The rhetoric on tax avoidance is creating a febrile atmosphere. Stephen Herring calls for a more balanced argument
I do not intend in this article to discuss tax planning, tax abuse or, indeed, tax evasion. All of these phrases have acquired, and in the case of tax abuse following the GAAR (General Anti-Abuse Rule) proposals, are acquiring, a more consistent and appropriate meaning. However, in my view, the statements in the national press and broadcast media about what might constitute the term ‘tax avoidance’ are becoming increasingly destructive and grossly misleading to readers and listeners about this complex subject.
The rhetoric on tax avoidance is creating a febrile atmosphere. Stephen Herring calls for a more balanced argument
I do not intend in this article to discuss tax planning, tax abuse or, indeed, tax evasion. All of these phrases have acquired, and in the case of tax abuse following the GAAR (General Anti-Abuse Rule) proposals, are acquiring, a more consistent and appropriate meaning. However, in my view, the statements in the national press and broadcast media about what might constitute the term ‘tax avoidance’ are becoming increasingly destructive and grossly misleading to readers and listeners about this complex subject.
At one extreme, commentators attempt to blur the distinction between tax abuse and tax planning so that all tax planning, which does not merely amount to securing a targeted relief introduced by parliament (ie, capital allowances, pension contributions) should be viewed as wholly unacceptable tax avoidance and abusive, immoral and wicked. At the other extreme, it is argued that no tax arrangements can be abusive and both HMRC and the courts are wrong in attempting to overturn any arrangements which appear to satisfy the form of the legislation even if the purpose was manifestly different.
Neither viewpoint is helpful in establishing guidance about what is meant by ‘tax avoidance’.
Not surprisingly, much of the political commentary uses the term to mean whatever fits their agenda with little or no attention paid to interpretation of the term or the consequences of their statements. The core concept which ought to underpin the term tax avoidance is whether there is a middle ground, which might not be automatically sustainable tax planning, but cannot properly be described as tax abuse. If this exists, there must be scope both for contentious correspondence between HMRC and taxpayers and, where needed, these matters should be decided by the courts.
Labelled an avoider
Taxpayers ought to be reassured that taking such a case to the First Tier Tribunal does not mean that they will be characterised as attempting to defend unacceptable tax avoidance and HMRC should feel able to reach an agreed settlement if they are not sufficiently confident that the courts will find in their favour. It is very unfortunate that some commentators have sought to treat every settlement reached between HMRC and taxpayers as the former acquiescing in the unacceptable tax avoidance of the latter.
The genuine position must be that neither HMRC nor the taxpayer could have been sure of court success so both appreciated the advantages of agreement. Politicians currently either seek to categorise tax planning arrangements they do not understand as aggressive avoidance or appear like a ‘rabbit in the headlights’ for fear of being criticised for ‘condoning’ tax avoidance. It should not be difficult for leading politicians to appreciate that there must be a space where there is room for genuine differentiation between tax abusive arrangements (which the GAAR will help prevent) and merely securing a prescribed tax relief.
As business becomes increasingly complex, global and technology driven, there are likely to be more areas where the recognition, location, calculation and timing of profit become increasingly problematic and open to different interpretation. This is a feature of the modern economy, not a sign that business is focused on reducing its tax liability.
The government’s progress in making the UK tax system more business-friendly to secure more foreign direct investment is welcome, but it is disappointing that businesses’ right to undertake non-abusive tax planning has often not been defended. There ought not to be a stigma in accepting that the effectiveness of some tax avoidance will be decided upon by the courts since that is one of their proper roles. Tax avoidance would not be baffling to business and the public if it were restricted to describing planning arrangements where the courts had determined that HMRC was correct in regarding them as ineffective.
People are not living in the real world if they believe otherwise. Reading recent court judgments should convince everyone that it can no longer be sustained that there is never any moral perspective on the interpretation of tax legislation. There will always be a middle ground where the outcome is found to be either a successful tax planning approach or unsuccessful tax avoidance. There is an urgent need for this middle ground to be recognised and understood by taxpayers, advisers and our political masters.
Stephen Herring, senior tax partner, BDO LLP
