The Uses of Morality in Tax

Walk down the street today and eight people out of every ten you ask will tell you that, at the moment, it’s all too easy for multinationals in the UK to avoid paying tax. That’s what a recent ComRes Poll for Christian Aid says. The poll goes on to observe that eight and a half out of ten individuals regard it as unfair that they have to pay their taxes whilst multinationals seem to avoid having to pay theirs. But only one and a half would agree that the fact multinationals are acting within the law means there’s no moral issue at stake.

What use can we make of these data, those of us who work in the tax arena? Is it enough to adopt the position that, as for example Prof Judith Freedman has argued, tax is uniquely an arena in which there is no place for morality. As she puts it: “how much tax should be paid is not a question of moral intuition but a question of what is imposed by law.”

To find the answer to this question, it seems to me, one must start with the “we”. Different groups of people – advisers, businesses, investors, consumers, voters, policy makers – all consider the moral aspect of taxation. But all in different ways.

But before turning to consider the uses made of morality by these different participants in the debate around the relationship between tax and morality, it might just be useful to start with a truism: that which is legal isn’t always moral. Discrimination on the grounds of “colour” (to use the language of the Act) did not become immoral only on 8 December 1965 when the first Race Relations Act received Royal Assent.

I start with that truism because it is only if we lose sight of it that we can regard the question ‘Does XCo wrongly avoid tax?’ as properly addressed by the response ‘XCo complies with all relevant tax laws in all the jurisdictions in which it operates’. It is only if one loses sight of it, too, that one can conclude (against the evidence – which I shall go on to discuss) that there is no use to which morality can be put.

What of us, the advisers? What part does morality play when we exercise that function?  No one, you may well say, comes to a tax adviser for a homily. We lack – most of us, anyway (Mike Truman ‘Emeritus’ Editor of ‘Taxation’ is a Licensed Lay Minister) – the qualifications. What we provide is a pure technical view: the tax result produced by a transaction.

However, even this, the apparently easiest of statements elides a number of difficulties. Advising a client as to his prospects of succeeding in litigation, I would be heavily influenced by my assessment of whether his use of a particular relief was pro- or anti-purposive. That technical assessment of prospects would map closely to my view of the morality of a transaction that accesses a relief provided for by Parliament. And not only mine: as I have observed elsewhere, “Judges do occasionally articulate their instinct to fairness against the grain of legislation”. Or as Graham Aaronson QC put the matter in his Report of the GAAR Study Group: “Judges inevitably are faced with the temptation to stretch the interpretation, so far as possible, to achieve a sensible result.”

As a litigator, I try to assess whether the way in which a judge might be persuaded to view the tax effect of a particular transaction will be regarded by her as “sensible”. That assessment, too, often maps closely to my assessment of the morality of that effect. And the task before me if I am advising pre-transaction is an identical task. It is only if I assess a judge as likely to agree with my view as to how the law applies to particular set of facts that I can advise a client that my view is ‘right’.

However, to focus on the narrowest and most technical aspect of an adviser’s function is to risk ignoring the broader reality. Most of my clients want more than a mere technical assessment. They also want assistance in assessing reputational risks. But I can more easily address that facet of the debate around tax and morality if I wear another hat: that of the CEO.

It is a commonplace that reputational issues are of increasing concern to businesses. Three quarters of CEOs surveyed by PWC agreed it was important that their company was seen to be paying its ‘fair share’ of tax. And four-fifths said that tax was moving up the corporate agenda.  What is particularly revealing about this analysis is that CEOs, like individuals surveyed by ComRes for Christian Aid, understand that the debate about good tax practice has moved beyond achieving mere compliance with rules which no longer work as they should. In that PWC survey, 65% of CEOs recognised that “the international tax system hasn’t changed to reflect the way multinationals do business today.” That sophisticated participants such as CEOs, too, hold these perceptions should stand as counterweight to any temptation to disregard the results of the ComRes survey as merely the product of public ignorance.

Why should businesses hold these views? There is a variety of, on analysis, discrete concerns. Not all will be present for all types of businesses. But they all tend in the same direction.

Businesses – and especially those doing or hoping to do business with Government – often regard the retention of a Low Risk rating with HMRC as of value. I am aware of instances where clients have chosen not to litigate cases, even cases entirely outside the avoidance sphere, because of a perception that to litigate would jeopardise that rating. And in the avoidance sphere Government has, of course, explicitly encouraged this tendency through its procurement policy.

But there are far from the only points at which tax and morality intersect for those running businesses. The effects of the rise and rise of the Corporate Social Responsibility agenda on tax behaviour have been magnified by an increasing public interest in tax.  These two distinct features have created obvious challenges for, in particular, consumer facing businesses.

But what of B2B operations? These are, of course, less susceptible of consumer boycotts and, it is fair to say, can enjoy aquiet the fiscal fruits of that type of planning the merits of which can be expressed simply as ‘lawful’. But not too fast. We can all think of a particular professional services firm which has become the unwitting – and many would say undeserved – poster-child for particular types of tax planning involving one of the smaller members of the European family.

