We await with bated breath the consultation document on a general anti-avoidance rule. Much will be said on whether the rule put forward is good or bad. But here is a broader question: is tax avoidance really so naughty that the Inland Revenue should have unlimited power to defeat it?
Tax avoidance is not cricket. The intricacies of the tax system may be fair game, but the game is closer to trout tickling than to cricket. On the other hand, it is not illegal. The avoider does not lie to the Revenue.
He merely relies on truths about the law that the Revenue might not like.
So goes the traditional distinction between avoidance and evasion: one is legal, the other not. Evasion is definitely naughty, and the Revenue has my full support in stamping it out. A general right to prevent avoidance looks much more acceptable if avoidance can be regarded as a form of evasion.
The sneaky way to look legal
Indeed, it would be an especially crafty form of evasion because it managed to look legal. But can this move be made – can avoidance be treated as evasion? Yes, but only if we rely on a premise that is totally unacceptable.
Avoidance differs from evasion because there is no law to say that you must not do it. This is not the same thing as a law to ensure that avoidance will fail. There are plenty of those for specific forms of avoidance, and even a GAAR would not stop you trying avoidance: it would merely stop you from saving any money.
On the other hand, avoidance and evasion have one thing in common: they both save tax. We can make the lack of a law against avoidance irrelevant by saying that only the end result matters: if it saves tax, it must be wicked.
This is the unacceptable premise: that only the result matters. Evasion is a crime, even if civil penalties or a cash settlement are normally used. An important component of criminal liability is the intention to commit a crime.
If you read the law first to make sure that your planned actions are not forbidden, you can hardly have this intention! The avoider does intend to exploit loopholes in the law, but that is different from deliberately breaking the law.
This thought severely weakens the case for a GAAR. It does so because it means that we cannot support a general rule on the basis that avoidance is nearly the same thing as evasion. It is quite different.
The case for a general rule must be made on other grounds.
But if the tax-saver can be defended on the avoidance flank, he is left dangerously exposed on the evasion flank. The danger comes from the same argument that intention matters, and not just result. Some people do things that are strictly within the law, but that were planned as evasion. The obvious way, now largely blocked, is to move money out of the tax-collector’s grasp before it can be collected.
Evasion dressed up as avoidance should be automatically struck down, but only in a way that will catch the evader rather than the avoider.
We need to go back to the intention of the tax-saver. If there was no intention to cheat – to be an evader – then only anti-avoidance rules should come into play.
Sadly, the finance bill suggests that tax-savers’ intentions no longer matter. Clause 65 applies PAYE to payments in assets which can easily be sold because of trading arrangements. The Treasury Notes say that the rules concentrate on the effect of the trading arrangements rather than their purpose: that is, motive does not matter.
Even worse, clause 112 (schemes to abandon companies with tax debts) can impose liability on wholly innocent parties so long as someone was guilty.
Revenue-raising must be fair
The goal of the tax system is primarily to raise revenue. But it is also important to raise revenue fairly. The chancellor says that it is unfair for a few people with clever accountants to avoid their share of tax. He has a point.
But that focuses on fairness as being between one taxpayer and another. There is also a fairness issue between the taxpayer and the state.
The state cannot treat the taxpayer fairly if motives count for nothing.
At the extreme, the taxpayer would not even be allowed to explain why he had undertaken transactions in a way that yielded anything less than the maximum possible tax.
Richard Baron is deputy head of the policy unit at the Institute of Directors.
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