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Opinion: Avoidance debate calls for new language

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15th Mar 2005
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Last week TaxZone reported that the chairman of the Revenue and Customs and Excise had some "strong words" to say about tax advisers who encourage tax avoidance.

AccountingWEB contributing editor Richard Murphy argues that the spirit of the law is being "abused", and that the real test is not whether someone is evading or avoiding tax but whether they are "compliant" with tax law.

Richard Murphy The tax avoidance / evasion debate rumbles on. And it won't get us very far if it is conducted the way that it has been to date. There are good reasons:

  • most people on the Clapham omnibus don't know which of avoidance and evasion is legal and which is illegal, so the language does not convey its meaning;
  • the pretence that is put forward by some practitioners that the difference between the two is easy to tell is not true;
  • the test fails to produce just results in practice; and
  • the debate which Dave Varney and others are pursuing for the government is not as simple as many practitioners would like to suggest. Their concern is that the spirit of the law is being abused. Most practitioners know this, and those who deny it deliberately obscure the truth about what is happening.

This issue is so important I'd like to explore these points in more detail to see if something better can be created.

Language
The language one uses to describe a problem is important. It sets the tone for the way in which it is understood. In this case the fact is that the language used is opaque. To most people the descriptions tax avoidance and tax evasion seem to be describing fiddling, and they can't tell which is legal and which is illegal. In that case this language is not useful to anyone.

Practitioners use it to add to the mystique of their work, and that alienates clients in the long run. If HM Revenue and Customs use it then it just creates confusion in the minds of taxpayers. And in the end it does not convey a useful message. We do, therefore, need to find something else that is more useful.

Spot the difference
Of course there are occasions when it is easy to say that something is legal in tax law. I can claim a personal allowance. Parliament wants me to. I can't in fact refuse it. The law is clear.

And it's equally clear that not declaring a source of income knowing it to be taxable is illegal. But to conduct the debate on avoidance and evasion as if this clarity were available on all occasions so that people knew where they stood at all times is to do two things.

The first is to deny the reality of the situation, which is that very often taxpayers, their advisers and the tax officials who have to appraise their actions are working in a grey morass of uncertainty as to what is, and is not, acceptable within the law.

Any mature approach to this problem has to accept this as a fact and work out an acceptable solution based upon this reality. The second is to deny that there are problems with taxation law which need to be addressed. Again, that does not help.

Justice
At the end of the day the taxpayer wants to be assessed fairly, and government should (we hope) want to collect that tax fairly due under the law, and no more. The avoidance / evasion debate is not helping progress either of these objectives in the way it is currently being conducted. The reasons are straightforward:

1. The avoidance / evasion debate has led to a presumption of guilt on the part of the taxation authorities when they find something they think is wrong. The black and white divide between avoidance and evasion does not only exist in accountant's minds, it also exists in tax officials too. This is unacceptable. Justice requires there to be a presumption of innocence, albeit that their must be evidence to support that conclusion.

2. The taxpayer needs to know that if they enter into a transaction in good faith, having taken reasonable steps to ensure that they have tried to comply with the law then they will not be penalised. What most people seem unaware of is that this privilege is now available to large companies.

Before entering into the grey morass of tax uncertainty they will, almost invariably seek the opinion of tax counsel who will, in exchange for a suitable fee, advise them that the course of action into which they are entering is in accord with his or her interpretation of the law. From that point on these companies have a defence against all charges of wrong doing. If the scheme they undertake goes wrong then all they will do is pay the tax that would have been true anyway plus interest, a situation they can live with.

This is not true of most smaller taxpayers. They almost invariably face penalties if it is found out they have made a taxation error. This is an area of considerable injustice in tax law because by and large, the wealthy taxpayer is being favoured. That is contrary to natural justice. Three things need to happen:

a. Below a reasonable limit it must be accepted that a person cannot afford to take advice, and it is not reasonable to require them to do so. In that case if the issue giving rise to error is a technical one, and the taxpayer can show that they used a sound logic which suggests their intentions were honest there should be no question of culpability with regard to the error that arose, although of course the tax may be due;

b. The defence for the taxpayer of having acted on reasonable advice should be extended to anyone who sought advice from a person reasonably qualified to give it in relation to the transaction being undertaken;

c. The onus of responsibility for ensuring that the advice provided is appropriate needs to fall onto the provider of that advice. If they can be shown to have been reckless in providing advice then they should be liable to a penalty. But the test has to be appropriate to the transaction. It should not require the knowledge of tax counsel to advise on most matters. The ability to read Tolley's carefully should be enough.

3. Those who are shown to have acted without due care should be liable to higher penalties. The reason is simple. They have been reckless with regard to their intent. In that case they were indifferent as to whether their actions were legal or not, and that leaves them liable to penalties.

If these suggestions were acted upon:

  • taxpayers would be better off. They know they could protect themselves;
  • there is a new presumption of innocence in tax, which is necessary;
  • the burden of responsibility on tax advisers would increase, but so it should. There is clear evidence that many have been reckless in this regard;
  • only the reckless will face severe penalties, and again, that is as it should be.

