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Tax avoidance: Is it time to change the letter of the law?


Tax avoidance may be legal but it is not good for the economy. Is this the moment for some aggressive law changes?

2nd Nov 2023
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Once you start channelling your inner Jonathan Swift, it can swiftly (please forgive me) become highly addictive.

Having attempted to help the Chancellor of the Exchequer by putting forward a modest proposal about negative IHT last week, another bright idea that should assist him has sprung to mind.

As we know, Jeremy Hunt and Rishi Sunak are under constant pressure from some of their more extreme backbenchers to cut taxes. In reality, when these backbenchers enter the fray what they actually want is cuts to taxes for themselves and their mates i.e. the rich.

If the Chancellor really seeks to achieve the maximum benefit and the best chance of winning the next general election by cutting taxes, it would make far more sense to do so in a way that would attract the largest number of votes possible.

This could most easily be achieved by reducing or eliminating VAT on items particularly favoured by the hard-up or increasing the personal allowance by introducing a triple lock similar to that applied to the great benefit of pensioners.

However, in a spirit of generosity, this column now seeks to achieve the virtually impossible by setting out a proposal that can appease the hardline backbenchers by reducing taxes for the rich at the same time as either having a zero impact on the economy or, depending upon exactly how it is carved up, giving UK plc a net saving, which could be invested in more widely popular measures.

I have a cunning plan

If this sounds too good to be true, for once that is not the case. There is a slight problem for Messrs Hunt and Sunak, since the scheme may take longer than the 12 months that they have before the sword of Damocles threatens to leave them politically headless.

As Mr Hunt is constantly at pains to remind us, there would be no problem with tax cutting if the economy wasn’t in such a terrible state. Interest on debt plus a baffling inability to ramp up productivity or get millions of active (non-) workers to return has stymied the not-very-well-laid plans of mice and men.

So what is the solution?

A number of eminent barristers, not to mention highflyers in our own profession make vast amounts of money by taking advantage of what they refer to as “the letter of the law”.

For anyone who is not in the know, these expert practitioners spend vast amounts of time poring over tax legislation in an effort to identify drafting errors, inconsistencies and potentially plausible interpretations that frequently have little to do with the intentions of what Americans so quaintly described as the lawmakers.

In some cases, HMRC and, where necessary, the courts eventually determine that such attempts at tax avoidance have gone too far and decided that taxes must be paid, along with interest and maybe even penalties.

Even so, there is a culture that is willing to take a flyer on what most of us regard as pretty dodgy schemes, partly on the basis that they might just get away with the wild interpretations and also in the full knowledge that HMRC is so understaffed that it may never get round to picking up on what should be regarded as abusive tax avoidance or even tax evasion.

To add insult to injury, even when an issue is identified and back taxes are recovered, there is a limitation on the number of years of back taxes, if any, that can be recovered, meaning that the perpetrators might well have got a significant advantage, even if it is not as much as they had originally hoped for.

Just think how much wealthier the economy would be had artificial schemes such as converting salaries into loans or allowing salary sacrifice as a pure tax saving measure been closed when first identified.

There is probably a general consensus that many artificial schemes form a large part of a tax gap that HMRC assessed as £35.8bn in 2021/22 and some commentators believe could be three or four times that amount.

Change the letter of the law

This is an awful lot of money and where it is purely predicated on “the letter of the law”, there is a simple remedy. Change the law to put the interpretation beyond doubt – and do it quickly.

If this was implemented ruthlessly by a team utilising the greatest talents at HMRC and the Treasury, imagine how much money could be saved every year.

We all know that the likes of Amazon, Facebook and Google (aka Meta and Alphabet), together with many super-rich individuals have been playing the system for years.

This is where Jeremy Hunt could become Mr Even More Popular. If the strategy managed to bring in or save an amount of say £15bn, he could offer generous tax savings to his rowdy backbenchers. However, in effect, this would do no more than redistribute the wealthy’s wealth.

If Mr H wanted to pander to the common man as well, he could easily offer significant tax savings to rich and poor alike making everybody happy and increasing the prospect of continued public employment for another five years.

Replies (22)

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By lukeoliver
02nd Nov 2023 21:25

Tax avoidance is legal.

Tax evasion is not and should be punished.

Putting your money into an ISA is tax avoidance. Do you have an ISA?

If we change the historical principles, should we just not pack up and let HMRC tax everything from our clients and more?

The tax take is now extremely high. We need to encourage our clients to continue despite the current tax system not give HMRC more power.