Moreover, management’s stance on tax is plainly a matter of concern to institutional investors. On 4 November 2014 the Financial Times carried a terrific piece ‘Aggressive Tax Avoidance Troubles Large Investors’ revealing the tax concerns of institutional investors. These funds are concerned at the reputational impact for them of investing in companies with “aggressive” tax policies and they are concerned at the sustainability of the post-tax profits those policies deliver. The conjoint effect of those concerns is that certain fund managers regard a disclosed low tax rate as an investment red flag.

If, as the Financial Times argues, we do reach a point where the post-tax income gains of certain types of tax planning come to be appreciated by business owners as delivering a negative hit to the capital value of their businesses then us advisers really are going to need to expand our skill-sets

For the consumer, the equation is a simple one. The ComRes poll reveals that a quarter of consumers are currently boycotting a company because they perceive it not to be paying its fair share of tax in the UK. And two fifths of consumers are considering doing so. And we don’t need to take the commercial effects of these actions on trust. A recent study for the Oxford Centre for Business Taxation found that:

The evidence suggests that the public scrutiny sufficiently changed the costs and benefits of tax avoidance such that tax expense increased for scrutinized firms. The results suggest that public pressure from outside activist groups can exert a significant influence on the behavior of large publicly-traded firms.

As to voters, there is no doubt that it is the perception of politicians that tax policy is a voting issue. Labour has sought to place public perceptions of Tory tax policy at the heart of the pre-election debate. The Conservatives have responded with measures to tackle tax avoidance by multinationals that have those (remarkably) right across the political spectrum crying that they go too far. Someone has got this political assessment wrong: either the tax commentariat or George Osborne. I know who my money’s on.

Standing back, what does all of this tell us about the question I started by posing? What are the uses of morality in tax? There is, of course, much truth in the notion that morality cannot fix one’s legal liability to pay tax. However, as I have sought to show, that truth is not an absolute one: morality is not irrelevant to the determination of one’s legal liability. And perhaps more important still: it is clearly the case that morality cannot be ignored in determining how much tax it is in one’s self-interest to pay.

The consequences of this discovery pose particular challenges to advisers. We can expect increasingly to be asked the question, ‘what tax should I pay’? This will take many of us into unfamiliar territory.

Morality has its uses. (Forgive me if I interrupt the argument to note that is an assertion you are unlikely to encounter outside the pages of this post.) But as a tool for delivering tax outcomes it is highly imperfect: subjective, imprecise, and enforceable indirectly at best. We should be able to do better.

At the Second Reading of the Race Relations Bill Peter, later Baron, Thorneycroft, argued that one should not legislate against discrimination on the grounds of “colour”; it was too soon. As he put it, “The British people can be led, but they cannot be driven.”

He was right albeit only in the narrowest sense. That there be a relationship between law and morality is a basic requirement of the law. The law becomes difficult to enforce if it is too advanced of morality: this was the Baron’s contention. However, the law falls into disrepair where it fails to keep pace with changing mores. And that, Dear Reader, is what we have here.

Plus ça change for the poorest? Guest post by John Andrews.

When you get to my advanced years, time seems to gallop rather more quickly than it used to. So it was with some surprise that when I was hunting for something I wrote “a few years ago” I found that it was, in fact, over 10 years ago.

I was, at that time, commenting upon morality in tax, because in January 2003 the Chairman of the Inland Revenue had made two observations during one speech which had made me wonder about the breadth of this subject.

Firstly he had said:

The link between taxes and the social goods that would be impossible without them is the very foundation of tax morality and cannot be stated too often

And secondly he added:

the heart of [the Revenue’s] business is to ensure that everyone understands and pays what they owe and understands and receives what they are entitled to…In the Revenue we believe that we are leading the way in public service reform precisely because we are putting the consumer first.

I don’t wish to step into the general tax morality debate which has enough heat without my “tuppence-worth”, suffice to say that after all these years we may be closer to consensus on the problems, but still some way away from solutions.

I also fear that the Revenue’s “lead” in the last dozen years has not yet led them to the moral high ground of actually ensuring that “everyone understands and pays what they owe and understands and receives what they are entitled to”. And the people who suffer most from this Revenue failure are those who are unrepresented and even more so, if they have particular vulnerabilities.

It still seems to me that the legislation which gets produced the quickest is that dealing with avoidance; the policy which gets pored over most often relates to the big battalions; the information which gets updated first and most accurately on GOV.UK is that dealing with issues which raise revenue rather than those which explain reliefs, particularly for those on the lowest incomes.

So how moral is it for HMRC, year after year, to reluctantly give up on the task of trying to explain the convoluted law that they helped bring into existence, to those that need to know in a format that they can understand? Always the excuse is lack of resources. But I might put it another way, a lack of balanced priorities and a real determination to make a step change.

One suspects that, for the next few years of austerity, the political pressures on HMRC will mean that the vulnerable, be they tax credits recipients, or pensioners or the struggling self-employed may receive the “taxman’s response” that LITRG identified back in 1999:

I sent a message to the fish:
I told them ‘this is what I wish’.

The little fishes of the sea,
They sent an answer back to me.

