Tax Avoision - where do we draw the line?

by Brandon Laroiya-McCarron, Associate at Claritas Tax

Earlier this year, LTS and Taxation magazine held a competition for young tax writers. Entrants were invited to submit articles on ‘HMRC Powers – too many or not enough?’ or on ‘Tax Avoision – where do we draw the line?’ The two winners were chosen by independent judges – Keith Gordon, Barrister at Temple Tax Chambers, Allison Plager and Andrew Hubbard from Taxation and Mala Kapacee, Director of London Tax Network Ltd and Founder of London Tax Society. The winning article by Dilpreet Dhanoa was published in Taxation and Brandon Laroiya-McCarron‘s article is published here.

“I don’t say evasion, I say avoision!” proclaims Kent Brockman when reporting Krusty the Clown’s arrest for tax fraud. The outburst might demonstrate a rare sight of media impartiality (albeit fictional), or indeed a clever use of rhetoric, but there is a more important question arising from this: how is one able to spot the correct course of action from an incorrect one, when taking into consideration the ideas of morally right or wrong behaviour, and legal or illegal activity when working in tax. The points considered in this piece look at the difference of opinion between the advisor, HMRC, and the public, and by extension whether there is any middle ground to reconcile these differences.

For us advisors in the field, the concepts of tax avoidance and tax evasion are well understood and the distinction between them can often be seen, due, in part, to the prominent position ethics and ethical behaviour has in any accountancy or tax qualification but also the ‘tone at the top’ principle of junior members being able to see the decision making of senior members in action as they demonstrate many years of experience in dealing with HMRC. This learning, coupled with time spent understanding the legislation and applying it on a daily basis to our clients’ specific needs means that we are well versed in knowing where tax planning opportunities lie and where there is material uncertainty in the legislation. 

The professional conduct in relation to taxation (PCRT) gives us a framework, which builds upon the five Fundamental Principles, and allows us to give advice that is delineated by the spirit of the principles rather than the restrictive, and at times, unclear guidance from HMRC. The Fundamental Principles allow us to approach each unique situation with a set of values that can almost always be applied and therefore solutions to problems can be created with the right intentions, approved by our regulators. It is worth noting that there is also the reasonable admission that the PCRT document is not an exhaustive list of all circumstances, which is a valid point although this does not detract from the idea that with communal adherence and a member’s careful application of the principles, they will stand in good stead for ‘drawing the line’ when it comes to tax advice matters.

For example, at a fundamental level, no advisor should be breaking the law nor regulations as this is, amongst other things, a breach of the fundamental principle of Professional Behaviour. The PCRT document then builds upon this principle with the Standard of ‘Lawful’, but its explanation, rather than focussing on the specific point of complying with the legislation, actually mentions ‘HMRC’ eight times – less cave canem, more cave HMRC. Whilst it would be an ideal situation to believe that as tax advisors our own line is drawn solely by complying with the legislation, it is often the case that risk of challenge from HMRC may affect where we might draw our line. This has the result that only on select occasions and to (sometimes) a large expense can a decision by HMRC be overruled and go in the taxpayer’s favour (and, by extension, the favour of his trusted tax advisor) after various legal proceedings.

It seems that the HMRC line, in principle, is drawn much simpler, that of operating within the ‘spirit’ of the law. While the message is simple, the way this missive is communicated could not be more convoluted. There is the churning out of mass information and guidance by HMRC to capture every possible situation, culminating in the magnum opus of ‘Tackling tax avoidance, evasion and other forms of non-compliance’. Half of the pages consist of a list of over 100 measures introduced since 2010 to ‘crack down’ on these illicit behaviours. Whilst a great proportion of these measures might be needed, the key statistics brought out are the values for 2016-17 for ‘Failure to take reasonable care’ £5.9bn, ‘Evasion’ £5.3bn and ‘Avoidance’ £1.7bn. This shows that the tax gap (defined as the difference between the amount of tax which should be paid and what is actually paid) is to a much larger extent due to a lack of reasonable care and evasion, rather than the area of avoidance. This might suggest there exists a lack of clarity or ease when an individual or business tries to fulfil their own tax obligations.

