A brief history of tax avoidanceby
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.
“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 ( 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 ( 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.
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 ( 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 ( STC 30) and Furniss vs Dawson ( 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.
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.