The little fishes’ answer was
‘We cannot do it, Sir, because –’

[Lewis Carroll, Alice Through the Looking Glass]

The tax charities, Low Incomes Tax Reform Group, TaxAid and Tax Help for Older People have done their best over the years to bring issues of fairness to HMRC’s attention and to ask them to get the Revenue heart in the right place. And sometimes you do hear it beat, but then an emergency “avoidance” issue jumps the queue in the tax equivalent of A&E.

So that is why the face-to-face charities of TaxAid and Tax Help for Older People need our support either as volunteers or as donors of cash.

They have just started a joint campaign, which will get more momentum in the New Year, but while you are thinking of Christmas could I encourage you to make a donation via

Knowing well the two organisations concerned I can confirm your gift will not be wasted.

John Andrews


(founder of the Low Incomes Tax Reform Group).

Editor’s Note. I am thrilled to be able to carry this post from John Andrews, OBE who is our profession’s most unsung of heroes. I have benefited, financially and otherwise, from my involvement in our profession and have accepted John’s invitation to give something back. I would encourage you to do so too.

Risk-mining the public exchequer: some follow-up points. Guest post by David Quentin


A few months ago I published a discussion paper called Risk-mining the public exchequer, the thesis of which breaks down, in summary, into these two propositions:

  • The distinguishing feature of “tax avoidance”, as a taxpayer behaviour to be contrasted with “legitimate” tax planning, is the deliberate creation or introduction of tax risk (e. the risk that you might owe more tax than you say you owe).
  • The opprobrium attaching to the label “tax avoidance” is applicable in the circumstances of deliberately-introduced tax risk, because introducing a tax risk factor in order to assess yourself to fall on the right side of it is to create the possibility of underpaying your tax.

I need to stress at the outset (to forestall a common misunderstanding) that merely adopting an uncertain filing position is not enough to constitute tax avoidance in my analysis. Risk-mining the public exchequer (which is the name I give to tax avoidance as defined in my paper) is a two-stage process: you deliberately introduce a tax risk factor in the way you arrange your affairs, and then you subsequently assess yourself to fall on the right side of it. Any adoption of an uncertain filing position could be said to create tax risk, but that tax risk is only deliberately created for the purposes of my analysis if the risk factor in question was introduced into the taxpayer’s affairs pursuant to deliberate prior tax planning.

Jolyon has very kindly invited me to write further on the subject on his blog, since a guest blogger of his has addressed it below, and I thought I would also take the opportunity to pick up some points raised elsewhere.


An assumption that my paper relies on is that tax planning (whether or not it amounts to “tax avoidance” by whatever definition) is a discrete and identifiable input into the eventual form that a transaction or a business structure takes. I did not expect this to be a controversial assumption, and I have never known it to be challenged in circumstances where tax planning is said to merge indistinctly into tax avoidance in that one-dimensional continuum of increasing taxpayer aggression that one so often hears about.

What I do in my paper is plot that one-dimensional continuum (expressed in terms of amount of tax said to be saved) onto a two-dimensional graph with filing position certainty on the other axis, and show that what is supposed to be an undistinguished linear continuum in fact has a distinct kink in it where the “legitimate” planning stops and the avoidance starts. Since this challenges the conventional idea that tax avoidance cannot be objectively distinguished from “legitimate” tax planning, it has caused some to wonder if the entire category of tax planning (at whatever degree of aggression) can really be said to have an objective real-world referent, distinct from the other inputs into the form of business transactions and structures.

One such post-structuralist is Iain Campbell, who wrote up his thoughtful and very welcome response to my paper in a comment on Andrew Jackson’s “Render Unto Caesar” blog here. “Where” Iain asks “is the evidence the structure was put in place, not from commercial/business considerations, but from acting in accordance with tax advice that created [tax] risks?”

I should emphasise that my paper was a theoretical one; it does not make any practical recommendations. If it were proposed, however, that my theoretical definition of tax avoidance be converted into a real-world legal test to be applied in a forensic context (for example as a component of a penalty regime in circumstances where a taxpayer is found to fall foul of his or her own deliberately inserted tax risk) then Iain’s question would be an extremely pertinent one. By way of answer, I would suggest that the evidence will probably be on a server farm in someone’s virtual filing system.

I say this because, in internal communications regarding a proposed transaction or business structure, the tax planning input almost always emanates from either an internal tax function or an external adviser with a specific remit to advise on tax, and it therefore flags itself up as such. Business decisions are taken by business people who take into account all relevant factors (of which tax will be one), and so their motives or purposes can be hard to unpick with clarity, but the content of the tax advice they are relying on should be discernible by reference to the documentary record. Indeed if it isn’t then someone somewhere has probably been negligent.

Iain asks (with reference to the example of Google’s UK tax structuring) “if the act of providing goods or services cross-border creates a tax risk, does that arise from following tax advice, or from the commercial decision?” It seems to me the question is probably best analysed as breaking down into two components: (1) what was the content of the actual documented tax advice insofar as it tracks through to the actual eventual form of the transaction or structure, and (2) did adopting that tax advice increase tax risk or introduce tax risk factors as compared with the form the transaction or structure would otherwise have taken? Clearly as bystanders without access to the full documentary record we can’t answer these two questions, but I agree that we would need to feel that they are capable of being answered if we want to apply my definition in practice.


