Tax, Morality and Reality – Guest Post by Stephen Daly

1. Introduction

The recent debate on tax in the UK has strayed into the murky area of questioning the relevance of morality. Chair of the Public Accounts Committee Margaret Hodge has stated that exploiting the complexity of tax law to reduce tax liability is “morally reprehensible”. David Cameron meanwhile recently voiced the opinion that there is a “moral duty” to cut taxes in order to allow people to spend more money on their families. What has perhaps been overlooked in relation to these assertions is that philosophers and jurisprudes for centuries have struggled to understand not only what influence morality has on the law, but also what influence it ought to have. As such, it appears unlikely that there will be a speedy resolution to the debate about tax law and morality.

Leaving aside the issue of what part morality ought to play vis-à-vis reducing tax bills; it is interesting to note that in certain circumstances there is no rigid figure as to the tax which must be collected by HMRC. Taxpayers may find their tax bills to be less than that which is strictly owed under the law, without resorting to the use of ‘gimmicks’ or abuse of reliefs. Accordingly, the tax which is raised from taxpayers is relative in the sense that it may legitimately be less than the amount Parliament has stipulated and this generally arises in two instances: first, where the law is fuzzy and second, where the law cannot practically be applied. The thesis of this post is that this relativeness is likely to play a more substantial role in the collection of tax than morality.

2. Theory of relativeness

To explain this relativeness, it is worth recalling that HMRC’s primary duty is to collect and manage taxes and credits (Commissioners for Revenue and Customs Act 2005, s. 5). Within this duty, however, there is a wide managerial discretion:

“In the exercise of these functions the board have a wide managerial discretion as to the best means of obtaining for the national exchequer from the taxes committed to their charge, the highest net return that is practicable having regard to the staff available to them and the cost of collection” (R v IRC, ex parte National Federation of Self-Employed and Small Businesses [1982] AC 617 (HL), at p. 637 (Lord Diplock))

This discretion however is limited to an extent:

“It does not justify construing the power so widely as to enable the commissioners to concede… an allowance which Parliament could have granted but did not grant” (R v HMRC, ex parte Wilkinson [2005] UKHL 30, para. 21 (Lord Hoffmann))

Taken to its logical conclusion, so long as the Revenue does not contradict the intention of Parliament, this discretion permits the use of cost-benefit analysis:

“In particular the [R]evenue is entitled to apply a cost-benefit analysis to its duty of management and in particular, against the return thereby likely to be foregone, to weigh the costs which it would be likely to save as a result of a concession which cuts away an area of complexity or likely dispute” (R (Davies and another) v Revenue and Customs Comrs; R (Gaines-Cooper) v Same [2011] UKSC 47, para 26 (Lord Wilson))

As a result of this discretion and legitimated use of cost-benefit analysis, HMRC is entitled to collect less tax than might be strictly due under the law. Thus, in the case of complex or fuzzy law where it is unclear as to the true amount of tax which is due, HMRC are empowered to arrive at a working interpretation which objectively satisfies the will of Parliament and in their opinion would raise the greatest amount of money in relation to that tax, over the course of all taxpayers. This same principle applies where the law itself is clear but would be impractical or unworkable in a certain set of circumstances. Where this arises, the Courts have found time and time again that it is proper for HMRC to forego the full collection of tax, so long as it is done with a view to raising the greatest amount of money for the exchequer overall. By focusing on morality in the tax system then, we ignore the other factors that in practice have a greater impact on how HMRC collect tax and how much tax they collect.

3. Application of relativeness

As this discretion is contained within the fundamental duty of HMRC, it pervades much of what they do. Three instances of the corresponding relative nature of tax appear especially pertinent to the differentiation between tax collection in practice and the normative collection of tax. The amount raised from settlements need not be the true figure which is prescribed as due under the law. Likewise, the decision to take or not take test cases rests solely with HMRC. This decision pivots on analysis of the benefit and likelihood of success rather than the desire to clarify law where it is unclear. HMRC may similarly spread their resources for the everyday collection of tax in a manner which would not collect all that is strictly payable. In each of these cases, what ought to happen is at conflict with what actually happens.

