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Key points
- Is the line between taxation and morality blurred?
- Tax avoidance and the development of a purposive interpretation.
- Follower notices and accelerated payments.
- The dangers of retrospective legislation.
- The general anti-abuse rule and the GAAR panel.
There are many divergent views as to the purpose and function of taxation. Historically, it could perhaps be argued that this is the ultimate expression of the power of a monarch over their subjects and now of the state over its citizens.
My concern is that there would appear to be a conflation of taxation and morality in the UK. When this is expressed by both the executive and the taxing authority, HMRC, this is a slippery slope. So how exactly did we arrive at this, in my view, dangerous and inappropriate state of affairs?
The classical view of taxation, as Rowlatt J reiterated in The Cape Brandy Syndicate v CIR (1930) 12 TC 358 was: ‘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.’
Although when Rowlatt J gave his judgment this was true of the judiciary’s approach towards taxation, it was not true of the executive which had increasingly, and typically over issues of perceived unfairness or inequity, made ad hoc and usually pragmatic relaxations and exceptions to the strict impact or scope of taxing statutes.
Fairness
For a fascinating account of the development of this very English approach to taxation, I would point readers to Professor Chantal Stebbings’ article, The Equity of the Executive – Fairness In Tax Law In Nineteenth Century England (tinyurl.com/y5khm49r).
As she writes, in the nineteenth century ‘there developed – coeval with the enactment of all tax legislation – a discrete body of informal rules emanating from the revenue departments of the executive aimed at achieving the fair treatment of taxpayers within the intense formalism of the legal system of tax’.
Professor Stebbings terms this ‘executive equity’ to differentiate it from legal equity, a set of established legal principles based on equity (fairness) and administered by the Chancery Division of the High Court.
As well as exercising this executive equity, the revenue departments themselves also developed methodologies of how they would administer the taxes legislation. Interestingly, Professor Stebbings points to this distinction between ‘law’ and ‘practice’ and, as a trainee tax inspector in the 1980s, one of the elements of my training was ‘law and practice’. Here, practice was not necessarily driven by any notion of fairness, but rather it represented the lubricant deemed necessary to keep the cogs of the tax system turning smoothly.
We then fast-forward from the nineteenth century to what I shall term the tax avoidance arms race of the 1960s and 1970s onwards, with the profession squeezing artificial and wholly unintended constructs from a narrow interpretation of the tax statutes. This led to the creation of a tax avoidance industry which existed for the sole purpose of creating tax driven ‘solutions’ and products for clients. Typically, these used the legislation in wholly contrived ways or exploited tax mismatches to produce a tax advantage. Having been born, the nascent tax avoidance even spawned some unicorns. Despite the huge volume of erudite commentary the scheme engendered, did any tax practitioner actually ever see, let alone advise a client to use, a ‘reverse Nairn Williamson’ – an arrangement to, purportedly, enhance the base cost of shares for capital gains tax purposes?
Playing catch-up
Always at least a step behind the tax avoidance industry, the Inland Revenue and thereafter HMRC struggled to play catch-up. This was usually attempted year on year by the taxing authority introducing blocking or anti-avoidance legislation contained in ever more complex and voluminous finance acts.
The judiciary then entered the fray and, moving away from the established tenets as expressed by Rowlatt J in Cape Brandy, began to interpret tax legislation purposively rather than literally. In other words, in reaching a decision it was legitimate for the court to consider the purpose of the legislation – why it had been enacted and what it was meant to achieve – rather than be constrained by what the legislative words actually said when applying a literal construction to them.
I have always felt this is, in part, a reflection of the declining standards of the parliamentary draughtsman, no doubt a function of the sheer volume of tax legislation being generated each year, combined with a desire, perhaps subconscious, on the part of the judiciary to ‘punish’ the users of tax avoidance schemes. Here I am reminded of Alice in Wonderland: ‘“When I use a word” Humpty Dumpty said, in rather a scornful tone, “it means just what I chose it to mean – neither more nor less”.’
From the standpoint of the humble practitioner, such as myself, this tax avoidance arms race could arguably be said to have culminated with two significant legislative responses on the part of the executive.
One was considered legitimate albeit extremely controversial and the second, after being subject to an unprecedented independent review, was found to be partly illegitimate in its intended reach and application. I shall term this the legal position in seeking to explain why these two HMRC responses had such different outcomes. In so doing, and by referencing back to the analysis of Professor Stebbings, I hope to demonstrate that at the fundamental level of analysis her bifurcation still holds good and is of application today. There is both a legal and a political response on the part of the executive, but with the former reinforcing the latter.
Allied to these legislative responses, and something which I find of far more concern, is a deliberate conflation by the executive of taxes with morality. Because taxes are ‘fair’, whatever that means, it is ‘right’ that we pay our fair share and any attempt to minimise the tax burden is heinous. A prime example of this is the public and highly publicised demonisation of the comedian Jimmy Carr by David Cameron, the then prime minister. Consider also the language – ‘schemes for scumbags’ – used by the then head of HMRC to describe the taxpayers who invested in films. I shall term this response political expediency, using ‘political’ in its wider sense.