The main purpose, or one of the main purposes, of my paper was to correct the (more-or-less ubiquitous, but false) perception that the effect of tax avoidance is to reduce the amount of tax legally payable. This ignores the fact that some tax avoidance (and it is not possible to say as at the point of self-assessment which tax avoidance) goes on to be found by the courts to fail. And tax avoidance doesn’t just fail where it falls foul of anti-avoidance law: tax avoidance can fail by falling foul of any risk factor that it introduces, whether the risk factor be to do with the law, the facts, the accounting assumptions, the mechanical effectiveness of the implementation, the valuation of an asset, whatever. And if the tax avoidance is found by the courts to be ineffective then the tax avoider turns out to have assessed itself as owing less tax than turns out to have been legally payable. The tax reduction was not “legal”; it was a figment of the taxpayer’s imagination. By my definition, therefore, “tax avoidance” means any tax planning in which there is a risk that the saving that the planning is said to yield turns out to have been imaginary.

The avoidance apologist will counter that there is nothing wrong with the taxpayer claiming the benefit of imaginary tax savings; the law is uncertain and the tax avoider cannot be blamed for having wrongly applied it to its position. The flaw in this argument is that it was the taxpayer itself who introduced the risk factor in question, as part of its tax planning. If you have understated your tax liability by (a) deliberately introducing a tax risk factor and then (b) wrongly assessing yourself to fall on the right side of it, the fact that tax risk factors arise naturally does not protect you from opprobrium. The risk factor in question was artificial. It would not have been there were it not for the deliberate prior act of tax risk creation.

It is for this reason that I have always thought the business sector’s constant calls for “certainty” in tax law to be deeply bogus. In a world of infinite possibility but finite tax law, there will never be certainty of treatment in all circumstances, and tax law is no more to blame for seeking to apply its distinctions to commercial reality as commercial reality is to blame for coming too close to those distinctions. No, what the corporate sector seems to me to be calling for when it calls for “certainty” in tax law is something more specific than that. The rhetoric about “certainty” always seems to me to be specifically about certainty in tax planning. The business sector likes the savings that tax planning delivers but doesn’t like the risk of those savings being challenged by HMRC and found not to exist.

I am happy to announce that I feel richly vindicated in this scepticism about the business sector’s habitual rhetoric on certainty by Jason Piper’s quietly radical recent paper Certainty in Tax, which acknowledges that aggressive tax avoidance is an extreme form of risk-creation, and that any deliberate creation of risk for the public exchequer is “open to censure”. What struck me most about Jason’s excellent paper, since he was writing in his formal capacity with the Association of Chartered Certified Accountants, was this sentence from its conclusion:

Tax systems should be designed so as to minimise unfair outcomes – but if the ‘fairness’ of tax certainty led to economic stagnation then that would be too high a price to pay.

If business sector organisations are starting to acknowledge that deliberate risk-creation is a necessary component of the tax savings that business is accustomed to obtaining, are they starting to tone down their rhetoric about the absolute desirability of “certainty”? It would appear so. This is a far more startling development than Jason’s measured and unassuming prose would suggest.

There is one aspect of Jason’s paper which (if he will forgive me for saying so) falls short of giving credit where credit is due, i.e. to the UK government. The paper is framed as a series of recommendations for policy-makers, but in this respect policy-makers are way ahead of business organisations. UK tax policies like DOTAS, Follower Notices, Accelerated Payments, and the freshly proposed GAAR penalty regime, are all recognition in practice that tax avoidance is a species of risk-creation, and we of the tax commentariat are only just catching up by having this debate about how risk and tax avoidance relate to each other on a theoretical level.

Abuse by the state

A key issue which Iain raises in his commentary is the question of how useful the risk-mining analysis is in the context of abuse of the international corporate tax system by multinational enterprises. I readily accept that in many cases the risk-mining analysis will only be half the story in this context. There is always more than one jurisdiction involved with double-non-taxation, and while there might be risk mining going on in both jurisdictions, there might equally be risk-mining going on in one jurisdiction and deliberate exercise of the state power to not tax going on in the other. There would be little point in Amazon risk-mining the UK exchequer from Luxembourg, for example, if Luxembourg was operating a proper domestic corporate income tax regime so as to tax the booty.

This latter category of tax abuse – states exercising their power to not tax in such a way as amounts to an abuse – is not one addressed in my risk-mining paper; my paper is about circumstances where the taxpayer is the abuser and it simply assumes that tax havens are available for the purposes of international planning. In order to theorise international tax abuse fully, both taxpayers and states need to be considered in their role as abusers.

Indeed when theorising abuse by the taxpayer, it is probably for the best to acknowledge that the state can be the abuser too, as a matter of general principle, so as to avoid giving the impression of having taken sides. I suspect I may have failed in this regard. Or, at least, if I had acknowledged the role of the state as abuser I might have attracted a slightly less hostile critique from Michael O’Connor, who raises in his guest-post below two very interesting questions about my “risk-mining” analysis, the answer to both of which is “no, that is not risk-mining by the taxpayer, that is (or may be) abuse by the state”.

