Avoidance is not evasion: HMRC stands accused

WHo makes tax law? Parliament, or HMRC?

It seems that the debate about the extent of the taxman’s investigative powers has reared its head yet again.

In June, a revised code of practice had been issued quietly to tax inspectors ­ but was only noticed by leading tax practitioners at a recent meeting. “Avoidance,” it started, “is not defined in the Taxation Acts and attempts to define it have not in the past been successful. One definition is ‘a situation where… more tax would have been paid if Parliament turned its mind to the specific issue in question’.”

The implication seems to be that a taxpayer could be investigated by HMRC before they have actually broken any laws.

The guidance has sparked belated anger among accountants and lawyers. One tax lawyer told Accountancy Age they were “angered when HMRC… seem to think they make the rules rather than the courts, Parliament or Europe.”

Another correspondent expressed outrage at what they called “tax avoision” guidelines, where HMRC has been perceived to pursue legal tax avoidance cases almost as if tax evasion has occurred.

Mike Warburton, private client director at Grant Thornton, agrees: “The government has tried to treat avoidance and evasion as if one is leading into the other,” he said. “It’s perfectly clear avoidance is legal, evasion isn’t; but the Revenue is trying to muddy the lines between them.”

However, Chas Roy-Chowdhury, ACCA’s head of taxation, didn’t think HMRC’s tone has changed “from before the downturn”, saying HMRC had “just taken a new angle [in their definition of avoidance] in deciding what Parliament would have intended”.

“But [that could be] pretty dangerous because nobody can really know what Parliament intended.

“While businesses and individuals obviously need to be careful they arrange their tax affairs in a way that they’re above board and legal, investigations into them by the revenue could end up in lots of extra expense which doesn’t result in any gain or loss ­ Parliament could rule either way,” he added.

Tax practitioners are, of course, familiar with the Ramsay v IRC (1981) case, where Lord Wilberforce ruled that taxpayers were permitted to arrange their financial affairs to reduce their tax liabilities, although the distinction between unacceptable tax avoidance and acceptable tax planning has remained unclear ever since.

HMRC said in the aforementioned code of practice that “fiscal authorities are becoming less and less concerned with fine distinctions between tax planning and tax avoidance and more concerned with the effect on the yield to the Exchequer.”

With government debt at such high levels, it is understandable that the taxman will try to recoup as much tax revenue as it possibly can. But is going after law-abiding citizens and companies before Parliament have even ruled whether the laws have been broken really the answer?

Warburton, for one, is very concerned. “It’s a fundamental right of democracy that Parliament sets the laws, not some unelected body,” Warburton says.

“For the revenue to slip this through for inspectors to milk money from hard-working businesses without laws being passed, is unacceptable.”

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