Follower notices and accelerated payments
Considering the legal response first, it is interesting to note that Professor Stebbings’ dichotomy holds true when applied to both the follower notice and accelerated payments regime introduced by FA 2014, Pt 4 and to the employee benefit trust (EBT) loan charge regime of FA 2016.
The accelerated payments leg of the former simply shifted the economic balance in any tax dispute, in other words switching which party had the benefit of the disputed tax advantage pending a final resolution of the dispute between HMRC and the taxpayer. So in that sense this was an example of legislation to achieve an administrative necessity – that necessity being the collection of disputed tax at a time of fiscal constraint, and it was not the operation or abuse of executive equity. As such, and unlike many commentators suggested at the time, this was not retrospective legislation, it simply changed which party held the money pending the resolution of any tax dispute from the taxpayer in favour of HMRC.
Somewhat more contentious, in my view, is the follower notice regime. Not because of its essential thrust or objective, but rather in how it can be applied and, arguably abused, by the executive. Once any decision is final in a tax dispute – even a decision of the First-tier Tribunal whose decisions do not create precedent – HMRC can use that final decision as the legal basis for issuing follower notices. Here there must be an obvious temptation on the part of HMRC to pick the taxpayer whose case is the weakest or whose pockets the shallowest, and ideally both. If such a taxpayer does not appeal the decision of the First-tier Tribunal then that decision is final and allows for the issue of such notices.
‘A mad world, my masters’ indeed if our executive is becoming reliant on a strategy of the ends justifying the means for its operation of the tax system. Here, although only briefly, I must also mention the creation and modus operandi of the general anti-abuse rule (GAAR) and the GAAR panel. HMRC’s General anti-abuse rule guidance (see tinyurl.com/y65aq4qr) tells us:
‘The GAAR study group report was based on the premise that the levying of tax is the principal mechanism by which the state pays for the services and facilities that it provides for its citizens, and that all taxpayers should pay their fair share. This same premise underlies the GAAR. It therefore rejects the approach taken by the courts in a number of old cases to the effect that taxpayers are free to use their ingenuity to reduce their tax bills by any lawful means, however contrived those means might be and however far the tax consequences might differ from the real economic position.’
Again the worrying introduction of ‘fairness’ in a tax and paying one’s ‘fair share’. I am not condoning the contrived and artificial avoidance schemes that flourished for the 1970s onwards, but I am concerned when ‘tax’ is used in the same sentence as ‘fair’. There is nothing fair about taxation; it is simply one of the methods by which the state raises revenue. What is fair about a system that taxes lowly paid workers and then makes them jump through the hoops of the tax credit system to obtain a tax refund?
Employee benefit trusts
Moving on to the EBT loan charge, here one can appreciate the rationale behind the conclusions of Sir Amyas Morse further to his unprecedented review of contentious tax legislation that was about to enter into effect.
Regardless as to the ‘why’ of the Morse review, the ‘how’ can be justified from a legal perspective. Just as executive equity was found to be legally unacceptable, it was legally unacceptable to tax transactions that had taken place before the legislation intended to tax them had been passed.
Hence, post-Morse, the EBT loan charge is now only to be applied to loans made on or after 9 December 2010, the date on which the so called ‘disguised remuneration’ rules were announced. In the same way, if there was a reasonable disclosure of the use of a tax avoidance scheme to HMRC in relation to outstanding loans made in any of the tax years before 6 April 2016, the EBT loan charge will not apply.
Using an analogy to make the point, capital gains tax was first introduced in 1965, but there was never any suggestion on the part of the executive that this new tax should be retrospectively applied to gains that predated the introduction of the new tax.
A confusing conflation
Finally, and in conclusion, I shall consider the potential consequences of the recent deliberate and, in my view, extremely dangerous, conflation of tax and morality on the part of both politicians and HMRC.
Once the current pandemic is over there will doubtless be a ‘coronavirus tax’ or, as all tax practitioners love an acronym, a CVT. This would be a levy to raise revenues to replenish the Treasury’s depleted reserves.
We will doubtless also be told that the additional 5% or whatever is charged as the CVT is going to help fund various job retention or creation schemes, the NHS and perhaps also a taxable bonus or non-taxable honorarium for NHS staff. As such, the taxpaying population will be told repeatedly that it is fair to pay this CVT and that we should consider it a moral obligation to pay our taxes. But this is duplicitous and misleading. Tax has nothing to do with morality – despotic regimes also levy taxes.
The Organisation for Economic Co-operation and Development’s working definition of a tax is ‘a compulsory unrequited payment to the government’. While my suggested CVT might be laudable it is still simply a tax. In the shift towards equating paying tax with a moral duty, the executive can create an easy scapegoat of the non-compliant or, worse still, the avoider of tax. This being a person who does not do what’s right or fair, ergo they are a ‘bad person’.
This both deflects from the executive being held to account over what our taxes are actually used for and creates a climate in which the excesses of HMRC can be justified on the grounds that they are simply targeting ‘bad people’. Neither of these approaches is considered to be positive or welcome developments.
