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A brief history of tax avoidance

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Our interpretation of tax avoidance and our attitudes towards it have evolved considerably over the past century. Steven Pinhey takes a look at the history of this practice.

18th Jan 2024
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“The avoidance of taxes is the only intellectual pursuit that still carries any reward.” This was said in 1944 by John Maynard Keynes, the English economist and philosopher whose ideas fundamentally changed the theory and practice of macroeconomics, and the economic policies of governments. But what do we understand by the term “avoidance”, and how has that understanding changed over time? 

Many readers will be familiar with the comments made by Lord Clyde in the case of Ayrshire Pullman Motor Services & Ritchie vs CIR ([1929] 14 TC 754). He said: “No man in this country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores.” And so the right to “avoid” paying tax was legitimised.

Lord Tomlin in Inland Revenue Commissioners vs Duke of Westminster ([1936] TC 490) upheld this view when saying: “Every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.”

The Duke of Westminster decision effectively upheld the strict interpretation of the “letter of the law” rather than the doctrine of the “substance” of a transaction in determining its tax treatment. This created an industry (backed by an enthusiastic market) for highly contrived tax planning schemes to avoid tax using the words of the legislation – even if this was not how the law had been intended to be used when enacted.

Prudent planning

Tax avoidance was now seen as part of the prudent structuring of a person’s financial affairs, but this concept has always been distinct from tax evasion, which has never been acceptable or permissible. The former Labour Chancellor of the Exchequer, Denis Healey, speaking in the mid-1970s once famously said: “The difference between tax avoidance and tax evasion is the thickness of a prison wall.” This was a great sound bite, reiterating the fact that tax avoidance was still seen as an acceptable practice, whereas tax evasion could land you in jail.

The market for tax avoidance products was fuelled in part by rising tax rates and the different tax treatments of capital and income. The first clear sign that things were changing took place with the decision in W T Ramsay Ltd vs IRC ([1981] STC 174) where the House of Lords decided that when a transaction has pre-arranged artificial steps that serve no commercial purpose other than to save tax, the proper approach is to tax the effect of the transaction as a whole. This approach was considered and extended throughout the 1980s, most notably in the cases of IRC vs Burmah Oil Co Ltd ([1982] STC 30) and Furniss vs Dawson ([1984] STC 153). No longer was it possible to rely solely on the letter of the law; now the substance of a transaction also had to be considered.

However, the tax avoidance market continued to grow, and what was seen as increasingly aggressive tax avoidance cases were being taken before the courts, leading the government to consider whether there was a need for a general anti-avoidance rule. However, the subject was so emotive during the consultation period, that the enacted legislation in 2013 was called a general anti-abuse rule (GAAR) rather than an anti-avoidance rule. 

The primary objective of the GAAR was and continues to be to deter taxpayers from entering into abusive arrangements, and to discourage would-be promoters from marketing such arrangements. Tax avoidance may have involved operating within the letter of the law, but it was often not within the spirit of the law, and that was no longer considered acceptable.

Additional legislation

Ten years on from the introduction of the GAAR and with additional legislation covering the disclosure of tax avoidance schemes (DOTAS) and promotion of tax avoidance schemes (POTAS), tax avoidance is now seen as any scheme that involves bending the rules of the tax system to try to gain a tax advantage that is contrary to the clear intention of parliament. While tax planning is still acceptable, tax avoidance (at least within the definition above) is not. 

Through the use of the POTAS and DOTAS legislation, HMRC has targeted promoters of tax avoidance schemes in an attempt to deter, disrupt and otherwise frustrate the marketing of those schemes and cut them off at the source. However, with current high tax rates and a cost-of-living crisis that just doesn’t want to go away, schemes continue to be promoted, most noticeably around disguised remuneration. 

HMRC is working hard to educate the public about the risks of using these tax avoidance schemes and publish a list of tax avoidance promoters who are marketing such schemes. It remains for taxpayers and agents alike to be vigilant of these products – the acid test being if it seems too good to be true then it probably is.  

We have come a long way since the comments made by Lords Clyde and Tomlin.

Replies (22)

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By Justin Bryant
18th Jan 2024 17:18

The whole thing is nuts. If the Government do not like certain tax schemes, they can simply block them retrospectively going back 20 years (as they did re the 2019 LC). Job done. No need for GAAR, DoTAS and all the other rigmarole. They even warned of this in 2004, but it was a pretty hollow threat. See:

https://www.taxpolicy.org.uk/2024/01/18/barrowman_fraud/

Incidentally, DN's above article is pretty contradictory in saying EBT loans are not really loans and yet can have dire repayment consequences for their taxpayer borrowers!

At least he agrees the 2019 LC was retrospective legislation (it's nonsense for anyone to pretend it wasn't - as HMRC tried to do in order to justify it).

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By richard thomas
18th Jan 2024 19:31

No more contradictory than the sellers of these schemes. The contract is for a repayable loan which they've tried in several cases to enforce. The nod and a wink, ie common understanding or consensus ad idem (if you like law Latin) that they are not repayable (nudge, nudge, know what I mean) gets the punters in and should govern the tax treatment.