Before discussing those questions I should emphasise that Michael and I are talking at complete cross purposes. When he talks about tax risk, he is talking about the risk of HMRC challenge, and he focuses on circumstances where HMRC challenges filing positions which are legally correct. I adopt for the purpose of my paper a conception of tax risk which, frustratingly from the perspective of being able to have a coherent debate, excludes the very category that Michael is most interested in: I am talking about the risk of an HMRC challenge having the outcome that the tax liability turns out to be greater than the one claimed in the filing position. I am, in other words, talking about the risk of successful HMRC challenge. “It is not meaningful to describe a taxpayer making a filing that is correct in law as creating tax risk, let alone deliberately so,” says Michael, and I completely agree. That would fall outside the creation of tax risk as I characterise it for the purposes of my paper.

I would urge Michael to re-read the first three paragraphs of my paper carefully, which I hope make this absolutely clear. I fear that he has been led to misunderstand my entire argument by taking the flow-chart on p.15 as his entry-point. The flow-chart exists only to make the point that wrong filing positions are wrong ab initio, rather than (as is sometimes suggested) being made wrong by HMRC challenge. The significance of this is that, where wrong filing positions go unchallenged, tax which is legally payable is lost to the exchequer. Michael himself says: “when David talks about Exchequer risk he can only mean the risk that an incorrect treatment in law will not be detected by HMRC”. Indeed – and that is what my flow-chart illustrates!

Another misunderstanding between us is the one I try to forestall at the outset of this post. Risk-mining is about the prior structuring that you implement with a view to taking positions as at filing, and not about the positions you take as at filing per se. I am not saying that taxpayers can’t take filing positions that HMRC might challenge, or that they have to adopt filing positions which maximise the amount of tax payable, or that they have to eschew reliefs unless it is 100% certain they are available, or anything like that. Still less am I saying that taxpayers have a positive obligation to minimise tax risk. This is about drawing a distinction between “legitimate tax planning” and “tax avoidance” at the tax planning stage, and it is not saying anything at all about the positions you might take at the self-assessment stage except to assume that, if you have structured for a tax saving at the prior tax planning stage, you are going to proceed to claim it at the subsequent self-assessment stage.

There are, however, interesting questions raised in Michael’s post notwithstanding these misunderstandings. The principal question is the one raised by the difference between our usages of the term “tax risk” i.e. is it “tax avoidance” where the taxpayer takes steps to minimise tax which introduce a risk of unsuccessful HMRC challenge? My answer to this is a resounding “no”. Where HMRC is known to adopt a position which is wrong in law, having the consequence that planning which does not create a risk of successful HMRC challenge nonetheless creates a risk of HMRC challenge, that is an abuse by HMRC and not by the taxpayer.

The other question which he seems to me to be raising is the question of whether it is an abuse by taxpayers to exploit strategies which are widely considered to be abusive, but which are known to be legally effective, so that no risk of successful HMRC challenge is introduced when those strategies are adopted. Again, my answer to this is another resounding “no”. If a loophole is knowingly left open, it becomes deliberate policy. The continued existence of the loophole may be an abuse by the state, but once it is known to succeed the use of it ceases to be risk-mining by the taxpayer.

Editor’s Note: Follow @_DavidQuentin on twitter. And here‘s a link to his original ‘Risk Mining the Public Exchequer’ Post.

The Google Tax – Some (Very) Initial Thoughts

The Government’s new Diverted Profits Tax – the so-called Google Tax – occupies 26 pages of closely drafted legislation. These are my immediate thoughts, a matter of an hour or so later.

The measures tackles two particular types of ‘diversion’ of profits being:

  • first, where an economic entity avoids establishing a UK presence (known to tax practitioners as a Permanent Establishment) so that the profits from sales of goods and services to UK consumers fall outside the charge to UK corporation tax (call it the “Amazon diversion”) and
  • second, where an economic entity which has profitable activities in the UK diverts those profits to lower tax jurisdictions abroad (call it the “Starbucks diversion”).

There are a number of important economic concepts embedded in the legislation but the important ones look to me (on an initial reading) to be

  • that the arrangements happen in concert (or as I have put it for shorthand within a single economic entity). This concept is defined in clause 5 “The participation condition”
  • that the arrangements generate a tax saving. This concept is defined in clause 6 “Effective tax mismatch outcome”. Clause 6 contains a key value judgment made by the drafters of the regime. Arrangements offend against the regime if they (broadly) lead to profits being diverted to another country where those profits give rise to a tax charge of less than 80% of that which would arise in the UK and
  • that they lack economic substance. This concept is defined in clause 7 (“Insufficient economic substance condition”) which requires (broadly) that the tax benefits of the arrangements are greater than the non-tax benefits. Putting the matter another way, that the arrangements were effected for tax reasons.

