What’s the definition of “tax avoidance”?
Here’s the simplified-but-somewhat-accurate infographic version:
The more accurate version? That’s hard – because there isn’t a single legal definition of “tax avoidance”. If there was, life would be easy: we’d pass a law saying that if you do tax avoidance, it doesn’t work, you pay lots of extra tax, and maybe go to jail as well.
Why isn’t there a definition? Because it’s too difficult.
So why am I bothering to use the term at all? Because if you do something most people regard as tax avoidance then some or all of the following will happen:
- People won’t like you. Newspapers will write bad things about you. Perhaps even stop buying your products.
- You will probably be caught by one of the approximately 64,000 “anti-avoidance” rules enacted by Parliament over the years. So what you hoped would avoid tax in fact won’t avoid anything at all. The phrase used by most practitioners and HMRC is that your scheme “didn’t work”.
- Even if you brilliantly escape the letter of the 64,000 anti-avoidance rules, you’ll run into the problem that judges really, really, don’t like tax avoidance (and haven’t since the late 1990s). So if you end up in court, the judge will probably magic some way for you to lose anyway (perhaps applying “common law anti-avoidance principles”). This annoys some legal purists, but doesn’t make me particularly unhappy.
- For all these reasons, if HMRC finds out about your tax avoidance, they will challenge it, and – almost all of the time – they will win. You will end up paying the tax you tried to avoid, very possibly other tax you picked up along the way, plus interest and (potentially) penalties of up to 100% of the tax due.
So I would strongly advise individuals and businesses not to do tax avoidance1I’m probably supposed to say this is not legal advice, but I’m a lawyer, and this is my advice.
No really – what is “tax avoidance”?
The conventional view – shared by most advisers, academics and HMRC – is that tax avoidance is using “loopholes” or other features of the tax system to save tax (“obtain a tax advantage”) in a way that wasn’t intended by Parliament. This is not a legal definition, and probably can’t be – but it’s a workable rule of thumb.
So here are some things that are not tax avoidance, even though (in the usual meaning of the term) you are “avoiding” tax:
- Investing through a pension or ISA. Yes, it avoids tax, but that was absolutely intended by Parliament. Not tax avoidance. Anyone who says otherwise is very silly. A small amount of cognitive dissonance is required to say that an ISA avoids tax but isn’t tax avoidance, but it’s nothing I can’t handle.
- Buying chocolate cake. Cake has 0% VAT. A chocolate-covered biscuit has 20% VAT. If you are pondering whether to buy a cake or a biscuit, and buy a cake because it’s cheaper, you are (in the most literal sense) avoiding VAT. But this is a legitimate choice – Parliament has drawn a stupid line in the sand, and you’re free to walk either side of it. The world is full of such choices, and none of them are tax avoidance.
- Avoiding 39.35% income tax on dividends by investing in a “growth” company, so most of your return will be capital gain (taxed at only 20%). Another stupid line in the sand, but not tax avoidance.
- Being genuinely self-employed2Where exactly you draw the boundary between employed and self-employed is a fascinating and difficult question which I am absolutely not going to get into here. Similarly, I’m not even touching IR35. Self-employed people get to claim deductions for expenses. More importantly, there’s no 13.8% employer national insurance (because there isn’t an employer)
And here are some things that are definitely tax avoidance:
- Investing £10,000 in a film and claiming £50,000 film tax relief (i.e. so you had £50,000 of taxable income; you now have zero taxable income). Where does the other £40,000 come from? It’s borrowed from a bank, but actually goes round in a big complicated circle, so it’s as if it doesn’t exist. Absolutely tax avoidance. Didn’t work.
- Paying £95,000 to magically create £1m of tax relief through a complex transaction which threw large amounts of money round in a circle, supposedly linked to a second hand car business. Didn’t work.
- Avoiding £2.6m stamp duty on the purchase of the Dickins & Jones building on Regent Street by taking advantage of a complex interaction between the partnership and subsale rules. The taxpayer thought it was a simple and elegant scheme. The Court of Appeal took about two pages to kill it.