Thanks (3)
By mhkay
03rd Nov 2023 09:57

There's a very fine line between a loophole and a concession or incentive. For example, consider R&D allowances against corporation tax: they were introduced for a very good reason. But R&D is so hard to define (and measure and monitor) that there's clearly lots of scope for abuse. The idea that you can keep the economic benefits while waving a magic wand to prevent abuse just doesn't fly. Any attempt to define and enforce the rules more precisely will cost a lot to implement, and will end up excluding many quite genuine claimants. Similarly VAT: do you really want more fine distinctions of the "biscuit or cake" variety? Not to mention Cornish pasties, which proved a banana skin for a previous Chancellor.

Thanks (1)
By evildrome
03rd Nov 2023 10:16

The purpose of taxation is not revenue.

All tax is destroyed.

If a bank makes a loan of £100 and that £100 is repaid, how much money does the bank have?

If the government issues £100 and taxes back £100 how much money does the government have?

Well, £100 according to government but the Consolidated Fund is an accounting fiction.

All money issued by anyone is a liability of the issuer.

No liability survives contact with its issuer.

After WWII, debt to GDP was 270% (!!). We nationalised, Coal, Steel, the BOE, Electricity, Gas & Rail.

We built 1 million new council houses.

We created Social Security & the NHS.

All in a country whose infrastructure had been run into the ground and many of the workforce had been injured or killed.

But now finances are WORSE ?

We can't afford to properly fund the NHS, police, prisons, housing, social services & education?

When government wants to spend, the Exchequer instructs the BOE to credit the reserve account of the bank of the payee.

The government spends its own money unit into existence.

This happens without reference to any (fictitious) balance in the Consolidated Fund.

Tax receipts are not revenue.

This has long been known. Beardsley Ruml, NY Fed Chair in January 1946 wrote:

"The necessity for a government to tax in order to maintain both its independence and its solvency is true for state and local governments, but it is not true for a national government. The public purpose which is served should never be obscured in a tax program under the mask of raising revenue."

When government says "We can't afford to" what they're really saying is "We don't want to".

Yes, by all means tax the rich to prevent the rise of a multi-generational Plutocracy poisoning our democracy with its financial influence but don't tax them because we "need their money".

We don't.

Government is not a household. It is the currency issuer.

Thanks (3)
Replying to evildrome:
By Springfield
03rd Nov 2023 10:49

OK - I'll bite. Many years ago I worked in the central treasury of one of the UK's clearing banks. Our task was balance the bank's books each day so that at the end of the day we had a small credit balance in our bank account with the Bank of England. Every other clearing bank did the same and there was always a bit of nervousness late each afternoon when the final settlement figures were reported from Town Clearing and our final BOE balance calculated.

Each day we tracked large commercial trade payments between our customers together with the huge tax receipts into the BOE on that day (eg tobacco tax, petrol revenue tax) as well as the all large government payments made by the BOE such as monthly MOD payments to our big defence contractors, DHSS payments for pensions on Friday's and (in those days) daily or weekly subsidy payments to the National Coal Board. Based on our calculations our deposit office would look to attract (or not) retail and wholesale deposits (much of it overnight) to balance our own book.

On days when the BOE's net tax receipts were less than their grants and subsidies the BOE would issue gilts and other instruments in order to bridge the shortfall. And so the whole cycle went on each and every day. Now, technology has moved on since then but the principle remains the same. Tax receipts and government payments are real actual daily cash flows which need to be balanced, and at the moment the government is a particularly large borrower on which interest has to be paid from somewhere. So. tax is a necessary and natural function of government.

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Replying to Springfield:
By evildrome
03rd Nov 2023 11:56

Tax is a necessary function of government.

I'm just saying its *purpose* is not as advertised.

Allow me to quote Ruml again:

Federal taxes can be made to serve four principal purposes of a social and economic character. These purposes are:

1. As an instrument of fiscal policy to help stabilize the purchasing power of the dollar;

2. To express public policy in the distribution of wealth and of income, as in the case of the progressive income and estate taxes;

3. To express public policy in subsidizing or in penalizing various industries and economic groups;

4. To isolate and assess directly the costs of certain national benefits, such as highways and social security."

Note that nowhere does he say, "fund government".

If you can issue your own currency you have no fiscal constraint (like a household).

You never have to "find the money", you always "have the money".

Governments saying "We can't afford X" are lying.

That's why "cash strapped" governments are always, miraculously, able to find money to prosecute wars or find £400Bn down the back of the sofa when Dr. Death comes knocking.

Governments HAVE got a constraint... real resources.

