As I hinted in my “Prologue”, before you start to think about measures for tackling tax avoidance, you have to face up to two immediate problems. The first, which I mean to examine in this post, is ‘what do we mean by “tax avoidance”?’ The second – equally difficult and for a later post – is ‘who works out what does and doesn’t qualify?’
But let’s start with the first. And begin by clearing away some of the undergrowth.
You can very easily distinguish between tax avoidance and tax evasion. The first is commonly (and accurately) said to be “legal” and the second “illegal”. But what is meant by these terms is less well understood.
Tax evasion is, effectively, where you lie on your tax return. So you put the wrong figure in the income box, or you fail to declare income which you know you have, or you over-declare expenses or suchlike. It’s illegal and you go to prison (assuming you get caught).
Of course, most larger taxpayers – individuals or corporates – need professional advisers to determine what figures to include in the income and expenditure boxes on their tax returns. I’ll need to come back and deal with the fraught role of advisers in providing that assistance: a role which, sometimes, can be described as policing the line between avoidance and evasion. But that’s for another post.
So tax evasion out of the way, what about tax avoidance.
Tax avoidance involves none of this. You declare accurately on your tax return the income and expenses that you have. But you arrange your affairs so that you pay less tax than you might otherwise pay. So if I choose to pay money from my earnings as a barrister into my pension scheme, I will not be taxed on those earnings: the tax code encourages me to make payments into my pension scheme by enabling me to do so out of untaxed income. So I will have arranged my affairs so that I pay less tax and will have avoided tax.
Now, few people would regard this as objectionable. If the tax code offers me a reward for behaving in a certain way – because it serves some broader societal purpose such as encouraging people to save for their old age – and I behave in that way, why should I not enjoy the reward?
Moreover, if you demonise those who seek out the tax advantages given to encourage socially useful activities – I have given the example of saving for my old age but one might equally think of funnelling seed capital to small enterprises or investing in research and development or giving to charity – or you financially counteract those tax advantages you diminish or destroy government’s ability to promote or realise those (valuable) activities or objectives.
So tax avoidance is not a particularly useful concept and ‘stopping’ it is not a particularly sensible objective. Tax avoidance, too, needs to be subdivided.
And here is where things get interesting. And complex. There is a difference between, if you like, ‘good’ tax avoidance and ‘bad’ tax avoidance. That which is pro-purposive – in other words, which runs with the spirit of the legislation granting the relief – is ‘good’ tax avoidance and that which “abuses” (to borrow a term from a recent statutory attempt to counteract tax avoidance) the legislation is bad. Most judges – and indeed HMRC – would agree that we should promote the former and discourage only the latter.
But in order to identify whether tax avoidance is ‘good’ or ‘bad’ one is required to (a) formulatesome notion of what the legislation in question is trying to achieve and (b) whether the particular tax avoiding transaction offends against that objective. Although there are many instances of tax avoidance transactions where these exercises (or at least the second of them) is straightforward, there also many where they are not. I’ll return, in subsequent blog posts, to examine some consequences of these difficulties of categorisation.
But, for the moment, I want to leave you with three thoughts. First, badging a transaction as tax avoidance does not, per se, tell you a great deal about the social desirability of that transaction. Second, demonising or counteracting all tax avoidance runs the risk of undermining important social objectives. Third, badging a transaction as ‘bad’ tax avoidance is by no means a straight-forward exercise.
Apologies for commenting on an aged post, but I’ve only just come across your very interesting blog.
I agree with your logic and definitions of the categories. What I’m intrigued by is your choice of names for them:
– bad avoidance
– good avoidance.
You have clearly and, I think, pretty accurately, described the line between the two categories of “avoidance”. I therefore wonder why you feel it’s appropriate to use the umbrella term “avoidance” to cover both of them.
I prefer to use:
– planning (or similar)
This is the nomenclature that HMRC (generally!) uses, and is consistent with case law such as CIR v Willoughby. I think it gives the word “avoidance” a much more useful and powerful meaning.
This may seem like nit-picking, but I often suspect that many apologists for (“bad”) avoidance like to give planning/good avoidance a similar or the same name as what I call avoidance in order to blur the line between the categories and downplay the difference between, say, a vanilla pension contribution and Working Wheels. The aim of this, I believe, is to create resistance in voters’ minds to tackling avoidance by making them think they’re going to get their ISAs, etc, taken away next.
I realise you’re not such an apologist and that the above isn’t your agenda and this comment isn’t meant as a criticism of you. It’s just that the line in question seems to have become increasingly blurred in the public domain given the recent unprecedented (and, I think, healthy) interest being taken in tax matters. I also think confusion has increased, if anything, perhaps suggesting that the apologists referred to above have been at least partially successful. I therefore wonder whether you have any thoughts on this and whether there is any reason why you’ve chosen the category labels you have.
Thanks for your comment.
The nomenclature question has become increasingly fraught. Some commentators have sought (on a moral continuum at least) to equate evasion and ‘bad’ avoidance (see Paul Lewis who talks of “evoidance”). I guess the nomenclature you prefer depends on the particular continuum you are discussing, where you think the divides are on that continuum and what your purpose is in choosing a nomenclature.
I tend, mostly, to talk about the legal continuum and so I distinguish (with the traditionalists) between avoidance and evasion. Within avoidance, and still on the legal continuum, I see the line (as do most) as being pro- v anti-purposive (labels which are, themselves, very difficult to apply). But my purpose in choosing the nomenclature (in these blog posts) is usually trying to bring clarity. I think if one uses a label – mitigation or planning – to describe pro-purposive planning you’re really just inviting a debate about what that label means. So I try and confront the question head-on hence: ‘good’ and ‘bad’ avoidance.
Hope that’s of some interest…