- Having your wages paid to an offshore trust which then makes a “loan” to you (scare quotes because it never has to be repaid and there’s no interest on it, so it’s no more a loan that it is a banana). Instead of paying income tax on your wages, you pay either nothing or a very small amount. Tax avoidance. Doesn’t work3This isn’t the article to get into why HMRC didn’t attack these schemes sooner and more aggressively, and the rights/wrongs of the loan charge. I’m aware lots of people say they were hoodwinked into the schemes and didn’t realise what they were. But one thing is clear and inarguable: they were tax avoidance. Amazingly, people still flog these schemes.
All these schemes had two things in common: they were trying to achieve a result that wasn’t intended by Parliament, and they were highly complex and roundabout ways of achieving something that should be simple (buying a house; receiving a wage; investing in a business).
This seems easy enough – what’s so hard about defining tax avoidance?
How about these?
- Incorporation. A plumber makes £50k/year. He sets up a company and starts working through that, paying himself dividends from the company. Nothing much changes, but he now doesn’t pay Class 4 National Insurance contributions – saving him about £3k/year. This is incredibly common.
- Salary sacrifice. A [insert sympathetic employee of choice] earns £50,000. She’s offered a £5k pay rise – but that will be taxed at a 68% marginal rate, as she loses child benefit. So she uses a “salary sacrifice” scheme to make larger pension contributions, and gets the benefit of the £5k (eventually) without a high marginal tax rate.
- Listing. A large plc is about to issue bonds to third party investors in the market. At the last moment, a tax lawyer spots that the bonds are unlisted, and so will be subject to 20% withholding tax – nobody will buy them. The obvious solution is to list the bonds, even though it serves no commercial purpose. A withholding tax exemption will then apply. Was the decision to list tax avoidance? It certainly avoided tax.
- Taxable presence. A French champagne company sends a Paris marketing team on a promotional tour of the UK. They worry they might accidentally create a taxable presence in the UK, meaning that a chunk of their profits become subject to UK corporation tax. So they ask their accountants to draw up a list of dos and don’ts for the team to follow. Is that tax avoidance? Again, it could avoid a whole bunch of tax.
Are these tax avoidance? I would say not, because each one is making a choice that is anticipated and permitted by tax legislation, and which has actual consequences.
And then, the big problem:
- Sometimes it’s obvious what was intended by Parliament – e.g. your earnings should be taxed. Sometimes it’s hard, even impossible, because the legislation is so arcane, and the results completely unintuitive.
So you can’t realistically define tax avoidance in a legally robust way – and that’s why, as far as I’m aware, no country has managed to do so successfully.
Doesn’t the GAAR define tax avoidance?
Since 2013, the UK has had a “general anti-abuse rule” – the GAAR. Note the term is “anti-abuse” not “anti-avoidance”. This isn’t an accident – it reflects the impossibility of comprehensively defining avoidance. Instead the GAAR applies only where a scheme is so outrageous that it can’t reasonably be regarded as a reasonable course of action to take.
The GAAR has in practice had very little effect, as the courts were happily striking down avoidance schemes for 57 different reasons well before the GAAR came in, and they’re equally happy to continue doing so. HMRC have in practice been using it as a shortcut, to save all the time/cost of taking a case to trial.
But we can be reasonably confident that, even if the four “definitely tax avoidance” examples above had somehow made it through every other anti-avoidance rule and principle, the GAAR would have kiboshed them. However, it wouldn’t have touched my four “maybe tax avoidance” examples – and that’s sensible (because otherwise no plumber would ever know if it’s safe to incorporate, and that would be unfair, and the resultant uncertainty would be bad for all of us).
Doesn’t some tax avoidance work?
Perhaps. Here are some things many people would say are tax avoidance but which normally work4definitely not legal advice – if you do this without taking independent advice, you are crackers:
- A US digital company makes lots of money from customers in the UK, but as it has only a very limited presence in the UK, it pays only a very limited amount of corporation tax. Its huge profits should be taxed in the US, but because the US tax system is broken, they’re largely not (particularly prior to US tax reform in 2017). Most laypeople people would say it’s tax avoidance; most advisers would say it isn’t. I’d say it’s a big problem either way: we’ll see in a year or so how effective the new OECD global minimum tax has been at changing things.