Standing back from the detail, a few observations

  • diverted profits tax looks to me to be a foothold – only a foothold but a meaningful one – in a new and more fiscally satisfactory world in which tax better reflects the economic substance of transactions
  • the higher rate at which the diverted profits tax is to be charged (compared with corporation tax) may well reflect a policy preference that economic entities bring themselves with the normal domestic corporation tax regime
  • there are signs – quite understandable, given the radical nature of these measures – of caution on the part of the draftsman: the tax liability is fixed following an iterative process of discussion between putative taxpayer and an officer of HMRC. Even after it is fixed, there remains scope for later adjustment
  • the Green Book shows the yield growing from £270m in 2016-17 to £360m in 2017-18. Speculating, I wonder whether built in to these forecasts is an expectation that the measures might adapt as business behaviour adapts. But whether or not that expectation is built into the forecasts, it is my expectation that these measures will have to adapt and change.
  • a big question is how other countries will respond to this unilateral measure. For myself, instinctively I doubt that these measures will come to be regarded as contrary to EU law. The bigger question is, what effect might they have on the propensity of our co-signatories to Double Tax Conventions to continue to observe those Conventions. On this point, I would assume that Government had already taken initial soundings.

Risk Min(imis)ing? Guest Post by Michael O’Connor

In his paper ‘Risk-Mining the Public Exchequer’, David Quentin says

This risk game that tax avoiders play with what is potentially public money is set out in the flow-chart on the next page. The innovative feature of this apparently simple flow-chart is that I put the questions in the correct order. The mistake invariably made in this context is to treat the process of tax authority challenge as itself determinative of whether or not a liability to pay additional tax arises. This treatment reflects a fundamental error of analysis. Except in the very rare case of retrospective anti-avoidance legislation, the liability is anterior to the processes of enforcement.

David illustrates this in a flow-chart


While liability is indeed anterior to the processes of enforcement, I’m not sure that David’s flow-chart gets it quite right though in implying that liability is determined by HMRC’s view of the law. Liability to pay tax is determined by the law. So taxpayer risk is in principle a function only of the likelihood of the taxpayer being wrong in law. Taxpayer risk is in practice also a function of the likelihood of challenge by HMRC and of the challenge succeeding.

For David, maximum certainty means reducing each of these functions to nil, but the risk of HMRC challenge can only be reduced to nil by adopting HMRC’s view of the law entirely. In David’s picture below, that’s what travelling along the horizontal path with him is – looking at reliefs, allowances etc. and seeing if your actual circumstances meet criteria set out in HMRC guidance.


David is perhaps disingenuous in going on to say

It should be emphasised that we are talking here about tax risk that has been deliberately created qua tax risk, and not tax risk which has arisen as a result of deliberate but non-tax-motivated behaviour. If you do something in pursuit of your commercial objectives and it gives rise to tax risk, you are not in the “avoidance” zone. You are over on the left of the curve in the zone where you want tax advice to eliminate tax risk, not create it. If you have an uncertain filing position over in that zone and it is not challenged you cannot be reproached for any loss to the public exchequer. The difference is in the risk gradient at the end point that the tax advice is taking you to. There is no “blurred boundary” or difficulty in “drawing the line” between on the one hand eliminating and on the other hand introducing tax risk factors, and advice which fails to identify itself as doing one or the other would be very incompetent indeed. To distinguish deliberately-created tax risk, which is better thought of as risk for the public exchequer rather than for the taxpayer (for whom it is really an opportunity) I propose to label it “exchequer risk”.

Does David actually mean ‘abuse of law’ – like driving a lorry across a border and back for no purpose other than to get a tax refund? If so, it is a false distinction (or at least not a very meaningful one) to say that on the one hand there are these cases and on the other hand every other case where taking advice is only for the purpose of eliminating tax risk. But that seems to be implied by his saying that there are no blurred lines.

That there are blurred lines is shown by Rebecca’s examples which as she says illustrate that the law can produce wide variations in tax burden on essentially the same income of the same person depending on which part of ‘the law’ is thought appropriate to apply. Clearly Rebecca feels that risk of challenge arises not so much from any uncertainty about the law, but uncertainty about HMRC’s position – informed by her knowledge that if for no other reason where there is less tax burden there is likely to be more risk of challenge.

While Rebecca calls this bread and butter planning, she recognises that in some cases the public might see it as the gaining of an unfair advantage. Precisely because they are ‘planning’ of some sort her examples perhaps slightly obscure the principle. And notably, they cannot be on David’s horizontal line because they are not characterised by maximum certainty.

For example in relation to the appropriate use of a relief, even with the best will in the world and intent neither to minimise tax nor plan anything, it is not always entirely clear whether every taxpayer detail matches up precisely with every HMRC requirement. Indeed in many cases, HMRC having provided guidance, it is left to the taxpayer to decide upon an apportionment, or make some other decision about his or her own liability. The guidance (and indeed the law) is often couched in terms of what is fair and reasonable and this requires the taxpayer to make a subjective judgement in any case. And HMRC are clear that their guidance (with a very few exceptions) represents their view of the law and that only the courts can decide what the law actually provides. Taken together with Rebecca’s points this means that maximum certainty in terms of certainty about risk of challenge can only be assured by always taking an extreme position on any spectrum of choice.

