Whale of a time

KEY POINTS

• Much talk on the morality of tax planning.
• Limited consensus on what is right and wrong in this context.
• Unacknowledged assumptions and presuppositions can make moral pronouncements meaningless.
• Judgments have confirmed the validity of tax planning.
• Safer to stick to the law.

Tax planning has never been so much in the news. The recent debate has involved not just undercover journalists, but also senior government ministers.

Even the prime mnister has been drawn into commenting on one citizen’s legal tax arrangements as being ‘morally wrong’, while the chancellor of the Exchequer has used the phrase ‘morally repugnant’.

The debate – which is playing out in the broadsheets, in publications such as Taxation and blogs, and which is subject to idle chat around the office water-cooler – really concerns three issues which are often confused: tax planning; tax mistakes; and tax dishonesty.

What’s the real issue?

Completing a self assessment tax return is rarely a simple process and it’s not one that is without pitfalls.

Some returns contain mistakes which are mere oversights, others stray into carelessness, while tax dishonesty may involve the submission of returns that are known to be wrong to the extremes of covering one’s trail with false documents.

The different penalties for careless action, deliberate action, and deliberate action with concealment, recognise these distinctions. Furthermore, there are tax offences which can, after investigation and conviction, lead to imprisonment.

Without explicit moral judgment, the penalty and offence rules command wide acceptance because most people in the UK regard tax dishonesty as wrong.

To seek personal advantage, in tax or otherwise, through untruth offends the personal codes of nearly all and so reasonable punishments are accepted.

There is no similar consensus that tax planning is likewise seen as wrong, far less as being ‘morally repugnant’.

Surely it would be odd if the individual who used, for example, an individual savings account (ISA), or made tax-deductible pension contributions or sought higher-rate relief for charitable giving was regarded as doing anything improper.

They are simply taking advantage of what Parliament has provided to assist them in managing their financial affairs.

Of course, it was not such simple arrangements that drew the ire of the authorities. It was sophisticated tax planning, which seemed to deliver substantial benefits to the well advised, that caused the excitement.

But what therein was wrong?

What moral compass empowers one to distinguish between ‘sensible and responsible tax planning’ and the ‘wholly unacceptable’? No such tools are available.

No one, apart from the odd eccentric, writes to HMRC saying, ‘Here’s a bit more than I owe to keep the country going’.

General public opinion is that we should pay no more than the law requires. Most people see tax as a cost in their business or personal lives and most people would like to reduce their costs if they could.

And that is the issue. Users of advanced tax planning believe that is all they are doing. Yet when the light of publicity shines on these arrangements some invoke notions such as ‘fairness’ or ‘the spirit of the law’ to assert that those who use sophisticated tax planning should desist as it advantages them over others who do not or could not use the planning available. Yet it is not made clear why it would be ‘fair’ for them to pay more than the law demands.

Resentment or reasonableness

It is clear that there are vested interests in ensuring taxes are collected. Governments need to ensure that there are funds for their initiatives; and whatever one might think of their spending, that is their role.

HMRC are frustrated when the law does not work as they would wish or thought it did. Perhaps there are those who believe that sophisticated arrangements expose the inadequacies of statute to the detriment of Parliament.

Some business advisers, doubting whether a particular arrangement delivers the advertised benefits, may see a moral issue.

Others may say that their status as trusted professionals is undermined by those who devise and market some tax planning. Not that business advisers have to encourage their clients to use tax planning strategies, but there is the view that clients should be aware of all the options available.

It is possible that a few advisers may harbour resentment that they do not share in the fees from such advice or, having lost clients to purveyors of certain arrangements, would want to believe that the arrangements are ‘wrong’.

On the other hand, there are those who believe that some arrangements deliver benefits for clients, are within the law of the land, and are therefore perfectly reasonable.

The company I work for believes this, and some may therefore point to our business model as being the rationale for my putting forward this view.

However, ‘he would say that, wouldn’t he’ is never a coherent argument. To expose motive does not mean a position or argument is consequently wrong – that is the motivation fallacy.

Yet unexamined and unadmitted motives can often lead to unreasonable arguments. Many who want to discourage sophisticated tax planning advance arguments ostensibly based on morality or fairness. If they do not explain and justify their own underlying moral position their arguments are meaningless.

In his article The house of Ussher, Richard Curtis analysed the then hot topic of ‘flipping’ main residences.

MPs had elected under TCGA 1992, s 222 to minimise the capital gains tax liabilities arising on the sale of their residences. Richard’s conclusion was that, ‘in principle, the relief seems totally acceptable’.

MPs were entitled to make the main residence election if they met the statutory and factual requirements. What was the moral issue?

They told no untruths (one assumes), the statute was plainly explained in HMRC’s own guidance, and therefore the relief applied.

Many MPs seem to have benefited, but some were forced by their parties to repay the tax.

It seems to me a serious issue if people were pressurised for political reasons for unexplained motives, or by distaste for media harassment into making tax payments which were not due.

That there was no outcry suggests to me that moral positions in this area anyway are often fuelled by envy and a desire to disadvantage the influential or relatively prosperous.

Right and wrong – what are they?

One would think that right and wrong are simple concepts, but not always. Why does someone believe what they believe and why do they act as they do?

In short, we need to ask ourselves what is our world view? If we face an issue with unacknowledged presuppositions we may not even hear, far less understand, someone with a contrary view because the underlying assumptions are not shared.