- A company reducing its profits by borrowing from its shareholders. Fair enough that interest paid to a bank reduces a company’s taxable profit, but we also permit this for interest paid to shareholders. There are now rules that limit the tax benefit, but there’s definitely still a benefit.
- Non-dom excluded property trusts. Being a non-dom is a perfectly legal way not to pay tax on foreign income for 15 years. After that, they’re fully subject to UK tax. But if they’d prefer not to be then, just before the 15 years is up, they can put their foreign assets into an “excluded property trust”, and keep them outside UK tax forever. Sure seems like tax avoidance, but it’s an inevitable consequence of the ways trusts are taxed, and so not something HMRC can usually challenge.
- There’s 5% SDLT when you buy commercial real estate. So most commercial real estate is held in “special purpose vehicles” – offshore companies whose only activity is holding the real estate. Then instead of selling the real estate, you can sell the shares, with no SDLT. Seems fair to say it’s avoidance, but it’s an inevitable consequence of the way SDLT works, and so there’s no chance of HMRC challenge.
None of these would be stopped by the GAAR, which is reasonable given that each is a choice that Parliament has intentionally5Or at least some people intended it made available to taxpayers.
What is the difference between tax avoidance and tax evasion?
The classic tax lawyer answer is: “the thickness of a prison wall”6That quote originates with Denis Healey. Like most classic lawyer answers, it isn’t of any help at all.
In theory, the difference is simple. Tax evasion is dishonestly failing to pay tax7Actually there isn’t a single criminal offence of “tax evasion” in the UK. There is a common law criminal offence of “cheating the Revenue” and numerous statutory offences covering different taxes; but all share the key feature I mention here.. It is illegal – i.e a criminal offence, punishable with jail time and an unlimited fine.
So, for example:
- Having “cash in hand” income you don’t declare to HMRC. Easily the most common form of tax evasion.
- Opening a Monaco bank account in the name of your dog, using it to receive “bungs”, and deliberately not declaring the bung or the bank account to HMRC. This is a hypothetical example.
- Claiming film tax credits on expenses that never existed.
- Doing an elaborate tax avoidance scheme, but where the key element is deceiving HMRC about the value of some shares.
- Doing an elaborate tax avoidance scheme, where a key element is lying about the residence of a company.
These are all clearly tax evasion, and people can and do go to jail for them.
What’s the difference between tax avoidance, tax mitigation, tax shelters and tax planning?
All are undefined vague terms that can mean what we want them to mean.
But I would say:
- Tax mitigation = a polite term for tax avoidance
- Tax shelters = a term that the US tax avoidance industry has successfully used for years, so that US media often refers to “tax shelters” (which sound nice!) rather than “tax avoidance schemes” (which don’t).
- Tax planning = chosing to walk on on one side of a line that has been drawn by Parliament, and being careful not to step over the line.
So is tax avoidance legal or illegal?
It depends:
- John and Jane both enter into the same tax avoidance scheme. John believes it works. Jane knows it doesn’t, but thinks HMRC won’t spot it. HMRC do spot it, challenge the scheme, and win.
The result, in theory, is that John and Jane both filed an incorrect tax return, and so owe the tax, interest and (if they were careless) penalties. They got their tax wrong, and that’s not illegal.
But Jane was dishonest. She committed tax evasion and so did act illegally. The question is: can HMRC prove it?
Here’s another, and more realistic, example:
- Catherine devises an elaborate “tax avoidance scheme” which she knows in her heart-of-hearts has no chance of working, but by the time HMRC come round to challenging it, Catherine (and her fees) will be long gone.
- Catherine flogs the scheme to hundreds of taxpayers, assisted by an opinion she somehow obtained from Bob, a tax QC.
This is definitely tax evasion – Catherine and Bob were dishonest. Other tax advisers may say the scheme had no reasonable prospect of success, and we can suspect (but perhaps not prove) that Catherine and Bob knew this. Catherine will say she had an opinion from Bob. Bob will say he was advising on the basis of his instructions (and they’re probably legally privileged anyway). So it’s hard to prosecute and, as far as I’m aware, HMRC don’t try. I believe they should.
