It has generally been accepted for generations that tax evasion is illegal but its relatively distant cousin, tax avoidance, is permissible.
While the line between the two could sometimes be blurred, until very recently, no government or civil service official had ever sought to question that basic tenet. Now, it appears that both the courts and HM Treasury, with the assistance of HMRC, see legitimate tax avoidance as a basis for attack.
This will prove worrying not only for those who spend their lives creating complex tax structures which often turn on the legal interpretation of a single word but also to many ordinary taxpayers arranging their affairs in the most effective fashion in order to minimise tax liabilities.
In the widely reported PA Holdings case ([2011] All ER (D) 237 Nov), the Court of Appeal decision appeared to use purposive interpretation to override what many saw as the strict position based on the wording of the legislation.
On 28 February, the lead media story across radio, TV and the broadsheet newspapers reported a Treasury crackdown on Barclays Bank. If the reports are accurate, the bank had entered into a pair of complicated and disclosable tax avoidance schemes that it believed were indisputably legal. However, it has been widely reported that they would increase the burden on the taxpayer by a cool £0.5bn of money much needed by the health service among other government-supported institutions.
Morality
It is a moot point as to whether morality and tax have ever been comfortable bedfellows. At one end of the scale, everybody condemns tax cheats, even the red tops. However, given the opportunity to slip a builder or plumber a cash payment in exchange for a 10% discount, the view taken can be rather different.
On that basis, the United States in particular seems to take the view that morality is all very well but legislation and in particular swingeing penalties are far better. While it is all very well to trust the taxpayer to behave responsibly, taking temptation out of their grasp might be a very good way of guaranteeing that responsibility.
Many may see this subtle change as very sad but realists might also feel obliged to accept that in today's culture it is a necessity. Once again, when a government is struggling to make ends meet in an economic downturn it is very much easier to crack down if a few billion can appear as a result.
The other side of morality relates to application of the law. There may be many who would suggest that where a judge uses an interpretation that is not in line with strict legal wording or an authority changes the law retrospectively this is just as immoral as knowingly assisting a workman to evade VAT or income tax.
Tax avoidance
In the wake of the Barclays' sting, the Treasury apparently use the rationale that their attack had been on ‘aggressive tax avoidance’, which they would like to regard as illegal. Although PKF actively steers clear of aggressive avoidance schemes, this change in emphasis will come as news to those who might have believed them to be of questionable morality but certainly not outside the law. In this case though, there was an extra factor.
Barclays, along with its sister banks had apparently signed an agreement that it would not get involved in tax avoidance. This certainly ups the stakes when it comes to the morality or otherwise of its actions. However, it does not change the law. The government had to do that off its own back.
Barclays are in no doubt that they have behaved honourably, as they made clear in a short statement that included the assertion ‘In the UK we comply with the letter and spirit of all our obligations under the HMRC Code of Practice and have open and transparent dealings with HMRC’.
Retrospection
Retrospection has been a dirty word for centuries, when considered in connection with tax legislation. That is because everyone believes in the principle of arranging taxation affairs with full knowledge of their consequences.
It is therefore very worrying to find not one but two precedents where it could be argued that the wording of the law has been overridden by political or social necessity. Whether this is a good thing because it protects the Exchequer from those taking steps that are wholly unreasonable (and might be interpreted by many as immoral) might be open to doubt. On the other hand, where taxpayers (or more accurately tax not-payers) are taking cash out of the hands of the millions who do pay their tax legitimately, not to mention those who would like to get educated, fed or restored to full health, it might be suggested that drastic steps are the only solution.
The future
Ironically, within the next month or so, there might be a legislative solution to these problems. While it might not be perfect, the General Anti-Avoidance Rule that the Chancellor is actively considering should outlaw the kind of schemes that both PA Holdings and Barclays Bank were persuaded to enter into in the belief that they were legitimately avoiding significant tax liabilities. We will see.
Philip Fisher, Partner, PKF
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