Issue 109: 2017 06 15: On tax avoidance (Penny Hamilton)

15 June 2017

On tax avoidance

A moving of goalposts

by Penny Hamilton

Whenever the phrase “tax avoidance” appears in the media a clock somewhere strikes thirteen.  The meaning of avoidance in the context of tax has, over the past twenty years or so, accumulated shades yet to be acknowledged by any dictionary.  A recent illustration of this “newspeak” is an article in “The Times,” on 9th June headed “Uber avoids £40m VAT bill on British cab fares,” which inspired me to reflect on this linguistic development over the years I have been a tax lawyer.

My career, like Gaul, has been divided into three parts: first in what was then the Office of the Solicitor for HM Customs and Excise, then a partner in a “Big Four” firm of accountants and now at Pump Court Tax Chambers.

I cannot remember any concern about VAT or duty avoidance tax when I was in the Solicitor’s Office.  Our concern was all with evasion.  If something was within the letter of the law we were not interested in what might have been “the spirit of the law,” and any protestation by officer or administrator that “I know they’re at it” met with little sympathy.  Any alleged intention of Parliament had to be derived from the legislation.  In the world of direct tax attempts by the courts to limit the excesses of the tax planning industry had variable success.  The courts felt themselves bound by the words of the statute so that a successful attack on a contrived and artificial arrangement, entered into for the purposes of avoiding tax avoidance, relied on statutory interpretation of the relevant provision (see the review of this trend in Barclays Mercantile Business Finance Limited v Mawson [2004] UKHL 51).  Attacking avoidance was a matter for legislation and, if the Inland Revenue did not like what was going on, it was up to Parliament to do something about it.  That is, of course, what happened with the introduction of the General Anti-Avoidance Rule: of which more below.

VAT had escaped the attentions of the tax-planners until the mid-eighties, when the introduction of penalties and interest brought it to the attention of the accountants, worried about their clients’ exposure.  When I joined the firm which was to become PricewaterhouseCoopers the possibilities for VAT planning had already become apparent to its tax department.  Oddly enough, given that VAT is a transaction tax, it took a while for the legal profession to catch up with the possibilities of legitimate avoidance.  By the end of the eighties planning arrangements which delivered large, but legitimate, VAT savings became commonplace.  As in direct tax, VAT planning had to be legally and commercially robust and, most important of all, firmly rooted in reality.  As I used to remind my clever colleagues who came up with ever more sophisticated structures, a kite can fly only as long as the end of its string is firmly anchored.  Correct implementation on a day to day basis was crucial and the phrase “the devil is in the detail” become a VAT planning cliché.

At first Customs and Excise were relatively relaxed about this but, as the VAT savings increased, what had been accepted, or at least tolerated, as legitimate planning came under attack.  An example was the uses of lease and lease back structures to spread the VAT cost of an asset over a period, commonly the economic life of the asset.  Following the (allegedly exaggerated) claim by Customs and Excise that this was being blatantly abused in a number of cases, the VAT law was amended by the addition of a new Schedule 10 to the VAT Act 1994 which contained a number of anti-avoidance measures.  Ironically enough, so complex was the drafting that (much to the joy of the VAT planners) the new provisions provided as many opportunities for avoidance as they sought to counter.  Try as the tax authorities might seek to limit them, the avoidance schemes became, as the framers of the GAAR would have said, ever more “egregious”.  There was a perception that VAT’s European law roots made a VAT GAAR impossible as a means of curbing what the tax authorities now saw as an untenable state of affairs.  Nevertheless, it was the European Court of Justice which came to the rescue.  In cases such as Halifax and Part Services the Court adopted and developed the concept of “abuse of law,” to counter artificial VAT avoidance schemes which lacked commercial reality.  But that would not be until 2006.  In the meantime something had to be done.

The first hints of an impending campaign against tax avoidance were in Inland Revenue and Customs and Excise releases, which began to refer to the effect of tax avoidance on public funding for schools and hospitals.  War was not formally declared, however, until January 2003.  The then Chairman of the Inland Revenue, Sir Nick Montagu, asked me, then President of the Chartered Institute of Taxation, if he could make a few remarks at the annual President’s Luncheon (usually a “ no speeches” affair) and, in the interests of cooperation, I was happy to give him air-time.  Nevertheless, after he had spoken I had to take him publically to task for his apparent confusion between the criminal evasion of tax and legal avoidance, reminding him that there was no such thing as “avoision”.  I might just as well have saved my breath.  The distinction between what is, and what is not, lawful has continued to be blurred by officials and politicians alike so that the concept of “unacceptable avoidance” has now become so firmly rooted in the public psyche that any tax avoidance is often perceived as unacceptable. There has been an elision of “unacceptable” and “avoidance” worthy of Big Brother.  As if that were not success enough, it has now become professionally impermissible for members, including lawyers, of the CIOT, ICAEW , ICAS or Society of Trust and Estate Practitioners, to “create, encourage or promote” tax planning arrangements or structures that set out to achieve results “that are contrary to the clear intention of Parliament in enacting relevant legislation,” and/or are “highly artificial or highly contrived and seek to exploit shortcomings within the relevant legislation,” (see paragraph 2.29 of the current latest edition of Professional Conduct in Relation to Tax Advice).

I cannot resist a sneaking admiration for what has been a clever campaign.  It has brought us from the acceptance of a person’s freedom to organise his affairs in any lawful way to the current abuse suffered by anyone who might be paying less that the greatest possible amount of tax HMRC might deem due.  It is, in a way, comparable to the anti-smoking campaign, which has transformed an activity quite within the law into something socially unacceptable.  Less admirable is the legally illiterate treatment of the issues by politicians who should know better and, unsurprising but more disappointing,  by the media.


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