A) Settlements

One of the most controversial elements of tax collection in recent years has been the negotiation of settlements with large businesses. Sir Andrew Park, former High Court Judge and perhaps the most widely respected Tax Silk of his day, was commissioned to investigate HMRC’s conduct in relation to large settlements. Ultimately, the report concluded that the 5 settlements examined were ‘reasonable’ in terms of fair value for the Exchequer and public interest. As to the parameters of ‘reasonableness’, the report further provided as follows:

“[Reasonableness] included considering whether the settlement was as good as or better than the outcome that might be expected from litigation, considering the risks, uncertainties, costs and timescale of litigation” (Park Report, p. 5)

These cases concerned a complex smorgasbord of issues and must be held against the backdrop of resource constraints. It is for this reason that the question of reasonableness was resolved, not on the basis of what is due under the law, but on the basis of what might be gained from litigation. This is strictly what the exercise of managerial discretion requires (although the revised ‘Litigation and Settlement Strategy’ somewhat circumscribes HMRC’s power).

More generally, this report provides an insight as to the way HMRC may go about settling cases and litigation. Where the law is unclear and the litigation of the case would not be cost-beneficial, HMRC may arrive at a settlement for tax, below that which might be strictly due. The cost-benefit analysis is further engaged by the fact that, on their table, HMRC have a backlog of cases to get through. In other words, HMRC must look at the entire catalogue of disputed cases, given that the resources must be stretched across all, and will be entitled therein to settle for less than the true amount in any individual case, provided this is done so as to obtain what in their view is the highest net practicable return. Further depletion of resources or further increase in complexity will necessitate prudent decisions on HMRC’s part which will be strictly at odds with what the particular legislative provisions will require.

What HMRC have done in practice however, with the revised ‘Litigation and Settlement Strategy’ (‘LSS’), is further constrained this authority. The binary framework of the LSS, which facially proceeds on an all or nothing basis, delimits HMRC’s discretion and overlooks the relativeness of the tax due. As this was a managerial decision to put the LSS system in place, it would be interesting to see empirically whether or not it in fact raises a greater amount of tax than would occur in its absence.

B) Test Cases

As regards test cases, the managerial discretion ensures that much deference is given to HMRC as to what cases they choose or do not choose to pursue. Put another way, the decision to take test cases rests solely with HMRC. To this end, accusations that HMRC have ‘picked’ on certain taxpayers have fallen on deaf ears.

As with the jurisdiction in relation to settlements, HMRC is entitled when deciding which cases to pursue to take account of the legal advice as to the chance of success, which in turn is balanced against any likely return. The more unclear the law is, the greater the return must be from a successful outing in order to justify taking a test case forward. Further, test cases do not arise in a vacuum and HMRC must decide which ones to contest, given the lack of resources to take every case. Where they do not pursue taxpayers for amounts which might in fact be due under the law, liabilities to the law remain but are unenforced. This is a far cry from the normative world in which all tax liability is collected.

C) Collection

It is perhaps in the everyday collection of tax where managerial discretion is most engaged. HMRC must make decisions as to the allocation of scarce resources. To this end, the use of risk assessment is legitimated. Through this process, HMRC analyses various sources of information in order to obtain a view as to the risk of non-compliance. Less time and fewer resources are dedicated to low-risk taxpayers whilst more time and a greater amount of resources are expended on high-risk taxpayers. This categorisation diverges from the law in that it does not indicate whether any taxpayer has actually conflicted with the law but rather focuses on the statistical likelihood of non-compliance.

HMRC is also justified in putting systems in place to ensure future compliance with the law, which might result in less tax than due being collected. A notable example of this is the Fleet Street Casuals case, wherein the Revenue legally refrained from collecting all tax that was historically due (which was estimated to be in the range of £1mil per annum over a number of years) in return for the assurance of future compliance. What prevented the Revenue from opening investigations into the historical evasion was the combination of the unknown return to be obtained from expending resources and the threat of industrial action. The latter in particular would have compromised the possibility of future compliance. This case serves to highlight that HMRC are entitled to compromise on what the law might require so long as mechanisms are put in place to ensure future compliance. Bespoke sector specific agreements, such as Flat Rate Expense Allowances relating to Airline pilots, are justified on this basis.