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By Justin Bryant
19th Jan 2024 09:11

With respect, that does not make DN's article non-contradictory re the point does it? Possibly it's been co-authored, hence the contradictedness.

Coincidentally, I had a con yesterday with the tax barrister who drafted HMRC's Rangers skeleton on their change of tack on this point (the new improved "don't pay me, pay my mum" EBT payment acquiescence or "redirection" argument - that ignores the loan altogether*). The previous "taxable loans" argument was always garbage according to him (and pretty much all other tax lawyers except DN it seems**), notwithstanding what DN and others say (which is why HMRC ditched it as above as it was going nowhere per JGKC - as there was no sham pleading).

It's not just loans of course. DN's article ignores basic Ramsay contractual analysis like this recently from CoA:

https://www.bailii.org/ew/cases/EWCA/Civ/2023/1481.html

66. The UT then observed, at [78], that there are limits to the application of the Ramsay doctrine, citing the dictum of Patten LJ in Brain Disorders Research Limited Partnership v HMRC [2018] EWCA Civ 2348, [2018] STC 2382, at [32]:
"Although the Ramsay approach to construction has undoubtedly involved the courts in looking at the commercial realities of the transaction and ignoring financial components of a scheme which are circular or have no purpose other than to produce a tax loss in order to identify whether and, if so, which parts of the transaction engage the relevant tax provisions, it does not enable the courts to fix the taxpayer with a contract which under the scheme it does not have. The actual transactions remain the same."

*https://www.taxjournal.com/articles/court-session-judgment-more-murray-g... , https://www.taxjournal.com/articles/murray-group-holdings-and-others-v-h...
** see Ramsay vs. sham article on Rangers FTT dissenting judgment by Nigel Doran Macfarlanes LLP, Tax Journal, Issue 1152, 8. https://www.taxjournal.com/articles/unrealistic-possibilities-11012013

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Replying to Justin Bryant:
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By Justin Bryant
22nd Jan 2024 11:48

Looks like DN agrees with me that the term "tax avoidance" is basically meaningless (as it cannot be properly defined) i.e. the whole thing is nuts to start with.
https://taxpolicy.org.uk/2024/01/22/avoidancefaq/

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By FactChecker
18th Jan 2024 19:28

"tax avoidance is now seen as any scheme that involves bending the rules of the tax system to try to gain a tax advantage that is contrary to the clear intention of parliament.
While tax planning is still acceptable, tax avoidance (at least within the definition above) is not."

Well that sets out the table as seen by HMRC ... but who determines the nebulous "spirit of the law", let alone what was the "clear intention of parliament"?

Frankly to suggest that parliament (a bunch of disparate MPs who are not universally recognised for their sharp minds except when the subject is close to their personal pecuniary benefit) has a single mind, whose intentions can be clearly discerned, belongs up there in cloud-cuckoo land.

There will be countless examples of where the basis of a 'scheme' can only be construed as serving no purpose other than the avoidance of tax ... but how, in principle, is that different to the average taxpayer deciding (without professional advice) to place funds that could've been salary as pension contributions or other funds that could've been invested instead in a cumulative ISA etc etc?

What has actually happened (and why HMRC are so happy about it) is that the onus of proof has shifted ... from what the letter of the law states, to whatever HMRC interpret to be the intention behind it. And, with the exception of a few ultra-wealthy individuals, that's enough - because not many taxpayers can afford to fight these unofficial 'rulings'.

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By richard thomas
18th Jan 2024 19:47

No lawyer (or judge who is not a lawyer) would make the mistake of assuming that the intention of Parliament is found in the intentions (or lack of) the MPs. The intention is in the words Parliament uses in promulgating laws (with the consent of the monarch), construed purposively where necessary. As always in any matter of the law and constitution, Lord Bingham is the go to writer. All professionals ought to read his book on the rule of law.

Whether something is tax avoidance is rarely relevant per se in the absence of a motive test: whether something is evasion and renders the perpetrator liable to criminal sanction or penalties for fraud is extremely important: many a tax avoidance scheme, going back to Rossminster and before, involved criminal/dishonest conduct and so tax evasion elements - the two are not mutually exclusive.

For HMRC tax avoidance is simply a label that designates that about which they will get hot under the collar and may sponsor retrospective legislation.

Contributions to a pension schemes and to ISAs are things that Parliament has chosen to advantage for tax purposes: of course taking advantage of them is not tax avoidance. See Willoughby v CIR.

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By Rgab1947
19th Jan 2024 15:12

Retrospective legislation is bad law by any definition.

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By listerramjet
19th Jan 2024 09:37

This is an interesting review but actually is about government efforts at defining avoidance as evasion.
The cause of avoidance is undoubtedly self-interest, which as Adam Smith observed is in all our interests. But the opportunity arises from the vast and usually contradictory tax code with its huge opportunity for arbitrage. The one way of reducing the expensive industry would be tax simplification. Of course politicians hate the thought of voters working out just how expensive they really are. Not to mention pointless.