I’m not one to harrumph on about ‘Westmoreland’ et al and it being the mark of honour of an upright citizen not to feel obliged to offer anything up to the Revenue, but it does not seem reasonable to characterise choosing anything less than maximum certainty as the deliberate choosing of risk such as to amount to attempted avoidance, when maximum certainty derives not from the law but from adopting HMRC’s view of it.  Rather, the taxpayer risk accepted or declined by the taxpayer is 1. that the position they adopt might not be correct in law even though they believe it to be so and 2. that HMRC might challenge it successfully. Taking a position that is not believed to be correct in law in the hope that it will not be challenged is not avoidance, it is evasion.

If it is accepted that positions of less than maximum certainty can be adopted legitimately (in every sense) then the question is what those positions are. Even if HMRC were to provide certainty to Rebecca as to the position that they would adopt themselves in relation to each of her examples, HMRC are not always right about the law. While they might point to a high rate of success in litigation, that tells us nothing about the proportion of cases where they do not litigate because they feel their case is not actually likely to succeed.  Though of course something about this can be inferred from the volume of legislation.

For this reason, it does not seem correct to characterise taking any position other than one of maximum certainty as the taxpayer creating risk. Rather, each point on the spectrum of choice has a particular risk of successful challenge. The taxpayer does not create the risk but in his or her choice of filing position either accepts the risks associated with that position or declines them.  Jolyon’s badges of avoidance can be helpful in assessing this risk, although I feel that they are more weighted towards assessing the risk of challenge rather than the risk of successful challenge.

So from the taxpayer point of view I think the position appears to be more like this:


I think this is the correct way of presenting things because when David talks about Exchequer risk he can only mean the risk that an incorrect treatment in law will not be detected by HMRC. A correct treatment in law cannot pose an Exchequer risk properly defined – a risk that an amount of tax actually due is not paid – whether or not HMRC’s initial view is that the amount is due. This is implicitly accepted by HMRC in adjusting the tax gap estimates in light of decisions of the courts.  That is, some of the tax gap is always at risk in that it is comprised of an incorrect estimation by HMRC of the tax due. To put it another way, there exists a tax risk for the Exchequer in that tax said to be payable by HMRC in law is not payable and if correct filings are made will not in fact be paid even if they are challenged by HMRC. It is not meaningful to describe a taxpayer making a filing that is correct in law as creating tax risk, let alone deliberately so. The only tax risk in these circumstances is the Exchequer risk created by HMRC’s incorrect view of the law. David labels as ‘effective avoidance’ in his flowchart those cases where a filing that does not adopt HMRC’s view is found to be correct in law by the courts. As a filing that is correct in law results in the payment of the correct amount of tax it rather begs the question of quite what has been avoided.  I do think that bundling up such cases with ones that are not correct in law and labelling them all as attempted avoidance is not particularly helpful to the debate.

In conclusion, David’s assertion that “the deliberate creation of exchequer risk … is the essential defining characteristic of what has hitherto been labelled “tax avoidance”, distinguishing it from “legitimate tax planning” does not seem right. The concept of exchequer risk seems to rely too much on maximum certainty (or rather its absence) when this is in fact not a relevant criterion for establishing liability to tax. Neither enforcement nor certainty can be anterior to liability.

Follow Michael O’Connor on twitter @StrongerInNos

The Hardman Lecture Revisited

On 11 November 2014, at the kind invitation of the ICAEW I gave the Hardman lecture. The text can be read here. In that lecture, I observed, in relation to the operation of the General Anti Abuse Rule:


Several days later, Ed Balls announced that the Labour Party would, on taking Government, introduce such a regime. And in the Autumn Statement, the present Government, too, announced that it intended to follow suit and would consult on whether and how to introduce a GAAR specific penalties regime.

A further concern I expressed in the Hardman Lecture was that the High Risk Promoters Regime introduced several months earlier in the Finance Act 2014 might not be fit for purpose:


This suggestion, too, looks to have been picked up by the Government. As the Autumn Statement Green Book records:


I am sorry not ever to have met Philip Hardman, in whose name the annual lecture is given. I can only hope he would have been pleased.


Osborne’s Buy to Let Bonanza

If you’re short of time skip to the end where I summarise the arguments. If you’re still interested, come back to the start.

Here’s how the FT characterised George Osborne’s changes to Stamp Duty Land Tax:


And here’s the Daily Mail:


But as we fiscal footsoldiers well know, there’s little political capital to be won in improving the technical functioning of the tax system. Especially not at an annual cost to the fisc of around £800m. Here’s the Green Book forecast costs of the changes over the next six years:


An effective 12% cut in the gross yield from stamp duty land tax on residential property and the most expensive measure in the Autumn Statement, more expensive even than the rise in the Personal Allowance. Even I, when I lie awake at night contemplating the fiscal utopia that would follow as night after day from a world in which I was enthroned as Chancellor, even I recognise that north of £800m per annum is a pretty heavy price to pay for avoiding some fairly modest distortions in the residential property market.

The Great Man knows this. Here’s what he said

“In recent years the burden of stamp duty has increased on low- and middle-income families trying to buy a new home, as prices have risen. This makes it even more difficult to get together the cash deposits buyers need. It’s time we fundamentally changed this badly designed tax on aspiration.”

Before we examine this statement can we just admire the tactical acuity that enabled a hugely expensive tax break purportedly for house buyers to be sold to the media as reform of a tax universally acknowledged to be badly designed.