Ultimately, HMRC is entitled to make decisions, which are pragmatic in their opinion, as to how to go about the everyday collection of taxes. The fact that many resources would be expended in seeking to ascertain and collect the full amount of tax due under the law in fact justifies compromising on the law:

“There will often have been… some “horse-trading” that has led, for good and practical reasons, to some departure from the strict requirements of the taxing statutes” (R (Bamber) v HMRC [2005] EWHC 3221, para. 48 (Lindsay J))

4. Conclusion

Whilst morality will continue to cause debate as to its proper relevance in relation to tax, the relative nature of tax itself provides an interesting problem which is often overlooked. We often ignore the factors that in practice are more likely to influence how HMRC operate. Settlements, everyday collection strategies and the (non) pursuit of test cases are but some of the pertinent ramifications of this relativeness. With the continuing reduction in resources and the increasing layering of complexity in tax law, this issue is set only to become more important. Should we not then be as, if not more, concerned with reality than morality?


Stephen Daly is a PhD candidate at the University of Oxford and blogs regularly at

Follow him on twitter at @SteveLincolnOx

13 thoughts on “Tax, Morality and Reality – Guest Post by Stephen Daly

  1. Clearly there is room for a moral component to taxation, like any other human behaviour. HMRC is charged with collecting the revenues that the state needs to provide the public goods and services that we as a nation have decided we want; to create the infrastructure of the society that provides the opportunity to earn income or profits, to make gains, to acquire goods and services, with a police force and courts and all the other machinery of the modern state.

    However, the process of collecting taxes must be governed by law. Without the rule of law, taxation turns into confiscation governed by executive discretion. What is a fair amount of tax for a taxpayer to pay, if not that amount that the law requires? If not that amount, how else should we determine what is “fair”? Whose moral principles should we apply, and who adjudicates?

    Is there a moral duty to pay more tax than the law requires? If so, how much? Is there ever a moral duty on HMRC to collect less tax than the law requires? (Which is a slightly different question to HMRC taking a commercial decision to maximise the overall tax take by compromising with specific taxpayers: in settling a legal case, both parties are taking a view on whether they might win or lose in court, and how much time and trouble it will take to win the case.)

  2. Some very astute questions and points. Tony Honore (Tony Honoré “The Dependence of Morality on Law” in Oxford Journal of Legal Studies vol 13, no 1 
    (1993)) has dealt with many of those moral questions much better and more concisely than I ever could! Very nice point about the difference between what role morality plays and what in reality HMRC take account of in settling cases

  3. If there is room for a moral component to tax, how far does it extend? If the moral argument is that tax provides the infrastructure, police, NHS etc that enables people to earn profits or income where does that morally leave (say) a professional footballer who may have left school at 16 and now makes use of private services for all his and his families needs. Is it a ‘moral duty’ that he contributes massively more than individuals who contribute little or nothing yet receive more from the state?

    Does the state owe the footballer a moral duty to pay him more in benefits if his career collapses through injury and he is suddenly earning nothing having contrbuted millions?

    Do I get a ‘moral’ tax opt-out if the government spends money on war and I am morally opposed to that?

    Is there a moral duty on the government not to contstantly change tax laws so that someone doing the same in consequtive years can have wildly different tax outcomes?

    Is it moral that having for decades had a system of NI that rewarded higher contributions with higher state pensions that this link is being rapidly dismantled?

    The UK’s former legislation for the attribution of gains to participators in non-resident companies has very recently been found to be against EU law. Will there be howls of protest from tax moralists that HMRC should be forced to pay penalties TO taxpayers wronged by this? Or future similar situations? Or will tax & interest suffice?

    Seems to me the ‘morals’ only ever work in one direction and the moral dimension has only been introduced now HMG is desperate for money. That isn’t morality in my view but hypocrisy.

  4. Are you suggesting, Andrew, that behaviour and decisions in relation to tax are – indeed should be – entirely divorced from morality? Or perhaps that HMRC needs more morality?

  5. Morality and Tax.Phew!!!Is there any morality in HMRC selectively and secretly reaching “compromises” more accurately preferential treatment to certain individual taxpayers and business whereby those parties are excused from their liabilities.This in turn means that other taxpayers must make up the shortfalls caused by the aforementioned “compromises”.
    Please find the morality!!!!!!!!!!!!!