But the key point: it’s incorrect to say that tax avoidance is per se “legal” or “illegal”. Much of the tax avoidance I’ve seen in the last year falls into the Catherine/Bob category.
So why do almost all articles about tax avoidance say “there’s no suggestion this was illegal”?
I’ve no idea.
Do companies have a legal duty to minimise their tax?
Directors have a broad duty to promote the success of their company, and tax is just one of the many factors directors should consider in making a decision. A director may well be failing in their duties if they blunder into a large unnecessary tax charge. But in no sense does this create a duty to minimise tax, anymore than it creates a duty to minimise employees’ pay or maximise consumer prices. This is very clear under the Companies Act 2006, and was clear enough under the old common law rules.
Why do so many people appear to think this is a live issue? I’ve no idea. In 25 years of practice, I didn’t once come across a client or lawyer who thought directors had a duty to minimise tax. So this appears to be a political/ideological point rather than a legal one.
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1I’m probably supposed to say this is not legal advice, but I’m a lawyer, and this is my advice
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2Where exactly you draw the boundary between employed and self-employed is a fascinating and difficult question which I am absolutely not going to get into here. Similarly, I’m not even touching IR35
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3This isn’t the article to get into why HMRC didn’t attack these schemes sooner and more aggressively, and the rights/wrongs of the loan charge. I’m aware lots of people say they were hoodwinked into the schemes and didn’t realise what they were. But one thing is clear and inarguable: they were tax avoidance
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4definitely not legal advice – if you do this without taking independent advice, you are crackers
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5Or at least some people intended it
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6That quote originates with Denis Healey
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7Actually there isn’t a single criminal offence of “tax evasion” in the UK. There is a common law criminal offence of “cheating the Revenue” and numerous statutory offences covering different taxes; but all share the key feature I mention here.
38 responses to “What is Tax Avoidance? A short FAQ.”
Never thought I would enjoy reading something on Tax on a summer Saturday morning. Brilliant!
Footnote 4 – arcane tax provisions. I apologise for an anecedote
I was a tax advisor to a large PLC with an even larger pension fund. The pension fund was found to have fallen foul of the then “reverse bond washing” anti-avoidance provisions.
The pension fund had split its assets between various fund managers, and one fund manager was found to have been buying a particular security at around the same time as another fund manager was selling it. The first fund management firm could have had no idea what investment strategy the other was employing, but the purchases and sales within the required short period were both made by the pension fund: the existence of the fund managers was disregarded (correctly, of course).
To this day I cannot see what point there was in applying these provisions in those circumstances, particularly since there was no way of preventing it happening in future.
that’s wonderful – thanks. Serves the pension fund right for wasting money on two active managers in the same product-space!
Your film tax example vastly over simplifies. HMRC actually pre-approved sale and leaseback schemes that were leveraged. It also gave tacit approval to subsequent schemes (although good luck getting a Freedom of Information request to get to the bottom of that – I take it as read there was tacit approval given the speed at which HMRC refunded tax when sideways loss relief claims submitted – someone at the top knew what was going on and signed off). When the case I am familiar with finally got to the Court of Appeal they found in favour of the film scheme / tax payer. HMRC only ‘won’ because it could rely on a First Tier decision that was never fully challenged in the higher (independent of HMRC) courts. This couldn’t be reopened due to legal system bureaucracy meaning many now facing bankruptcy due to HMRC dodgy accounting (irrespective of views on leverage which is perfectly normal in many businesses).
I’m not aware of any Court of Appeal case where a film scheme “won”, or indeed came close to winning. Which one are you referring to?
I’ve heard the claims that HMRC pre-approved leveraged schemes, but never seen any evidence.
Incidentally, you are wrong about FTTs – they are entirely independent from HMRC.
When I worked in the Compliance team in a London investment bank, I would often ask “Why is the client using this complicated legal structure?” “Tax” or “Tax efficiency” was often the reply from the trader or salesperson. On probing further, I never received any appropriate explanations. On occasion, I would submit a Suspicious Activity Report to the authorities.
