A joint conference of The Chartered Institute of Taxation, The Inland Revenue and HM Customs & Excise, Latimer House Conference Centre, Chesham, Bucks. 29–30 June 2001. Article by David Hurwich, a sole-practitioner specialising in dealing with individuals and organisations in the performing arts.
Published in September 2001 issue of Tax Adviser.
‘The wolf also shall dwell with the lamb, and the leopard shall lie down with the kid.’ (
Isaiah, Ch. 11, v. 6)
The Conference opened with short presentations on ‘The Meaning of Tax Avoidance’.
The opening speaker David Shaw, Inland Revenue, stated that whereas tax inspectors see avoidance everywhere, tax advisers see it nowhere.
Gordon Brown looks for fairness. Tax advisers claim that better legislation would reduce tax evasion, but have to accept that there will always be loopholes. The question is when does planning become avoidance? And perhaps the further question of when does avoidance become evasion? Judge Oliver Wendell Holmes – US Supreme Court stated ‘Tax is the price we pay for living in a civilized society and in a fair society we expect to pay our fair share’.
Gordon Brown has stated:
‘It is essential that tax policy is based on clear principles. These are to encourage work, savings and investment, and fairness.
Fairness by ensuring that everyone bears their fair share of taxation and pays the correct amount and which is seen to be fair by vigorous pursuit of tax avoidance and evasion.’
FSBR July 1997
Lord Tomlin stated in Duke of Westminster (1936) 19 TC 490 – 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 – and this paraphrases Lord Clyde’s earlier dictum.
David Shaw thought that the best definition of tax avoidance is found in Tax Avoidance: A Report to the Tax Law Rewrite Committee November 1997.
It is worth noting the more recent opinion of Lord Hoffman (Norglen v Reeds Rains Prudential Ltd (1999) 2 AC 1).
‘Tax avoidance schemes either work or they do not. If they do not work, the reason is simply that upon the true construction of the statute, the transaction which was designed to avoid the charge to tax actually comes within it.
It is not that the statute has a penumbral spirit which strikes down devices or strategems designed to avoid its terms or exploit its loopholes.’
Shaw foresaw that under the new commercial approach of the law, if tax avoidance continues to expand, this will lead to draconian counter-measures!
Richard Wild, HM Customs & Excise, sees two types of avoidance:
- Objective – the system of VAT is concerned principally with objective effects.
For example, Direct Cosmetics / Laughton Photographs [1985] BTC 5,013. - Subjective – artificially creating the requirements for a specific saving or relief.
Fraus legis – frustration of the law.
Transactions which while legal in themselves have no practical significance – similar to GAAR (see below).
Wild saw the prime duty of H M Customs & Excise as being to collect the right amount of tax at the right time, and to challenge avoidance schemes.
Edward Troup, head of Tax Strategy at Simmons and Simmons, sees two conflicting objectives in tax planning.
- Government wishes to ensure that no taxpayer pays less tax than Parliament intended.
- No taxpayer ever seeks to pay more tax than obliged to by law.
Troup accepts that a lot of tax avoidance schemes are unfair. In his opinion if we think legislation has misfired, then change the law but not retrospectively. He felt that cases like Ramsey are to a certain extent retrospective, and therefore he does not like GAAR.
Paul Morton, head of Tax for the Global Oil Products Business of Shell believes a large corporate body must recognise five areas of responsibility:
- to shareholders;
- to customers;
- to employees;
- to those with whom they do business; and
- to society.
Morton admitted that one reason why small taxpayers resent paying tax is that large corporations pay very little tax and this is a serious problem in many countries.
Steve Bousher from the Inland Revenue Solicitors office then talked on ‘What can the Taxman see’. Taxpayers and advisers, he admitted, resent requests for information requiring lots of research (e.g. a notice under TMA 1970, s. 23). Article 8 of the European Convention on Human Rights provides that everyone has the right to respect for his private and family life, his home and his correspondence. There can be no interference by a public authority with the exercise of the right-
‘Except such as is in accordance with the law and is necessary in a democratic society in the interests of … the economic wellbeing of the country …’
The latter paragraph gives the Revenue rights but the powers must be properly and reasonably used. The Morgan Grenfell decision now in the Court of Appeal, en route to the House of Lords, is worth consideration on this matter.
In the UK, the taxman can see any documents that are or might be relevant to the case.
However, as Tim Cawdron of Price Waterhouse Coopers stated, some inspectors think that they can see everything but this is not always true or simple.
Chris Colford of HM Customs & Excise thinks that the Morgan Grenfell case is hopeless from the view of the taxpayer.
On a more general approach, following the Halifax doctrine, transactions wholly to avoid VAT are not acceptable and artificial transactions are not supplies.