  6. Hi James,

    Putting it as you do there is clearly no morality in such settlements. But there is another way one might reasonably think about it – which is that there is very real doubt about the existence or amount of certain liabilities, that fighting on (in such circumstances) could actually reduce the amount of tax that is collected, and (in a small minority of cases) might be unfair on taxpayers who have done nothing wrong.

    I don’t think that anyone could support secretive, backroom, sweetheart deals. But those are not the only deals that might be done!

    Thanks for engaging


  7. Hi Andrew,

    First, the idea of justifying taxes on the basis of what the money raised will be used to do, has been a logic I have struggled with and I’ve written (briefly) about here- I think it would be preferable for us to think about the genesis of the money on which tax is levied, rather than on the result of the spending of said tax. So for your example, the tax a footballer pays would be justified on the basis, not as a payment for services which she might not use, but rather on the basis of the fact that the footballer would not be paid so much if it weren’t for the particular legal, economic, social, cultural system in which she plays.

    Second, you raise an interesting point in relation to the volume of noise in relation to the tax debate. Indeed, historically, it is notable that there is a cultural shift against tax avoidance/abuse/planning/mitigation etc in times when the Exchequer is short of money owing to economic circumstances. Look, for instance, at court judgments in the postwar eras


  8. Hi James,

    I think Joylon has very aptly dealt with your points.


  9. Pingback: Tax, Morality and Reality | taxatlincolnox

  10. I am coming late to this interesting blog. I concur with the legal analysis and reminding us that HMRC is in the business of bringing in the money within the boundaries of statute and case law. But I wonder if it is worth looking at some other areas of interest, with some focus on how regulatory authorities operate, and where morality and tax have entered the debate on HMRC’s activities.
    To begin with, I think the term “collecting” tax is perhaps too much a portmanteau term, for it sweeps up a range of discrete but connected activities. In one sense, and at the highest level of abstraction, HMRC “collects” the taxes and duties owing under the law. But, in practice, the vast bulk of taxes and duties are collected and paid over by employers (PAYE and NICs) and traders (VAT). Most other self-assessed taxes (corporation tax and income tax self assessment) are voluntarily paid over, often with the help of professional agents who prepare accounts and computations.
    This leaves about £20bn out of £506bn (last year) that is derived from a range of HMRC interventions. Those interventions “collect” tax (albeit not always cash up front) from a programme of risk assessments, calibrated responses, and a relatively small number of enquires. And an even smaller number of those enquiries will require HMRC to consider the terms on which to end them so as to maximise the tax “collected”. This need not be just the basis for a particular dispute but things like how many (any) earlier periods that might need to be included, the tax affairs of connected persons or close company directors, and so on.
    The common thread in all this activity is for HMRC to balance its resources against what it expects to get for employing them. Care and management are integral to all of this, not just to that small number of cases where the LSS might be invoked. (It is worth noting that HMRC is bound by legislation and administrative law over and above the Taxes Acts. So it may be that the LSS is not an exercise in self- limitation but a sensible way of ensuring that its policies on settling cases are not vulnerable to challenge by way of judicial review.)
    In all this activity HMRC operates as probably do most large organisations – there is no specific reference to morality, even if there are comments about fair shares and the like. Indeed, in the case of tax there is judicial support that you do not look for a moral purposes in tax legislation. You apply ordinary rules of statutory construction, and may even refer specifically to Parliament’s intention’s (including Parliamentary debate, as in Pepper v Hart on the value of discounted school fees).
    Admittedly, when discussing the Tax Gap, HMRC invokes not ‘morality’ but perhaps its distant relation or second cousin in the “spirit of the law”. (It will be rare to have this apply against HMRC and in favour of the taxpayer, although I can recall (unsuccessful) representations to this effect.) Not all tax professionals and lawyers are convinced that the spirit can be so constrained and invoked!
    So I think the really interesting question is how has the debate changed recently. From what I have seen the new focus is not on HMRC acting morally but on what a range of bodies, politicians and ordinary people see as “immoral” conduct by some (a minority of ) tax professionals, and some (a minority) businesses (mostly large). Margaret Hodge famously told Matt Brittin that Google was acting immorally, it was doing evil. The critique of HMRC is that, at worst, it has become too close to the (large) businesses it deals with or, at best, lacks a moral compass and drive to tackle non-compliance.
    Most tax professionals I know are very wary of ascribing moral agency to taxes, HMRC or businesses. They are probably more comfortable in accepting the concept of values which are overt, documented and against which actions can be judged. As Rebecca Benneyworth mentioned at Jolyon’s recent Hardman Lecture the professional accountancy Institutes already have codes of conduct in this area. So perhaps someone can take forward this blog by giving Jolyon one on whether these standards, or HMRC’s Charter are sufficient?