We can't just hire 100,000 new nurses because there aren't 100,000 new nurses no matter how much money you have.

Lets say there are X amount of real resources in a country.

The currency (C) denominates the power to deploy these resources.

Government decides that it wants to utilise a percentage (Y) of the national resources for its own purposes.

It therefore taxes an amount of C that represents Y in the economy.

That way the total amount of C does not exceed the total available national resources (TANR).

If it does try and commandeer more resources than are available, it ends up bidding up the price of real resources.

What you and I call "inflation".

But, and this is the kicker, the amount of TANR is not fixed.

Government can expand the number of nurses, policemen, council houses, etc by temporarily increasing Y.

It may also be that there are idle resources in the economy that government could utilise.

E.g. the 1.4 million unemployed.

Instead of paying them to do nothing (very inflationary, Y deployed for zero productive activity), it could give them a job which would expand TANR.

So we could have the things we want (nurses, police, council houses) if government were willing to deploy national resources to make that happen.

This is literally how we rebuilt the UK after WWII when we had a fraction of the TANR we have now.

Thanks (0)
Replying to evildrome:
By Springfield
03rd Nov 2023 16:02

We literally rebuilt the UK during and after WW2 with a mixture of Lend-lease, the Marshall Plan and UK Governments Gilts and borrowings, to bridge the shortfall between tax receipts and what we required. All of those borrowing vehicles obey the fundamentals of borrowing - sums of money lent for a purpose, repayable at a future date, at a known or calculable rate of interest and sometimes secured on tangible assets.

The UK Government of the day didn't find money down the back of the sofa - if it had we wouldn't have needed to sign up to the Marshall Plan and its onerous terms.

I would agree though that modern QE is a sleight of hand, effectively plucking money out of thin air. And the side effects of QE are that

(1) it causes inflation because more and more cash is chasing the same level of goods and services, thereby driving up prices, and
(2) Although the UK has never defaulted on its sovereign debt and that keeps the risk pricing element of UK debt pricing low, excessive QE means that may not last for ever.

Thanks (1)
By listerramjet
03rd Nov 2023 10:17

I have a much better idea, although legal types won’t like it. Scrap all the “minor” taxes, remove all the complexities, and simplify what is left.
It does seem perverse to suggest that complying with the law should be penalised! And your contention that tax avoidance is bad for the economy is sheer balderdash!

Thanks (3)
By johnjenkins
03rd Nov 2023 10:39

Give people more money in their pocket and watch the economy boom. Give them less and watch the economy shrink. Not rocket science.

Thanks (3)
By Rgab1947
03rd Nov 2023 11:22

".... the greatest talents at HMRC and the Treasury,....."

I think here it starts to fall over.

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By Marlinman
03rd Nov 2023 11:24

Give us value for money for our taxes instead of squandering billions.

Thanks (4)
By GrayMan
03rd Nov 2023 12:39

Claiming that an individual investing a maximum of £20k a year into an ISA so that the gains are not taxed is tax avoidance is the same as having millions of profits generated and earned in the UK stashed abroad annually to avoid income tax, national insurance, and capital gains is laughable. Sure, tax avoidance is legal at present because we have an antiquated tax system no longer fit for purpose. It has never suited the current government to change things because their paymasters are the worst offenders. If it were not so, abolish tax avoidance and tell the tax avoiders to invest their stashes in Isas instead and see their reaction.

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By adam.arca
03rd Nov 2023 13:47

"Tax avoidance: Is it time to change the letter of the law?"

The OP can quote as many abuses (in its original "ab use" sense) of the ways our laws work as he likes but the answer for me to the question he poses is an emphatic no.

What he proposes would be a sea change to the English (and American) legal tradition of respecting the law as it is written not as it *should have* been written. It would doubtless have severe and unseen dramatic consequences downstream on all sorts of stuff, not just tax law. It would further entrench the current trend of judicial encroachment into what is properly the preserve of politicians as is seen with poorly drafted and widely-scoped law such as the Human Rights Act.

The answer to the death-by-a-thousand-cuts approach to tax legislation by the tax planning fraternity isn't to give more power to the executive or to the judiciary but is to require the legislature to properly do its job: ie, spending a LOT less time on your inane political games and invest that time in properly drafting new law and reviewing existing law.

Thanks (1)
JD Portrait
By John Downes
03rd Nov 2023 15:18

Yes, let's all pay more tax so the government can waste even more of our national wealth. Such piffle.

Once you start from the premiss that most of government spending is utterly wasted, it become obvious that the less money they can get their hands on, the better for everybody.

Tax avoidance is one's public duty.