GAAR
The final subject under review was the case for a GAAR – will it be back?
Howard Williams, Revenue Head Office, gave a Revenue perspective of GAAR.
From the Revenue point of view, he saw the defects of what he called the ‘hole and plug’ approach to tax avoidance as follows:
- tax inspectors always well behind the game;
- resource intensive;
- much tax escapes through holes before they are plugged;
- increases legislative complexity;
- provides unwitting blueprint for next scheme.
He quoted from Gordon Brown’s Budget Day press release of July 1997;
‘The Chancellor further signalled his intention to stem the leakage of tax from the Exchequer through continued tax planning or avoidance arrangements. He has commissioned the Inland Revenue to carry out a review of the whole area of leakage and avoidance of direct taxes, including how the Department approaches the defeat and deterrence of tax avoidance schemes.’
Williams sees the limitations of a GAAR:
- specific anti-avoidance measures still needed;
- ample scope for litigation about its application.
However, the merits of a successful GAAR are statutory rules give greater certainty over purely judge-made laws:
- consistency of treatment; and so
- greater fairness in distribution of tax burden; and
- economic playing field not tilted in favour of avoidance.
Andrea Pierce, head of the Anti-Avoidance Team at Customs, while accepting that a GAAR in VAT could counter avoidance schemes or deter their development, pointed out that the legal position is uncertain – not being authorised by the sixth directive (Directive 77/388) nor clearly within art. 27 of that directive (derogations).
She pointed out that France and Germany have ‘abuse of rights’ GAARs, applied to VAT, the Netherlands applies ‘Fraus legis’ to direct tax but not to VAT, and Italy does not apply abuse of rights to tax matters.
The penultimate speaker on the panel was Vincent Oratore, tax lawyer in charge of Tax etc. for Merrill Lynch in Europe, who foresaw that a GAAR would get rid of Case Law, therefore we don’t want it (As a lawyer he would say that wouldn’t he?); he felt there needs to be a much more rigorous approach. what we are trying to get to is commercial reality and economic substance. Tax systems are coherent in themselves; each jurisdiction makes its own judgment.
His final comment, which to my mind neatly and humorously sums up the whole question of tax avoidance – can be summarised as follows:
Show me a commercial decision that is based on a potential tax benefit alone and I’ll show you a bunch of morons.
The final speaker was Robin McKnight, from Canada, who opined his views against GAAR based on Canadian experience.
The Canadian Realisation of Taxpayers Rights states:
‘you have a right to arrange your affairs in order to pay the minimum tax required by law’ (see Lord Tomlin). In his opinion, a GAAR gives lack of certainty and what is wrong with tax law is that the judges don’t understand it. However, in his view, Canadian drafting is negative whereas UK approach is reasonable.
In McKnight’s view, therefore, if we are considering a GAAR based on Canadian experience the courts are unlikely to accept it.
It would give no certainty, no simplification, no reduction in costs, and the drafting in Canada has been abysmal.
The keynote address
The keynote address was given by Ian Barlow, Head of Tax & Legal at KPMG.
He stated that avoidance will always be with us – that tax planning is acceptable but tax evasion is unacceptable. However, there is no clarification of a judicial interpretation of avoidance, and long on-going cases do not help finance directors. It is legitimate to aim to save tax in commercially viable transactions – through commercially oriented tax advice.
However, the complexity of the system leads to a waste of management time in dealing with tax. Tax needs to be raised in the least economically destructive manner. We need to have a commercially aware tax system that bears lightly on industry – to improve our competitiveness.
Barlow seeks a system where government bodies and the tax professions must work together and must look for trust/simplification and there must be a coming together of Revenue, Customs and the professions. He mentioned Lord Howe’s Tax Structure Reform System, where he sits on the Committee. He proposed more secondments from Revenue and Customs into the profession, and vice versa. This was met with unanimous approval.
He wants to see more academic work on tax in the universities and has made contributions to this at both Oxford and Cambridge. He also pointed out the amount of time spent on tax work in the country is far too high and is a waste of intelligence – as an example, the chargeable hours expended at this conference could be in the region of £1.5m. He would like to see a future conference concentrate on raising academic opportunities/scope in the profession.
Summary
All speakers and attendees were in agreement that a conference of this type, bringing both viewpoints together can only be useful. The general opinion of the people I talked to, and those in my discussion groups, appeared to be that there is a coming together of viewpoints in that tax advisers are coming round to the view that putting in schemes, etc. with little chance of success is not helpful to their clients, and so, Revenue and VAT are less likely to attack the advisers at every opportunity – and therefore we are all working towards a more honest and fair approach, with mutual respect.
Technical Department
020 7235 9381
September 2001 by David Hurwich
