alexis Brassey contributes a discussion piece on tax avoidance. Dr. Brassey is a PhD student reading Law at the University of Cambridge.
Disclaimer: Any opinions expressed are solely by the author and is not representative of the opinions of individual members of the Cambridge Tax Discussion Group. The Group is a diverse network of scholars and professionals who gather weekly to discuss broad topics related to tax.
Tax Avoidance: An Oxymoron
Dr. Alexis Brassey
The expression tax avoidance elicits strong emotions from journalists and politicians. This interest, which has spawned thousands of articles and frequent legislative proposals, arises as a result of a belief that “something untoward” has happened. Some clever company or “ultra high net worth” has managed to outfox the great British public and therefore something must be done about it.
The question, “what exactly is tax avoidance?” barely gets a mention, other than the possible tacit acknowledgement that its “legal”, but somehow “wrong”.
The most eloquent and succinct definition of tax avoidance was proposed by Lord Hoffman in 2005:
“…tax avoidance in the sense of a series of transactions successfully structured to avoid a tax which Parliament intended to impose should be a contradiction in terms. The only way in which Parliament can express an intention to impose a tax is by a statute that means that such a tax is to be imposed. If that is what Parliament means, the courts should be trusted to give effect to its intention.”[1]
If Lord Hoffman was correct, however, the idea that so much could be said and done about tax avoidance would be very odd indeed. At the heart of the avoidance debate and every avoidance case, one finds the executive[2] branch of government, HMRC, unable to convince the judiciary that they are able to impose a tax. The frustration of the executive branch then manifests itself in their assertion that whilst, grudgingly the tax payer has legally avoided being taxed, they ought not to have done. Something unfair, in the eyes of the executive branch of government, has taken place.
In the context of our constitutional doctrine, built on the principle of a separation of powers, how concerned ought we to be when the executive branch loses its case in a court of law? The answer, in ordinary circumstances, is that the mediation of executive power by the courts ensures our freedom. This freedom is underwritten by an overarching set of principles that constrain executive power by the judicial branch, which itself operates within a rule of law doctrine. The British legal tradition has a proud history of constraining its executive to ensure the liberty of its subjects with doctrines such as ultra vires and judicial review. Surely, so called tax avoidance is merely a by-product of a system of law working well.
In light of this analysis, what then is tax avoidance? HMRC bring a case to impose a tax. The courts consider the case and there can only be one of two outcomes. Either the courts decide HMRC are correct, in which case no tax has been avoided. Alternatively the courts can decide that no tax is due, in which case no tax has been avoided. The existence of tax avoidance, therefore, resides only in the minds of those who either misunderstand the judicial process or harbour the belief that law is something that ought to take place outside the courtroom.
Tax academics have written widely on tax avoidance[3], most struggle to articulate a coherent definition, all fail to overcome the problem that they are doing nothing more than discussing the executive’s frustration at losing in court.
There have been attempts[4] to distinguish between what is legally effective and what ought to be legally effective in the literature. These attempts, however, do little more than articulate the normative perspective of the authors in respect to the outcome.
“Tax avoidance or aggressive tax planning involves bending the rules of the tax system to gain a tax advantage that Parliament never intended. It often involves contrived, artificial transactions that serve little or no purpose other than to produce a tax advantage. It involves operating within the letter – but not the spirit – of the law. In arriving at a view as to whether the transaction is contrary to the intentions of Parliament, HMRC will consider a purposive construction of the legislation, and will also consider whether Parliament can realistically have intended to give the proposed result in circumstances that are very different from those that prevailed at the time (e.g. re loopholes being used to arrive at an unexpected result).”[9]
On this definition, HMRC believe themselves to be the arbiters of the law as opposed to the court. Under the current constitutional settlement, the only criteria the taxpayer needs to fulfil is to be able to demonstrate to a court of law that their transaction is not subject to tax. Of course, HMRC may take a different view, but that is part and parcel of our system of law. Unless and until ALL parties recognise that it is for the courts to decide the law and only the courts, we are doomed to spend time on listening to subjective moral or political positions of various parties who have failed to understand our constitution.
The introduction of a General Anti Abuse Rule[10] in 2013 has opened up the spectre of increased political positioning in the field of tax law. It is now possible for HMRC to advance their position in court as somehow arbiters of “reasonableness”[11]. The Finance Act 2013 now requires courts to have regard to HMRCs GAAR panel[12].