The Spirit of the Law
The further benefit is that such a move would take tax planning into the area where compliance with the spirit of the law is what will count when culpability is considered.

If the taxpayer tries to comply with the law, and can demonstrate that he tried to do so with actions appropriate to the scale of risk they faced then they could not be liable for the consequences if error arose, but only the tax due. They had tried to be lawful in an area where determining the law is difficult.

If the tax adviser had acted responsibly and had sought to guide their client to work within the law, or within interpretations of it which they could have reasonable expectation of a court accepting (based on sound logic) then they too would not be liable for their actions.

And the Revenue would be bound to look at the intent of a person before they undertook a transaction. If that intent was to be compliant with the law it may still be that a correction to their declarations might be required, but that is all that will be required. Penalties do not follow. If they were indifferent as to compliance or were deliberately non-compliant, then penalties should follow.

In this way the point the Revenue are trying to make - that compliance with the spirit of the law is what is required of taxpayers - would be reinforced by the actions of HMRC officials in the future.

A new language is needed
All of which requires a new language of tax, because the current language is failing us. What we need is a language that does not only appraise outcomes (although these will remain of significance). We need something which suggests intentions are important too.

That's why I suggest the test is not whether someone is avoiding or evading tax. It is whether someone is seeking to be compliant or non compliant with tax law. And just in case of doubt, if this language were mixed with a general anti avoidance provision, it would then be clear that inserting steps into transactions purely for tax benefit would always be non compliant.

At that point we have a basis for progressing this debate, and the quality of the environment in which we all practice tax in the UK.

Richard Murphy

Richard Murphy is a chartered accountant and director of Tax Research Limited.

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Replies (3)

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By AnonymousUser
21st Mar 2005 14:20

Here we go again
What is wrong with some of you people!!!!!!!!!
Every Practitioner knows the difference between evasion and avoidance. If they don't then they shouldn't be in practice.
Gordon Brown has decided that he will choose which bits of LEGAL are WRONG and which bits of LEGAL are RIGHT. His famous quote "people should pay the RIGHT amount of Tax" says it all.
The uncertainty is caused by Accountants not knowing what part of LEGAL GB will decide is wrong tomorrow!!!!!!!!!!!!!!!!!
As for "Tax-compliance". Is this what TB meant by Education, Education, Education.
As for "the spirit of the law" Who decides? If the legislators can't put in plain ENGLISH what is meant by the LAW then we are in serious trouble.
We don't need a new language we need a new chancellor. One that has the guts to realise our Tax system is out of date and is prepared to scrap the whole thing and start again. Problem is OL hasn't the bottle.

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Richard Murphy
By Richard Murphy
17th Mar 2005 09:39

In response to Mark
I’m grateful for Mark’s comments. I bounced them around a group of people interested in this subject last night. That group included practitioners, academics, economists and those with some interest in linguistics. They were already familiar with my suggestions.

In looking for comment I put some proposals to this group which might, I thought have met Mark’s criteria.

To my surprise, without exception they rejected any alteration to my suggested term “tax compliance”. That, they all agreed, was a completely adequate description of “legitimate and generally acceptable tax planning and advice on how to mitigate one's liability to tax within the spirit as well as the letter of the law”. Any clarification reduced the effectiveness of the term.

Of course it leaves some ambiguity. But there is no form of wording that will not. As one respondent put it “The ability of any language to fix meaning of communication is limited. The meanings are always contestable and can be destabilised by competing discourses. Thus the historical meanings of masculine, feminine, black, etc., were contested and now don't have the previously oppressive connotations.”

In that case adding more words will not help resolve this issue. Instead, and what I think is right, is that we have to move on from the now discredited terms of avoidance and evasion and impart appropriate meaning to new terms. Tax compliance is in this sense a comprehensive term. It means that the person who is tax compliant has sought to work within the spirit and letter of the law. To assist such a person by advising them as to what the spirit and letter of the law might be is an honourable, and professional, occupation. But the term “planning” is in this sense also discredited, because it has become associated with avoidance. In that case my suggestion is simple. The practitioner who wants to assist a client to be tax compliant (which, by implication means claiming the allowances parliament intended them to have appropriate to the transactions they have undertaken) is providing tax compliance advice.

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By David Heaton
16th Mar 2005 20:40

Planning -v- fraud?
Whilst I agree with Richard's general sentiments, I'm not sure about the assertion that people don't recognise the difference between the legal and the illegal. One of my friends who is a 'one-man band' plumber would feel very patronised if Richard thought he didn't know that evasion was illegal.

Might I suggest we adopt 'tax planning' and 'tax fraud' if we're worried about confusing the poor, unsuspecting voter who hears that businesses have been avoiding their taxes? Could I also put in a plea for ministers to stop referring to 'tax leakage' when they mean tax avoidance (er, sorry, legitimate tax planning)?

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