Thanks (3)
Replying to John Downes:
By evildrome
03rd Nov 2023 15:35

96.2% of all government spending is taxed back.

The deficit is 3.8%.

That means that if government spend £100, they get £96.20 back.

When you spend £100 with EON or whoever, how much do you get back?

Financially, it makes no sense at all not to nationalise everything.

Thanks (1)
Replying to evildrome:
By Ian McTernan CTA
03rd Nov 2023 18:38

evildrome wrote:

96.2% of all government spending is taxed back.

The deficit is 3.8%.

That means that if government spend £100, they get £96.20 back.

When you spend £100 with EON or whoever, how much do you get back?

Financially, it makes no sense at all not to nationalise everything.

Can you quote the source for that? You're saying Govt spending is taxed at 96.2%

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By Ian McTernan CTA
03rd Nov 2023 18:36

:In reality, when these backbenchers enter the fray what they actually want is cuts to taxes for themselves and their mates i.e. the rich.

OK, so we know which side of the fence you're on...saying things like that just shows your bias. In fact, Tories are the ones who increased the personal allowance, doubling it, which had a huge affect on the low paid. They probably went too far with that compared to most other G20 countries.

The suggestion that tax law could easily be rewritten to make it clearer is fanciful- they had a group for this for many years and it achieved almost nothing.

Rewriting the tax laws would take a LOT of money and time, not to mention a lot of debate as to what exactly the law was trying to achieve in the first place.

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By richard.bladen
06th Nov 2023 10:29

I heard many years ago that:-
*Instead of tax law being based on preventative rules (ie what you prohibited from doing) which leaves an open house for abuse until the tax avoidance scheme is shut down by a change in tax law to prohibit that particular tax scheme which takes many years,
*Tax law should be based on what you can do legitimately and if the rules do not say what you want to do, then you can't do it. This will be much easier to understand and enforce, and will stop people dreaming up wild schemes to abuse the tax system. Of course it would mean a comprehensive "list" of what you can do at the start, and if your plan does not appear on the "list", you can't do it. There will also need to be a system whereby you can apply for the "list" to be expanded should your "plan" be deemed acceptable. I am sure there are other measures that would also need to be included, but "the boot would be on the other foot" to the benefit of the many rather than the few, and avoid the abuse of the present tax system that hemorrhages vast sums of much need tax income which could benefit society.

Is there a reason why something along the lines of the above has not been considered/enacted?

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Replying to richard.bladen:
By johnjenkins
06th Nov 2023 10:50

You're spot on. HMRC stated quite clearly that it wasn't going to "vet" every scheme that came on the market but suffice to say that if there was an element of non commerciality in it (say loan not being repaid) then that scheme would be deemed evasion.
It has always been the case of "clever dickie" barristers, et al, coming up with bypasses. Trouble is law is written for present not future. How many laws are there on the statute book that are meaningless today? Tax is the same.

Thanks (1)
Replying to johnjenkins:
By evildrome
06th Nov 2023 11:16

I can't help but that think that ending all tax havens owned by the UK would help.

Many of the 'dodgy' schemes rely on being setup in UK tax havens or some aspect of intersection between the UK and the tax haven jurisdiction.

No one asks this question but what is the legitimate purpose of a tax haven in a democracy?

It seems to me that it has exactly no legitimate purpose and it exists entirely to allow those who can afford it to legally avoid tax.

If we had a referendum today on "Should all UK tax havens be closed" I'm pretty sure > 80% of the population would vote "Yes".

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Replying to evildrome:
By johnjenkins
06th Nov 2023 13:43

Not so sure that all "tax havens" can be tarred with the same brush. There are countries designated "tax havens" just because they have a lower tax rate than ours.

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Replying to johnjenkins:
By evildrome
06th Nov 2023 14:44

Fair enough. For foreign jurisdictions.

But UK jurisdictions, where you get the very attractive UK rule of law, should

A) Be fully transparent. Sunlight is the best disinfectant.

B) Have the same rates of tax as the UK.


If you want to move your money out of the UK you pay the differential rate between the UK and the recipient country.

So if you would have paid 40% here and 30% there, you pay a 10% here.

And no untaxed international company transfers.

No sending it to the Caymans via Ireland via the Netherlands.

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Replying to evildrome:
By johnjenkins
06th Nov 2023 16:21

The old saying is still very true.
Why set up your stall in order to pay maximum tax?
Unfortunately international laws are sometimes not taken on board by all, should they be?
Banks entice NEW customers by offers, without giving the same advantage to established ones.

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