The latest figures, for the tax year 2019-2020, show that the values for the three contributors to the tax gap mentioned above are £6.7bn, £5.5bn and £1.5bn respectively, with a new category which was not included in the 2016-17 data: ‘Legal interpretation’ which contributes £5.8bn to the tax gap. This is described as ‘when the customer’s and HMRC’s interpretation of the law…result in a different tax outcome, and there is no avoidance’. It almost seems nonsensical that a portion of the tax gap is created by tax which should be due according to HMRC, although it does not fall into the categories of evasion or avoidance, which would suggest that the customer is entitled to the tax benefit by virtue of the legislation.   

The definitions HMRC has of Tax evasion, Tax avoidance, Tax non-compliance, and Tax planning continue to blur already murky waters. Tax non-compliance acts as the umbrella capturing ‘not getting your tax right the first time…and includes evasion, avoidance and other behaviours’. Whilst ‘Tax evasion is always illegal’, and Tax avoidance is ‘operating within the letter, but not the spirit, of the law’. This is accompanied by ‘most tax avoidance schemes simply do not work’. If one is struggling to see the line set by HMRC and are feeling overwhelmed with all of the terminology, it is surely no surprise. Tax avoidance is given a similar standing to tax evasion, even though they are fundamentally different given one is legal and the other is not. A reasonable explanation is that HMRC is disseminating anti-avoidance propaganda and the recent consequences seen in social media visibly show how public the issue of tax has become, and HMRC getting into bed with the mass media has cultivated strong feelings against tax.

The change in the use of language has allowed HMRC and the media to see tax, or tax avoidance/evasion/any other term HMRC choose, as a tool in which any mention is often bathed in a negative light. This can be seen in the number of words accompanied by the word ‘tax’ which describe incorrect or improper actions taking place, an assortment of which are given in the paragraph above. These additions to the vocabulary around tax seem only to suggest that, whilst possible, many advantages gained from tax planning should not be acceptable courses of action because they are morally wrong, too complicated or are not likely to work. This is also seen in the media where celebrities have been linked to ‘tax dodging’ and companies who avoid tax have seen action such as boycotts to shame them publicly. This is exacerbated by the speed messages are pinged around in the public forum of social media, in which a company’s valuable reputation and customer loyalty can be severely damaged through the exponential sharing of opinions.

This culminates in another line of ‘tax avoision’ being drawn, that being what is permissible to the public. The philosopher Kierkegaard suggested ‘A crowd in its very concept is the untruth’, and it would be fair to ask if the intricacies of tax legislation and the comparative advantages which different countries offer are of interest to the ‘crowd’. Whether or not they are of interest, the result is that the propaganda – or at worst – the manipulation of the media and HMRC through repeated negative messages associated with tax have led to a general feeling of unease around the subject. If tax is involved in a news story, there seems to be no presumption of innocence. This is a real problem because a country is ultimately in charge of setting the legal framework from which people and businesses should adhere to, and if there are opportunities of a tax advantage – whether intentional such as a country with a lower tax rate – then why should this not form part of a business strategy?

The various lines drawn, which are mentioned above, demonstrate the differing interests of the parties involved, and so where does that leave us when making day-to-day decisions as tax advisors? Tax is full of rules, and the legislation is our source document which allows us a wealth of opportunities to get the best results for our clients. The words of Lord Tomlin (Duke of Westminster vs IRC) echoes this sentiment: ‘Every man is entitled if he can to order his affairs so that the tax attracted under the appropriate Act is less than it otherwise would be’. Therefore, whilst HMRC has everything to gain by blurring public perceptions of tax avoidance into something similar to tax evasion, it is imperative we continue to differentiate the two.

The aim of the tax advisor should be to highlight the difficulties and complexities of the legislation, whilst giving clear advice and thought-out conclusions which will point out where HMRC stands on issues, but also offer proactive courses of action and their associated risks. Ultimately, a neat and attractive solution to a problem may not be a viable solution if there is any risk of challenge or uncertainty in the reaction of a company’s stakeholders, although it is our job to find and present those solutions using the training and experience we have amassed in our careers.

Brandon is a Tax assistant at Claritas Tax and is currently studying on the ACA-CTA route. He gets involved in predominantly ERS returns, Tax compliance and R&D reports.

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