The same bank also used third party investment advisors in Switzerland to sell retail structured products to individual investors. Frequently, the advisors would ask to the bank to pay their commission to their account held at a bank outside Switzerland. In our example, I asked a Swiss advisor “Why do you want your commission paid to your account in Singapore?” “Bank charges are cheaper in Singapore” came the reply. Another SAR was quickly submitted. I made the business pay all advisors’ fees to a bank account located in the country where they conducted business from, which was usually Switzerland,
Footnote 1 😀
I think the binary legal/illegal is inadequate: there’s a further category “unlawful”. Avoidance generally relies on a kind of first-mover advantage, hoping that the Revenue will not find out, not notice, not understand or not decide to challenge for lack of resources. I think such schemes should be described as unlawful, unless or until they have been upheld in court. That’s why much better than the GAAR are notification requirements like DOTAS, or the EU’s directive on reportable cross-border arrangements, or even better shifting the burden of proof to the taxpayer in some circumstances.
I don’t think there’s any legal basis or authority for saying that’s unlawful.
DOTAS is very successful, I agree. The EU equivalent is a dismal failure. I’ll write more about that soon.
“So why do almost all articles about tax avoidance say “there’s no suggestion this was illegal”?
I’ve no idea.”
There’s a one-word answer: libel. Putting in these boilerplate sentences is done as a risk-management device. It’s fine to say “there’s no suggestion this was illegal.” But they often go further and (often wrongly, because they often don’t know) say “this was perfectly legal” or, even worse, “this was legitimate.” (Apartheid was legal in SA, but it wasn’t legitimate.)
click the link, Nick…
At the risk of introducing a philosophical element, we all (individually & professionally) make decisions every day regarding actions that are likely to have a tax consequence. And the degree of that consequence is likely to vary depending on the choice made.
As far as I can see, all the examples here of avoidance seem to be predicated on the minimisation of that tax consequence being the primary determinant of the action chosen. So is that necessary for those examples to be valid – or would it still be avoidance if the reduction in tax is just a ‘happy coincidence’?
I ask because once the concept of ‘intent’ is introduced, the path tends to get slipperier as it descends.
This isn’t really a problem for actual tax avoidance schemes – the four examples I give above. It certainly is a problem for other transactions. Adam could spend weeks working out how to structure a transaction just so, to get the benefit of (say) business asset disposal relief. Angela could just luck into exactly the same structure. We surely have to tax the two equally. Don’t we?
Neatly side-stepped … of course I agree that the two should be taxed equally (or at least using the same mechanism). But I’m interested in teasing out how ‘intent’ does/doesn’t impact in various areas.
For instance, in your John & Jane example you say (I paraphrase) that Jane was committing evasion (if, however unlikely, HMRC manage to prove her pre-planned intention).
And there are as, I understand it, other tax areas (such as within the non-dom arena) where intent is deemed relevant (and attemptedly measured via 3rd-party indicative factors).
Plus of course the scale of penalties, and even how far back HMRC can generally look back, are highly dependent on HMRC’s view of intention.
I’m just curious as to whether you think the intent (or the lack of it) can see-saw the labelling of a particular action as avoidance – in the same way that it can regarding the evasion label?
For the informal definition I’m not sure, but it won’t be relevant very often. For the strict statutory definitions in various anti-avoidance rules then intention often does matter. See for example the “bona fide commercial reason” CGT share-for-share exemption test. Two identical transactions can be taxed differently if one person has a bona fide commercial reason and another doesn’t.
Well I did say it was a slippery slope, so possibly taking us off-piste from your article – if so, apologies.
But it sounds like you agree that (however rarely) labelling something as avoidance ‘may’ be a matter of interpreting intent … whereas clearly evasion should always be a matter of facts.
I’m not defending over-optimistic avoidance schemes, but just felt this aspect was raising a point not covered by your article.
If we step outside promoted ‘schemes’, one still encounters loads of cases of basic ‘avoidance’ where an unrepresented taxpayer simply chooses not to spend time checking/researching for any changes to the law that might be to the detriment of a claim – not in the active knowledge of change, just arbitrary laziness.
