In my blog of yesterday, I noted that tax advisers sometimes “police the line between avoidance and evasion”. When doing this, advisers are not paid out of common funds but by those who activities they police. If this reminds you of the activities of bond ratings agencies of yore, it should. And if you’re wondering whether you should feel comfortable with this state of affairs, you’re right to wonder.
Let’s take a hypothetical. I’ve simplified things a little – but not so that it matters.
X is in the business of developing tax efficient structures to sell to investors. And X has got an idea which it thinks will fly. Let’s call it the Big Idea – and assume that the effect of the Big Idea is to reduce X’s taxable income. And it wants to take it to market: i.e. sell it to corporates or individuals whose particular circumstances match what the Big Idea requires. And let me just say, for those who haven’t read yesterday’s post, there’s not, necessarily, anything wrong with the Big Idea, either legally or morally.
Before anyone will buy X’s Big Idea – before X’s clients will pay for that idea – they will want to see that the idea has been ‘blessed’ by someone external to X. Someone who has both the expertise to advice on it and a sufficient reputation that their blessing carries weight.
That someone external is not always a barrister, but let’s assume it is. The barrister will receive details of the Big Idea from X and be asked (and paid) to advise whether it works. If the barrister advises that the Big Idea does work, X can go out and sell the Big Idea to its clients.
When a client then utilises the Big Idea they fill in the tax return with their (lower) income numbers that flow from implementing the Big Idea.
Now, one of three things can happen: first, the tax return might not get checked; second, the tax return might get checked and HMRC might agree that the Big Idea works; third, the tax return might get checked and HMRC might decide that the Big Idea doesn’t work (and the courts might agree).
What about the first possibility?
You have to remember, when you file your tax return and pay your tax you’re paying the tax you think – or your advisers have told you – you are liable to pay. Not what tax you are actually liable to pay. And if you’ve participated in the Big Idea you’re going to be telling HMRC that you have less income than you would otherwise have and you’re therefore going to be paying less tax. Now, not everyone’s return gets checked. And if your return doesn’t get checked, it doesn’t matter whether the Big Idea works or not, because, either way, you’ve paid less tax.
What about the second possibility?
As as I’ve argued previously, some tax avoidance is good tax avoidance. We should be pleased when HMRC agree that it works. Some tax avoidance is bad tax avoidance and we should be displeased when HMRC agree that it works. But that’s for another day.
What about the third possibility?
I don’t, just for the moment, want to get diverted by a description of the process whereby a court might ultimately find that the Big Idea is also a Bad Idea. Let’s just assume that it has. The effect will be that you have made your return showing income of, say, 70, when, in fact, your income is, say, 170.
So you will have participated in a tax avoidance transaction and you will have under-declared your income. But you still won’t be guilty of tax evasion – you still won’t go to prison – because, in filling in your tax return, you won’t have deliberately under-declared your income. You will have relied on the advice given by the barrister.
That’s what I mean when I say that tax advisers sometimes police the line between avoidance and evasion. But perhaps the more important question is, do they invariably police it well?
The amounts of tax at stake are vast – sometimes running into billions for a single Big Idea. And the fees that can be generated for X are similarly vast. And if, as a barrister, you are prepared to ‘bless’ a Big Idea you’ll make a great friend of X – who will be very pleased to come back to you again and again for (well paid) advice. And X’s industry also knows the names of the Boys Who Can’t Say No – which in turn can drive further advisory work to your door.
So there are ‘powerful forces’ – to put the matter politely – operating in favour of saying ‘yes’. There are also powerful internal and external controls on saying ‘yes’: not least, your reputation and the inclination of insurers to indemnify you against the consequences of giving poor advice. I think most barristers at the tax bar get the balance right. But several do not.
This aspect of the tax industry has, rightly, exercised Margaret Hodge (although you should not rely on as accurate the particular individuals she has named as offenders under cover of parliamentary privilege). But, more importantly, the account given above should spark further ideas as to how one might tackle tax avoidance. In a quiet, but effective, and pro-growth sort of way. I’ll come on to those another day.
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