The GAAR can be considered as either being ineffective or a mechanism to circumvent the rule of law for the following reasons. If the GAARs application is limited to allowing courts to impose tax on the basis of a purposive jurisprudential construction[13] then it is not adding anything to the current legal corpus. If GAARs application is designed to allow courts to ignore or exceed purposive jurisprudence on the basis of an unspecified notion of “double reasonableness”[14] then we are indeed in a pre Magna Carta[15] or pre-Bill of Rights[16] era where arbitrariness is allowed to reign in determining tax on an ex-post basis.
Lord Diplock suggested that requiring citizens to do anything other than understand the words in the Statute was tantamount to a confidence trick:
“If the meaning of those words is clear and unambiguous and does not lead to a result that is manifestly absurd or unreasonable, it would be a confidence trick by Parliament and destructive of all legal certainty if the private citizen could not rely upon that meaning but was required to search through all that had happened before and in the course of the legislative process in order to see whether there was anything to be found from which it could be inferred that Parliament’s real intention had not been accurately expressed by the actual words that Parliament had adopted to communicate it to those affected by the legislation.”[17]
Graham Aaronson, the author of the GAAR along with Judith Freedman et al, however, were relaxed about giving consent to both the executive and the judiciary to go beyond purposive analysis and traditional rules of judicial interpretation:
“The advantage is that the GAAR can use concepts which could not be developed by applying conventional interpretation to the tax rules. A significant example of this is to define “an arrangement” in the sensible terms which were rejected by the majority of the House of Lords in Craven v White[18] because in their opinion those terms went beyond the scope of permissible judicial interpretation.”[19]
This author rejects the possibility of an interpretation of law that is beyond the scope of permissible judicial interpretation (on a pre-GAAR basis), given that judicial interpretation is law. So, where does this leave the definition of tax avoidance now courts and the executive have the capacity to determine the law on an uber-purposive analysis? The answer will be difficult to know until we have seen what happens when, and indeed if, the courts overturn Magna Carta by applying the GAAR contrary to a purposive interpretation. The result, whilst eliminating “tax avoidance” as defined by a losing executive, will be the circumvention of the rule of law and the separation of powers doctrine with all that entails. Let us all hope sanity and good sense means liberty requires GAAR to be entirely ignored by the judiciary. In the meantime, it would be helpful to view tax avoidance as nothing more than the by-product of a liberty protecting constitutional democratic system based on the rule of law.
[1] Hoffman, L “Tax Avoidance” in British Tax Review No. 197 (2005) pp197-206, p203
[2] Some would prefer to separate out the executive from the administrative branches of government, but for the sake of brevity I have used “executive branch” here as pointing to HMRC
[3] Tax Avoision, IEA readings 22 (Institute of Economic Affairs, 1979); Cooper, GS (ed) Tax Avoidance & the Rule of Law (1997)
[4] Freedman, J (2008), “Is Tax Avoidance Fair” in Wales, C “Fair Tax, Towards a Modern Tax System”, The Smith Institute
[7] Mayes v HMRC [2011] EWCA Civ 407
[8] It is possible for a scheme to be ineffective for tax purposes but still have legal consequences, but I would not characterise those schemes as tax avoidance, given they have failed to avoid tax.
[9] HMRC, Consultation Document, “Improving Large Business Tax Compliance”, 22nd July 2015, Annex C
[10] Ss206-215 Finance Act 2013
[11] Through the mechanism of a dubiously independent, albeit HMRC appointed GAAR panel
[12] S211 (2) (b), FA, 2013
[13] W. T. Ramsay Ltd. v IRC, Eilbeck (Inspector of Taxes) v. Rawling [1982] A.C.; Barclays Mercantile v Mawson [2004] UKHL 51 , IRC v. Scottish Provident Institution[ (2003)] CA, [2003] STC 1035, MacNiven v. Westmoreland Investments Ltd HC [2001], 73 TC
[14] S207 (2) FA, 2013
[15] Clauses 12 and 14 of the 1215 Charter state that to levy or assess an aid or scutage the King will accept the “common counsel of our realm” indicating that only Parliament as opposed to the Monarch could levy a tax charge.
[16] Bill of Rights 1688: Chapter 2 1 Will and Mar Sess 2 An Act declareing the Rights and Liberties of the Subject and Setleing the Succession of the Crowne Passed on 16th December 1689
[17] Fothergill v Monarch Airlines Ltd – HL, [1981] AC 251
[18] Craven v White [1988] 62 TC 1
[19] G. Aaronson (2011) “GAAR Study, A Study to consider whether a general anti-avoidance rule should be introduced into the UK tax system” para 5.6
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