A just-published paper by the tax barrister David Quentin (link to the side or below) concludes
"49. There is a widespread perception that the law provides a clear line of
minimum tax payable, that prudent persons push their tax liabilities down to
that minimum, and that the idea of “tax avoidance” as a discrete species of
anti-social behaviour is therefore misconceived. This is a plausible-seeming
narrative which is happily promulgated by the tax industry but it is deeply
misleading. In fact, as we have seen, the creation of exchequer risk is an
objective threshold which a taxpayer chooses to cross under advisement, and
once over that threshold the taxpayer is playing a deliberate risk game with
what may be public money.
50. There are some who say that the paramount factor where tax avoidance is
concerned is the rule of law, and that the solution to tax avoidance is better
legislation and better enforcement. As I hope emerges from the analysis in
this paper, that approach is only ever going to be able to tackle the aggressive
avoidance at the far end of the risk curve. A more sophisticated perspective
which recognises the role played by risk is required in order to arrive at a
proper understanding of the problem, and hence to develop solutions which
render the public exchequer resistant not just to the more dramatic forms of
tax avoidance that are widely acknowledged but also to the systematic value
extraction that I have characterised in this paper as risk-mining."
Obviously this sort of thing is far too long for Twitter, but it reminded me that I'd been meaning to write a piece on the subject.
It is perhaps a mark of the tangled difficulties of this area that something I wrote in another life back in 2005 seems quite as relevant to David's points today. So here's its opening sections ...
"Issues and background
1. It is now a commonplace that avoidance succeeds because
· it is difficult for HMRC to find out about new avoidance schemes early enough
· there are too many loopholes in the law
· there is little downside to failed attempts at avoidance
2. A lot of effort is being put into directly addressing the first and third of these problems, and into developing a strategy to alter perceptions of the risk associated with attempted avoidance, but the impact on the tax yield of work in these areas will not be sufficient unless the second is successfully addressed. In the long run the impact might even be insignificant. Once a scheme has been successfully implemented (i.e. such that the courts would decide that the proper application of the law gives the result sought by the taxpayer) HMRC finding out about it early usually only allows limiting the damage that would be caused by its wider use. And a taxpayer cannot be penalised for doing something that is allowed by the law without a serious risk from judicial review and/or human rights challenges.
3. Effective charging provisions in the law are of fundamental importance. The prime factor in a taxpayer’s assessment of the risk taken in an attempt at avoidance will be its chances of success at law. And its actual chances of success are affected only minimally by the time at which HMRC find out about it (save for the prospect of retrospective legislation) and not at all by any downside resulting from failure. For the rational taxpayer, the greater the chances of success, the less weight will be given in the taxpayer’s decision-making process to any downside. Conversely, the less certain the success, the greater the weight of any downside.
4. So downside is likely to have a significant impact on taxpayer behaviour only where there is a credible threat to the success of the attempted avoidance. The taxing provisions overall do not at present provide a credible enough threat as there are loopholes. The threat is further lessened by general resource constraints on legal action and consequential operational policies – for example negotiated settlements. And long experience of seeing loopholes plugged with specific legal measures in successive legislative cycles can only lead to the conclusion that HMRC cannot rely on these alone to reduce the amount of successful avoidance by enough to make a sustainable difference to the avoidance element of the tax gap.
5. There are a number of reasons why specific measures seem to have little impact overall. For example:
· The external environment is not assessed correctly and key assumptions are wrong [e.g. that the pool of capital losses was about as big as it could be]
· Likely taxpayer behaviour is not predicted well enough [e.g. incorporation]
· Technial analysis or drafting is poor, and the measures either do not achieve the desired result in law or have unintended consequences and so are not effective in closing the loophole. [the series of measures on the VAT treatment of sports clubs]
· Where measures do strictly achieve the desired effect and succeed in closing a loophole, their interaction with other parts of the legislation often opens new loopholes.
6. But what does it mean to say that there are too many loopholes in the legislation, or too many opportunities for avoidance? This is offered as an explanation for much of the avoidance component of the tax gap as:
· certain transactions and/or economic outcomes are expected to have a particular tax result
· the application of existing legislation does not give this result in a high enough proportion of cases
7. But this means that the expected yield is predicated on the results that HMRC expects or intends the law to have rather than the real results that the law will have or could have if analysed objectively and applied correctly. The ‘avoidance element’ is the difference between what HMRC wants and what it gets, not the difference between what should be paid and what is paid. In contrast, the other elements of the tax gap are differences between what should be paid and what is paid.
8. On this analysis the avoidance element of the tax gap is itself made up of two components –
· tax that HMRC should not in fact get because, despite HMRC’s intentions, the law does not provide for it
· tax that HMRC should get because the law does provide for it. In this case, the taxpayers have not paid the tax provided for by the law because they are arguing that it is not due. But because it is due and they will ultimately fail if pressed to the courts, it is only tax lost if HMRC do not do so.
National taxes - Principles of statutory interpretation
9. In a recent article ( BTR No.2 pp 197-206) Lord Hoffman questions whether there can logically be such a thing as tax avoidance, suggesting that avoidance must mean not paying tax that you ought to have paid, while your only obligation to pay tax is under the law. This makes avoidance either a contradiction in terms or a legal irrelevance. Our experience is that often, but not always, the ‘wrong’ result is deliberately sought or engineered by the taxpayer but searching for the reasons behind taxpayer actions is a futile undertaking where the ‘wrong’ result comes from the proper application of the law to a real set of facts. It is in law the right result. In such cases avoidance is simply the name that we give to results that we do not like, and we all too often give this name to things that we failed to anticipate or guard against, or that are only with hindsight undesirable. All possible ‘wrong’ results are inherent in the tax system independent of any intention on the part of the taxpayer, and so it is to ourselves that we must look for any real and sustainable solution to this problem. Bearing in mind the two components this means focussing our efforts on the one hand to ensure that the law provides for the right result and on the other to applying the law rigorously and consistently. Taxpayers are unlikely to change their behaviour significantly unless these efforts are clear and credible.
I think this means I agree with David probably more on the nature of the problem than on its possible solution.
Musings on tax avoidance and most recently on the 'Boys' behind it ... here.
Interesting new paper about perception of risk and influence on avoidance behaviour, here
The Professor. A number of her papers available here