For instance … the WFH ‘allowance’ that HMRC (and Martin Lewis et al) promoted so heavily at the start of the pandemic, when one day at home gave you a full year’s entitlement.
No longer the case, but I’ve seen plenty of SATRs still claiming a full year’s worth – if only on the basis of ‘that was I did last year and it was OK’.
No deliberate intention to defraud (in most cases), but no great incentive to double-check for any changes to the rules either.
It doesn’t, as you said at the beginning, change the tax position … but does the person doing it without ‘intent to avoid’, commit tax avoidance?
This may be straying into ‘angels and pinheads’ territory, but it seems to me to be the chink in the armour of avoidance through which so many people try to drive (albeit, again as you say, often rather laughably).
The US tech example isn’t avoidance imho. The value was never in the UK, and it hasn’t been brought into the UK. It would be US avoidance, but the US specifically don’t tax this income under Subpart F. So it’s not avoidance there.
In my view, the UK should take a more expansive view of PE – is a business really only carried on where contacts are concluded? Other countries would disagree.
I agree – technically it’s right that only the US gets to tax the profits. The problem is that this goes against most peoples’ intuitive expectation of how the tax system should work. That’s toxic to public faith in the tax system, and why IMO the international tax system needs radical reform towards a destination basis. That’s a topic for another day.
Dan, I think you well know that this description of international tax avoidance is grossly over-simplified. Many of US tech multinationals you are referring to have a very substandial presence in the UK as well as sales — Google (Alphabet) and Facebook (Meta) both employ thousands of software engineers in London (and pay them less than those in California). These employees create enormous value for the firms as whole, but the subsidiaries employing them are treated as ‘independent entities’ under the so-called arm’s length principle. This means that they can claim to conduct R&D as contractors, and declare taxable income on a cost-plus basis. Furthermore, they can deduct as remuneration expenses the value of stock options given to their top managers — not in the equity of these supposed ‘independent entities’, but of their controlling parent entities. Sure, it would take international agreement on a paradigm shift to achieve proper reform, but HMRC and Treasury could do better at pushing the envelope of the current rules.
Going beyond Andrew’s suggestion on PEs, I think they could challenge the notion of contract R&D, which seems ludicrous for DeepMind. Similarly, firms with substantial sales in the UK such as Amazon can be treated as having significant intangibles in the UK, in the form of customer data. I think the problem is that the UK and other OECD countries have been reluctant to make greater use of the profit split method under current transfer pricing rules, because it would open the door to formulary apportionment. Instead, they have further entrenched the irrational notion of ‘arm’s length’, by trying to fragment corporate R&D into the so-called DEMPE functions.
I’ll talk more about international tax another time, but it’s a political problem more than it is a tax problem.
Even without having development employees in the UK there are issues.
Tech Firm has a large number of marketing staff in the UK, but claims that contracts only come into existence when agreed by employees in Ireland.
UK entity recharges Irish entity at Cost+10%, so pays 2.5% of expenses as CIT.
From the point of view of the general public I suggest that’s tax avoidance, but doesn’t show in HMRC’s definition of the tax gap.
Any structure like that is going to run into problems with the diverted profits tax.
Assuming that ‘cooking the books’ is considered tax avoidance, would it qualify as ‘a cake’
PS: Google translates ‘avoidance’ to Spanish as ‘evasión de impuestos’
Amusing piece that gets the message across loud and clear. Although Dan doesn’t pretend its actually a definition, the idea of tax avoidance being something parliament didn’t intend has always seemed problematic to me. After all, loopholes are generally there precisely because parliament didn’t think about it, so whether or not they intended something to be ‘ok’ can only be judged by hypothesizing what parliament might have intended. Even if you can identify the underlying objective of a given law (like: businesses should pay tax on their profits), that doesn’t, for example, tell you what profits are if they forgot to define the term in the first place, and it doesn’t tell you what parliament might have said if they hadn’t. So I’m not so sure how ‘workable’ Dan’s rule of thumb really is…..