  11. Hi Iain, thanks for this. A very detailed and thought provoking response. In fact, I agree entirely with what you say. Just to pick up a few points. First ‘collection’ is, you are correct, a portmanteau term. In my post, I should have properly cited the legal provision which actually reads ‘collection and management’, which itself is derived from the original ‘care and management’ provisions which can be found in the earliest acts governing the (then constituent components of HMRC) Inland Revenue and Customs & Excise. It is essential to remember, and point out as you do, that management is a very important term here. This idea of management/’care and management’ is synonymous with managerial discretion and perhaps I should have stressed that more clearly. Second, relatedly, this managerial discretion pervades the entirety of what HMRC do, and not just the LSS. I tried to emphasise this in the piece and the LSS, test cases and everyday collection, were supposed just to be three case studies where the discretion is most visible. Third, I would agree with your interpretation of the LSS as being a way of delimiting the potential for judicial review. What I tried to point out in the piece is that it is not actually aligned with HMRC’s potential discretion. For this reason, I think in fact, it is open to judicial review on the basis that it unduly ‘fetters’ HMRC’s discretion. Moreover, I don’t think that it actually achieves the greatest net practicable amount for the exchequer (which as I’ve said must be their goal when exercising discretion-see: Fleet Street Casuals; Wilkinson etc). If we accept that there are not binary answers in complex cases, then constraining themselves to an all-or-nothing interpretation is arguably irrational (in Public Law terms). Put another way, it is irrational to refuse to accept anything, when you could legitimately take half! (I will be investigating the LSS in more detail in my thesis!) Fourth, the ‘morality’ introduction was really just that: an introduction. But I think you pick up on quite an important point there when you say

    “From what I have seen the new focus is not on HMRC acting morally but on what a range of bodies, politicians and ordinary people see as “immoral” conduct by some (a minority of ) tax professionals, and some (a minority) businesses (mostly large)”.

    My trouble with this is not that people are talking about morality (I am delighted that there is public discourse on tax). My trouble with this is that people are talking past eachother. The debate seems to be somewhat at cross purposes. When this is the case, it is far too easy for the people with actual power to effecutate change to side-step the issues. The “morality pressure valve” is nothing new. It raises its head in times of economic crisis-just look historically at shifting attitudes to tax avoidance evidenced in court judgments, starting with Duke of Westminster, through Ramsay up to Eclipse today. What I fear is that the pressure will be released when times get better. When that occurs, nothing will have in reality changed as the people with actual power will have evaded any responsibility for long-term change.

  12. “So for your example, the tax a footballer pays would be justified on the basis, not as a payment for services which she might not use, but rather on the basis of the fact that the footballer would not be paid so much if it weren’t for the particular legal, economic, social, cultural system in which she plays.”

    It’s an argument and perhaps a valid one but if it is a valid one, what then of a pop star based in Britain who through the vagaries of the music industry is wildly popular only in Japan? Or a UK author writing books that only Americans like and buy?

    Should they pay less tax in the UK as they owe less to the ‘systems’ in the UK?

    The answer always seems to be ‘no’ to such questions.

    As I say, these moral arguments only ever seem to work in one direction, to justify more tax moving toward to coffers of the state.

    (Finnaly, and as an example of the cultural shift, I recall Ken Dodd getting extra laughs when he worked his acquittal on tax evasion charges into his act in 1989/90 while of course Jimmy Carr got booed after his case much more recently – and since you (Stephen/Jolyon) are more likely to be lecturing on tax and morality than I, do feel free to use the expression “the Dodd/Carr cultural shift paradigm” in your next talk)

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