Of course, nearly everyone agrees that violence, theft and untruthfulness are wrong. Yet without shared world views and presuppositions we will, in many other instances, fail to agree on whether something is right or wrong, fair or unfair.

Often, debates on ethics, especially in connection with tax, are confused and inconclusive because the underlying presuppositions are not identified, far less agreed.

This is plainly so with tax planning. There is much talk of morality and many leaps to judgment, but very few try to explain what their world view is, how they distinguish right from wrong and why their view of the world is superior to the one being challenged. Often such pronouncements on morality appear to be mere power plays.

All who criticise the morality of others’ behaviour should at least make clear their presuppositions – ‘where they are coming from’.

Primacy of law

In this philosophical jungle, it is far safer to stick to the law. Law, although rooted in prevailing belief systems, claims to order society so that – regardless of an individual’s underlying world view and consequent moral values – each member of society knows what is required.

The UK tax code runs, in the CCH Red and Green Volumes, to over 30,000 pages (including repealed material).

There is a vast corpus of case law, more and more EU law and further uncounted pages of guidance, instructions and advice from the tax authorities and others.

In addition, there are double taxation treaties and the necessary interaction between UK tax law and the general law of the countries of the UK and elsewhere to be considered.

While Henry James was rather unkind to Melville’s Moby Dick when he called it a ‘loose baggy monster’, that phrase exactly describes the UK tax code. It is a whale of a task to make sense of it.

At the risk of introducing yet another animal there are elephant traps galore and tax advisers make a living from keeping people out of them.

HMRC often do nothing to help those who fall in. ITEPA 2003, s 222, for example, says that if reimbursement of a tax charge is made by an employee to their employer on day 91, a tax charge will still arise on the employee even though, by reimbursement, the individual has not benefited (see HMRC’s Employment Income Manual at EIM11951).

Indeed, this provision has often been stigmatised as ‘unfair’. That is irrelevant – we have to live with it.

On the other hand, as was noted by Henderson J in HMRC v D’Arcy [2008] STC 1329 where a legal loophole allowed a transaction in gilts to result in a tax deduction for a manufactured interest payment, this was ‘one of those cases, which will inevitably occur from time to time in a tax system as complicated as ours, where a well-advised taxpayer has been able to take advantage of an unintended gap left by the interaction between two different sets of statutory provisions’.

There was a gap in the law and as a consequence Mrs D’Arcy paid less tax.

Some seem to believe she was ‘wrong’ to have used the arrangement, but one wonders what they would have done in her shoes. In any event, what was the moral issue there?

Ordered affairs

The words of Lord Tomlin in Duke of Westminster v CIR 19 TC 490 are still as true now in the post-BMBF world ([2005] STC 1) as they ever were:

‘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. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.’

In Cape Brandy Syndicate v CIR 12 TC 358, Rowlatt J, as so often, got to the nub:

‘In a taxing Act clear words are necessary to tax the subject. … it means that in taxation you have to look simply at what is clearly said. There is no room for any intendment; there is no equity about a tax: there is no presumption as to a tax; you read nothing in; you imply nothing, but you look fairly at what is said and at what is said clearly and that is the tax.’

Of course, we nowadays apply a purposive interpretation and take a realistic view.

But a fair analysis of the words of the law, despite its scale and complexity, is still what tax advisers do; and is all that those who offer and use sophisticated tax planning desire.

It was ever thus

Window tax was a classic attempt to tax the rich. It only kicked in when houses had a certain number of windows, it was easy to identify who had to pay, and it was logical that those who could afford more than the set number of windows could also afford the tax. As we can still see today, many responded by bricking up windows.

They accepted the cost of materials and labour to do the job and some loss of amenity so that the tax did not bite so heavily on them.

Would anyone seriously argue that these householders were breaching some unstated moral code? They just took some action so that the tax did not affect them in the same way as it had hitherto.

Firms like EDF thoroughly research all the relevant legislation, take advice from experts, and assess the likely judicial reaction and sometimes conclude that if arrangements were structured in a specific way, clients could receive more funds in their hands than others who used a different structure or none.

So long as the stated ethical standards of the relevant professional and representative bodies of the advisers were also followed, it is hard to see what could be ‘morally wrong’.

If the client accepts the cost and potential loss of amenity from a possibly more complex process, the likelihood of an HMRC enquiry, litigation with all its uncertainties and so on, just quite how is he different from the householder who bricked up his windows?

Conclusion

It has been ingrained in our constitutional thought since Magna Carta in 1215 that citizens are ruled by law not by whimsical power plays.

Tax planners don’t expect, and don’t get, any special favours. But we are all entitled to expect that we will be governed by law and not by pressure from special interest groups advancing arguments based not on the law, but on arbitrary and unexplained ‘moral’ positions.

Robert Bolt put it as well as any in A Man for All Seasons:

William Roper: Yes, I’d cut down every law in England to [get after the Devil]!

Sir Thomas More: Oh? And when the last law was down, and the Devil turned ‘round on you, where would you hide, Roper, the laws all being flat? This country is planted thick with laws, from coast to coast, Man’s laws, not God’s! And if you cut them down, and you’re just the man to do it, do you really think you could stand upright in the winds that would blow then? Yes, I’d give the Devil benefit of law, for my own safety’s sake!

People’s views will vary on what is the equivalent of the Devil in the tax planning debate. But we are all safer if we stick to legal analysis and avoid uninformed and judgmental moralising.

Issue: 4366 / Categories: Comment & Analysis , Admin