Of course you’re right. In some cases it’s obvious what Parliament intended – eg gains should be taxed. In others (hybrid mismatch rules!), good luck. I should add something on this.
Great readable summary, well recommended, one point, you cannot an actual liability you can only either prevent the liability arising in the first place, arrange so that the liability arises to some other person (with a more beneficial tax position such as a non-resident) or create some tax attribute to set against the liability thus reducing/eliminating the tax on the liability.
You are of course correct, although some people take this argument even further and say that, therefore, tax avoidance doesn’t exist, which is an argument redolent of the late great Douglas Adams.
But also favoured by Lord Hoffmann in his lecture (c2005) as reported in the British Tax Review.
You write :
“we’d pass a law saying that if you do tax avoidance, it doesn’t work, you pay lots of extra tax”
Isn’t this just s207(2), FA 2013?
That’s the GAAR – the general anti-abuse rule. It applies only in the most egregious cases, where no reasonable person can say the taxpayer took a reasonable course of action. It’s limited in this way because of the definitional problem I mention, and so in practice it applies only to the most hilariously hopeless schemes.
Can I therefore check that you are NOT aligning your definition of Tax Avoidance with those arrangements that are susceptible to the GAAR?
I ask because Richard Murphy (I believe c 5 years ago) suggested that the two were aligned.
That would be crazy! Anything subject to the GAAR is definitely tax avoidance, but plenty of things that are tax avoidance are not GAARable. I should add something on this.
Great article Dan. When I taught the GAAR when it came in I used a cricketing analogy. When your wicketkeeper is a bit suspect the fast bowler will ask for a ‘long stop’ fielder. He stops the ones that slipped through – way out on the boundary rope.
Here’s one I’m interested in. Directors (married couple) of their own small company decide to award themselves trivial benefits in the form of retail vouchers to the value of £50 six times a year (each). I dislike these types of advice to exploit rules intended to relieve large employers of burdens when offering flu jabs to staff and similar. But is it tax avoidance?
I don’t think it is correct to describe the GAAR as addressing the most egregious tax avoidance. In fact I think rather the opposite is the case. You need to go back and look at what it was that Graham Aaronson said that he intended the GAAR to address. We all knew that the existing case law (Furniss etc) nullified the most egregious tax avoidance schemes. The problem was the more subtle “Ships 2” type of scheme (see the interview in the July 2011 edition of the Tax Journal – there is quite a good history of the GAAR in this paper: https://researchbriefings.files.parliament.uk/documents/SN06265/SN06265.pdf). Although it has suited various ministers to say that the GAAR is directed at the most serious cases of tax avoidance – it isn’t true. I continue to find it curious that tax avoidance schemes that are nullified by the GAAR are penalised more heavily that the most egregious schemes that are nulified by the pre-existing case law.
I don’t think it turned out like that – there’s a reason the GAAR hasn’t actually been applied in a single decided case since it was introduced, and that’s that TAARs plus modern judicial interpretation is sufficient to kibosh all tax avoidance schemes. There’s nothing technically for the GAAR to do. It’s purpose has therefore become a simple way for HMRC to dispose of the most egregious schemes, without going through the bother of a Tribunal.
How about writing about the cumex debacle and how those who should have put up the safeguard rails didn’t (were they stupid – what was it – trader worship?) and why and how on Earth the tax lawyers allowed it?
I’m reluctant to get too far into the detail of cumex, because ultimately it’s a question of German tax where I have no expertise. But I should write on the general point about rails, and the important role that in-house and external advisers have in keeping clients on them.
A refreshingly direct and practical outline that sails around the bay, avoiding all the rocks and shallows of this set of issues, without being wrecked. (Although except maybe the hypothetical dog might hypothetically get away with it.)
On the evasion v avoidance example, I suspect in practice that it would be hard to prove Jane was not able to hold the view that the scheme “worked” because the Courts have some times made very odd decisions that needed the House of Lords/Supreme Court to judge as not workable (eg https://www.taxjournal.com/articles/tower-mcashback-mawson-revisited-26392).
It may have been choppier waters but a follow up on the GAAR rules and approach will help us complete our tour around the bay.