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Following the 'spirit' of tax law

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7th Sep 2009
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The draft code of practice on taxation for banks has been in issue for a while and the deadline for comments on the consultation is later this month. Tax avoidance and evasion have been the subject of much activity over the last few months – all of this activity is clearly as a result of the focus on tax avoidance at the London G20 summit in April 2009.

So if the banks will have to comply with the 'spirit' of tax law in the future, what does this mean, and will this be the first step in persuading businesses and individuals that they should also subscribe to a similar view? How on earth do you measure whether the spirit of the law has been met, and does this leave no room at all for tax planning? Is it plausible for the tax authority to persuade businesses – whether of one particular sector or generally – that they should regulate their behaviour in this way?

The justification for this step in relation to the banks is that they are a special case for a number of reasons. First, taxpayers have provided a very significant amount of money to the banks to enable to weather the current financial crisis, and this presents a justification, maybe, that the banks should now play fair by the taxpayer. But as the consultation document points out “banks are uniquely placed in that they:

  • can seek to avoid their own tax liabilities, whether this involves increasing the recovery of VAT incurred on their transactions, reducing their profits liable to corporation tax or minimising their and their employees’ income tax and national insurance contributions;
  • provide financial services to customers, many of which services are sensitive to tax and some of which can be used for tax avoidance; and
  • have access to large amounts of capital which they can use to facilitate avoidance schemes designed and implemented by others, for example by providing loans of tens of billions of pounds for periods sometimes as short as a few hours.”

So a different approach to the banking sector is regarded as appropriate. One is still left wondering whether this might prove to be the thin end of a very large wedge.

How will compliance with the spirit of tax law be measures and is this the end of tax planning for the banking sector? The actual draft code of practice covers tax planning at section 3 and seeks the following assurances:

  1. The bank should not engage in tax planning other than that which supports genuine commercial activity
  2. Where the bank is principal, transactions should not be structured in a way that will have tax results that are inconsistent with the underlying economic consequences unless there exists specific legislation designed to give that result. In that case, the bank should reasonably believe that the transaction is structured in a way that gives a tax result which is not contrary to the intentions of Parliament.
  3. Where the bank is not principal, but is providing or facilitating transactions undertaken by other parties, there should be no promotion of arrangements unless the bank reasonably believes that the tax result of those arrangements is not contrary to the intentions of Parliament
  4. Remuneration packages for bank employees, including senior executives, should be structured so that the proper amounts of tax and national insurance contributions are paid on the rewards of employment

Members will hold differing views on this subject, but in truth I have no real problems with the above as a modus operandi, and I suspect there will be a number who agree. This issue, of course is that at present we operate the tax system on a literal rather than purposive interpretation, and I am left feeling that if Parliament wants to change the way we make and use tax law, then it should grasp the nettle and do so. Or maybe that will be the next step – to impose similar requirements on all businesses?

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By Bob Bishop
07th Sep 2009 10:48

tax spirit of the law
It is all very well for Revenue and Customs to push a policy of "spirit of the law" , but let Revenue and Customs lead by example, example, example. In countless instances, Revenue and Customs ignore the spirit and press on technicalities, and how many times do they make technical mistakes but never do they admit to their errors.

And so it goes on, in quest to maximise tax take they resort to every device, even sending out penalty notices for alleged filing defaults, for example.

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By mydoghasfleas
07th Sep 2009 11:22

Spirit of the law

When you resort to arguing spirit of the law, it is the last defence in a lost cause.  By that time you realise your proposition has disintegrated and you are appealing to a god who you mistakenly believes gives a damn.

The law is exactly what it is, if it is inadequate for the purpose or is the cause of an unexpected consequence it needs to be changed. 

HMRC is a government department; it is not a church interpreting divine messages for the taxpayer.  The legislation is not scripture; the spirit is only invoked is when the Courts find it so badly drafted they needs to look to Hansard for clarification.

On the more specific point, surely the better the banks are at tax avoidance, the quicker they can repay taxpayer loans and redeem taxpayer shares.  This seems bizarre but what did we expect?

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By User deleted
07th Sep 2009 11:51

Spirit of the tax law

I am reminded of the old legal maxim that there is no equity in tax law. So tax law is to be interpreted exactly, with no room for wiggles in favour of the taxpayer or the Revenue if the statute does not appear to be fair in a particular case. The Revenue is trying to tip the scales in its favour and this way of doing it is unacceptable. If it wishes to achieve a particular result then it should persuade Parliament to pass clearly drafted legislation accordingly, not make the banks the first line of defense against possibly legal arrangements.

Having said that, of course I am not enamoured of wholly fictitious arrangements for pure avoidance purposes, as a matter of conscience (if that is a word understood nowadays). But it is the Revenue's job to counter that legally, not by imposing new duties on others. Or am I yearning for a new Utopia?

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