Have you paused? Good.

Now let’s turn to the effects.

Council of Mortgage Lenders figures show about 50,000 purchases for home owner house purchasers a month of which around 20,000 are to first time buyers; there are also around 8,000 loans a month to buy to let purchasers. So of buyers in the market, first time buyers account for 34%, other occupier buyers 52%, and buy to leters 14%.

To work out who benefits from the changes, one must also factor in that different types of purchasers buy at different prices. According to ONS figures, the average price paid by a first time buyer is £210,000 and the average price paid by a “former owner-occupier” is £315,000. The saving made by a first time buyer at that average price is (£2,100-£1,700) £400. And the average saving made by a “former owner occupier” is (£9,450-£5,750) £3,700. (For comparison, a purchaser at the average house price in London (£514,000) would save (£20,560-£15,700) £4,860).

I’m not going to pretend to be an economist (it’s challenging enough pretending to be a lawyer) and I don’t have access to the data and assumptions underpinning the forecasts. So let’s make the (simplistic) assumption that all buyers of particular types buy at the same price.

I am not aware of data showing the average price paid by a buy-to-leter. But if one assumes that she buys at the average price paid by a former owner-occupier, the putative sharing of the benefit of the stamp duty land tax cut as between these different types of purchaser is first time buyer (34×400=13,600/257,800) 5.3%, other occupier buyer (52×3700=192,400/257,800) 74.6%, buy to leter (14×3700=51,800/257,800) 20.1%.

Putting the matter another way, if one wanted to deliver the benefit of this cut in stamp duty land tax to your hypothetical person “trying to get together the cash deposit buyers need” it would cost £42m rather than £800m. Indeed, you could give them the (even more financially meaningful) assistance of a complete exemption from stamp duty land tax  at a cost of (34×2,100/315,600 = 22.6% x 315,600/257,800 of £800m = 979m) £221m.

But, structured as they presently are, ‘buy-to-leters’ get four times the benefit from the stamp duty land tax cut as George Osborne’s ‘person saving for their deposit’. However, as I will go on to show, this figure substantially understates the buy-to-leter’s share of the take.

It is, of course, only superficially true to attribute (as I have done above – and as did George Osborne) the benefits of cuts in stamp duty land tax to house price buyers. The papers are full of stories of vendors pulling out of the deals because they realise that they will now be able to get more for their property; and of the house price boom expected to result. The cut in tax for buyers is immediately swamped by an increase in price and the benefit goes to those holding property wealth.

Given that the deficit will, as George Osborne has made plain, be closed through cuts in public spending, one might perfectly reasonably say that the real transfer of wealth implicit in the cuts to stamp duty land tax is from those reliant on public services to those who own property – and (with one important proviso) the more property someone owns the greater the transfer of wealth to them.

The important proviso is that those who own houses worth more than £937,500 will see a diminution in housing wealth as they suffer the devaluation consequence that a purchaser of their property will face a higher stamp duty charge. Those on the left will attribute this feature of the changes to a desire to spike Labour’s Mansion Tax; those on the right will say it demonstrates that the Tories recognise that those who can afford to pay more should do.

Whatever the spin, once one recognises this factor, one can see that the real benefits of the cut in stamp duty land tax flow to those who have substantial amounts of housing wealth in houses worth less than £937,500. The more housing wealth you hold in houses worth less than £937,500 the more you benefit. So, as I have indicated, the percentages given above are likely to understate the extent to which buy to let owners will benefit from a tax cut funded by cuts to public services.

There is, of course, a further political dimension to be noted. To badge this as a ‘reform’ of stamp duty land tax may well be to disguise its true intent. As Danny Dorling, professor of Geography at Oxford University put it:

“This is the politics at the heart of the stamp duty cut. It is designed to trigger a housing boom before the election. The Tories know that they cannot not win seats outside of London unless the value of homes is rising. This is critical to their election prospects next year.”

None of this should be surprising. And it was why, listening to Ed Balls on the Today Programme the morning after the Autumn Statement, after an impressive performance by the Shadow Chancellor on (for him) the most difficult day in the political calendar, I tweeted:

As the data demonstrates, the Labour Party is credited much too little for how carefully it has sought to address the perception it cannot be trusted with public finances. Against that background, and as a Labour Party member, I regret that it appears to have been bounced rather too quickly into supporting a tax cut that undermines the goals and ambitions of the Party.

This is a long and rambling post. Let me try and pull the threads together:

(1) this is a hugely expensive measure;

(2) contrary to what Osborne says, materially none of the benefits go to those struggling to get on the housing ladder;

(3) one certainly can’t describe it as designed to help those people;

(4) it looks like a transfer of state wealth, to be funded by cuts to public services, to those holding residential properties worth <£937,500;

(5) the more of those properties you hold, the more you’ll benefit – so the big winners will be those with substantial buy to let portfolios;

(6) one might well regard it as designed to generate a good old fashioned pre election house price boom;

(7) I’d be interested to see Labour’s case for supporting these cuts – it’s not immediately apparent to me.

Follow me on Twitter @jolyonmaugham