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By moneymanager
19th Jan 2024 12:46

'tax simplification', easy a 10th of one percent on all electronic transactions, cash transactions free.

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Replying to listerramjet:
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By The Rogue
22nd Jan 2024 17:53

Self interest is not in all our interests. Looking after number one inevitably means someone else is less well off and if government does not get enough tax income to pay for its activities then those don't happen and people who need them suffer.

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By johnthegood
19th Jan 2024 09:45

HMRC just like many others in the public view have realised that living in a post truth society it doesn't really matter whether what you say is factually correct, if it is portrayed in a certain way using certain language and said often enough, people that already wanted to believe something will believe it.

And that for me is the fundamental issue with using the word avoidance.

My self employed clients avoid tax all the time, perfectly legally of course, they are avoiding tax but they are not engaged in tax avoidance - I cannot understand that, so how can the average Joe who already thinks being Self Employed must be great because you hardly pay any tax.

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By johnjenkins
19th Jan 2024 09:50

Great article. Let's look at a simple tax avoidance scheme (as HMRC would have it). Going from PAYE to a one man band limited company. There is nothing illegal about it. It does not contain elements that are artificial. So HMRC don't like it and the IR35 saga was invented. They have now come up with a "hypothetical contract" as opposed to a "contract for services". You could call it a "tax creative scheme".

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By Postingcomments
19th Jan 2024 12:38

Well, IR35 was aimed at employees who were masquerading as self employed.

Their designation as self employed was a bit false - especially when they have to turn up 9-5 and do what they are told. Also, many of the ones I've come across have all the sense and acumen of an employee - ie little. They wouldn't survive as genuine self employed people. I think their lack of sense is also indicated by the number who go in for every and any dodgy tax scheme they see advertised on the internet.

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Replying to Postingcomments:
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By johnjenkins
19th Jan 2024 13:55

Hold on there young Man/Lady/etc.. There is no law that describes the self-employed. There is no law that says HMRC should control employment status. In fact employment status is a commercial decision. HMRC have taken away a legal status (Limited Company) and put their own interpretation on it. The work status (even though the work procedures haven't changed) has legally changed. HMRC have somehow (oh yes IR35) bypassed legality. Little wonder others try and do the same. Please tell me how you can "masquerade" as self-employed. You become self-employed because you can earn more money. You sign up for SA, legally. Where's the "masquerade" in that. The fact that they are working for the same company and doing the same job is totally irrelevant.

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By Arcadia
19th Jan 2024 09:52

John Maynard Keynes did indeed fundamentally change the practice and theory of macroeconomics and we can thank him for post war prosperity. Unfortunately the monetarists came along and we have been in the grip of their fundamentalist dogma ever since, most notably the vicious and wrong policy of austerity which has brought us to where we are today.

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By Marlinman
19th Jan 2024 11:15

With all the corruption in the higher ranks of the public sector and the way they squander billions you'd be mad not to avoid tax. The best methods are all very simple, making use of all allowances, pension contributions, ISAs and VCTs. I've always taken a long term view and structured my affairs to minimise tax even if it means going without in the short term.

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By moneymanager
19th Jan 2024 12:40

"Our" government doesn't even need taxes, he just hits the money creation button and pays more interest to the money tree magicians,central banking should be shut down and replaced with national state banks although that will get you bombed to oblivion.

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Replying to moneymanager:
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By johnjenkins
19th Jan 2024 14:04

Or let the bank of Dave take over.

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By moneymanager
19th Jan 2024 12:38

"We have come a long way since".

No we haven't we have regressed to an increasingly arbitrary and capricious rule of uncertainty, surely a key aspect of law is just that although the application of ex post facto law, creating crimes from non crimes, at the 1945 IMT gave us a big push onto this slippery slope.

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By moneymanager
19th Jan 2024 12:48

Governments do not make law, nor does HMRC, only judges do when called upon to adjudicate and even then, as some learned judge said 'the lower courts make mistakes which is why we have the higher courts above them tonset them right'.

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By bobsto12
19th Jan 2024 14:13

What about the Vesteys ?
Didn't they invent disguising income as loans and Lord Vestey even managed to get the public on his side a little with his quips about everyone being tax avoiders.

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By Mr J Andrews
19th Jan 2024 19:39

As Steven indicates, schemes continue to be promoted owing to high tax rates and a cost-of-living crisis. These factors may not affect Joe Public but the half baked , ill thought through legislation - in the first place - certainly has a bearing for promoters to certain wealthy individuals.
Sadly there are still some [***] rule benders around , still jousting with the Revenue. Anyone who can recall the charity tax fraud involving a certain Mr Faichney and Mr Perrin should praise the introduction of DOTAS / POTAS shortly afterwards. Apart from the obvious, a term of leisure at HMP could have been avoided.

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