A tax avoidance headache

Head of taxation, Institute of Directors

6 Jun 2012

Stephen Herring and Robin Hutton of BDO say the government stance on avoidance is creating a moral minefield
Tax advisers now have an additional perspective to consider when discussing the tax consequences of transactions being undertaken with their clients. Not only do they have to make sure they advise their clients in relation to the legislation, tax case law and HMRC's attitude and practice with regard to a particular approach, not to mention whether the Courts are likely are to agree, but they also need to ponder the public perception of a transaction, particularly for their listed and other high profile clients.

Stephen Herring and Robin Hutton of BDO say the government stance on avoidance is creating a moral minefield

Tax advisers now have an additional perspective to consider when discussing the tax consequences of transactions being undertaken with their clients. Not only do they have to make sure they advise their clients in relation to the legislation, tax case law and HMRC’s attitude and practice with regard to a particular approach, not to mention whether the Courts are likely are to agree, but they also need to ponder the public perception of a transaction, particularly for their listed and other high profile clients.

Everyone in tax knows the judgment in the Duke of Westminster’s case in which Lord Tomlin stated ‘...every man is entitled to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be’. Of course, the Courts have since evolved the position, effectively limiting the taxpayers’ flexibility to stretch the wording of legislation to achieve a favourable tax result, particularly in the judgments in Ramsey and Furniss v Dawson and, more recently, ‘Scottish Provident’.

Applying tax case law precedents and day-to-day interaction with HMRC, it is of course possible to advise a client on their realistic choices and to help them understand the tax risks associated with each particular approach. There is often no ‘risk-free’ route available. Nowadays tax evasion, tax abuse, tax avoidance and tax planning are much more in the public arena.

No mainstream professional tax adviser would contemplate tax evasion or abusive tax planning. However, even when neither evasion or abuse are in question, it is increasingly important to keep in mind the public’s perception of each potential approach to optimising the taxation treatment of a particular set of circumstances.

In the March 2012 Budget, the chancellor said that tax avoidance was ‘morally repugnant’ but one must wonder whether he can be clear where he is drawing this line. For example, the House of Commons Library briefing on the proposed limit on charitable donations (Reference SN06303) discusses the relief provided and restrictions proposed in terms of tax avoidance. In this instance, the chancellor has displayed confusion between the outcomes of reliefs intentionally introduced by parliament with his dislike of the more cookie-cutter abusive tax schemes.

He might be right in fiscal terms to limit this relief but he cannot be right that this policy change is part of an overall approach to reduce tax avoidance.

Politics, whether of the right, centre or left, seldom considers the principles distinguishing acceptable tax planning and unacceptable tax avoidance but far more care is required when ministers and shadow ministers continue to use terms such as evasion, avoidance and abuse interchangeably. Taxpayers and their advisers need to be given a sufficiently clear chart to enable them to understand when they are approaching choppier waters.

Misleading language

The Exchequer secretary, David Gauke MP, in June 2010 seemed to address this matter by describing tax avoidance as ‘the use of legal structures and allowances to reduce tax bills in manners not intended by parliament.’ However in October 2010, chief secretary, Danny Alexander, adopted a much less nuanced approach by asserting:

‘Our clampdown on tax avoidance will bring in £7bn a year by the end of the parliament because there is no place for tax cheats in our society’.

This association is unhelpful given that under English law it was held in R v Sinclair [1968] that to ‘cheat... is to act with deliberate dishonesty to the prejudice of another person’s proprietary right.’

We need the Treasury and HMRC, and more importantly, government ministers (and not just Treasury ministers) to state positively that tax planning is perfectly proper for both businesses and individual taxpayers to undertake.

Indeed, the directors of a listed company ought to have an imperative to mitigate taxation liabilities for their shareholders on the same basis as they reduce other business costs. This benefits all shareholders, including those investing through their pension fund or investment trust. Otherwise, the UK’s tax competitiveness will be eroded to the advantage of other jurisdictions and certainly not just the tax havens. No one should pretend we live in a world where this would not be the case.

Finding sufficient clarity, transparency and consistency to distinguish between tax abuse, avoidance and planning ought to be a priority for the government to propose and the opposition to support.