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How far would you go?

03 July 2012 / Mike Truman
Issue: 4360 / Categories: Comment & Analysis , evasion , GAAR , Admin
MIKE TRUMAN launches our survey of attitudes toward avoidance and evasion


  • Poor reporting of recent tax avoidance stories.
  • Readiness of those without advice to evade rather than avoid tax.
  • ‘Double reasonableness’ of Aaronson’s GAAR.
  • Fill in our survey.

Let’s face it, although tax has been in the news as never before, the quality of some of the coverage has been abysmal.

The concepts of avoidance and evasion are constantly elided, most articles have referred to the K2 and Icebreaker schemes as ‘legal’ without explaining that (in their current forms) they have not yet been tested in the courts, and some journalists seem to think that the direct tax system is still run by the Inland Revenue.

The combination which has resulted in a ‘hand/forehead’ [which we hipsters call a facepalm - Web Ed] most often from me is the one I have heard everywhere from Newsnight to some day-trippers on the train to Victoria:

‘If they want to stop them doing it they should close up the loophole. Anyway, we wouldn’t have this problem if tax law was simpler.’

You, dear readers, will know how wrong this is, but let me give you an explanation you can pass on to your clients with my compliments.

'Keep out' signs

Our tax law is so long precisely because people keep trying to get round its provisions.

I used to have a standard lecture on share incentives that started with a simple transfer of shares and the tax consequences which followed, and then went through the various inventive ways that employers have tried to avoid the tax but still pass on the shares.

That took at least three hours, or, if you were really unlucky, you had to listen to me for a whole day.

The result is whole swathes of the law which are only there to stop people doing things, rather than to tax transactions that will actually be carried out.

No one is really meant to be taxed under ITEPA 2003, ss 446A-Z (shares acquired or sold other than at true market value), any more than they are meant to be taxed under the disguised remuneration provisions of Part 7A.

That’s about 40 pages of the Yellow Book designed solely to put up ‘Keep out’ notices around some clever tax planning schemes.


We have always argued that it is important to distinguish between the avoidance schemes which do legally work (once they have been tested in the courts) and outright evasion. I would still support that, but with a couple of caveats.

The first is that I have a strong suspicion many taxpayers do not. I have argued before that the tax profession raises far more tax by stopping evasion than it loses the Exchequer by coming up with avoidance schemes.

If ‘ordinary’ taxpayers see those with well-paid advisers avoiding tax successfully, they will think they are merely joining in if they fail to declare a bit of cash-in-hand part-time income. In law the two are entirely different; in practice to many people they are more or less identical.

The other caveat is that, ever since the House of Lords made its fateful decision in Barclays Mercantile Business Finance v Mawson [2005] STC 1 to undermine the Furniss v Dawson [1984] STC 153 principle, a much wider range of entirely artificial tax planning ‘solutions’ has been pushed aggressively to taxpayers.

Like the original Rossminster schemes of the 1970s, these involve going into the provider’s office; signing lots of documents as securities are issued, contracts are made, and boards of directors reach carefully pre-prepared conclusions; and walking out three hours later with cramp in your writing hand and a tax loss worth ten times as much as you have paid.

While they are both legal (assuming the purposive interpretation principle is passed), there is a clear distinction between these sorts of schemes and the level of tax planning which finds the least-taxed path of several that a transaction or series of transactions could legitimately go down.

The risk to the Exchequer of the former is significantly greater, and it is therefore not unreasonable that taxing authorities say they need greater protection from such predation; not bolting yet another strut to the scaffolding buttressing the walls of the tax system a year after that area of the rampart has fallen into the moat.

Hence the proposal, based on a study by Graham Aaronson QC, to introduce a general rule that overrides this sort of aggressive tax avoidance, but leaves ordinary planning intact.

His general anti-abuse rule (GAAR) was carefully distinguished from a general anti-avoidance rule (old GAAR) by a provision that specifically limited the impact of it by a ‘double reasonableness’ test.

This has been included by the government in the consultation they have now launched, and the first part of the test reads as follows:

‘2) Tax arrangements are “abusive” if they are arrangements the entering into or carrying out of which cannot reasonably be regarded as a reasonable course of action, having regard to all the circumstances including –

(a) the relevant tax provisions,

(b) the substantive results of the arrangements, and

(c) any other arrangements of which the arrangements form part.’

The ‘double reasonableness’ principle is in the first sentence: ‘Cannot reasonably be regarded as a reasonable course of action’.

It is intended to provide an objective test in what might otherwise be a subjective area: do I think it is acceptable for me to do this?

If it works, it should prove possible to withdraw some of the existing anti-avoidance principles and remove some of the complexity, although the consultation document is deliberately cautious in its proposals to do so.

A reasonable man

Who decides what is ‘reasonable’? For over a century, with a flagrant disregard for gender equality, shifting demographics and the rise of private car ownership, the law has answered ‘the man on the Clapham omnibus’.

But how do we know what the average man or woman thinks is reasonable? Presumably it is what they would or would not do themselves.

So Taxation thought it might be a good idea to ask taxpayers, their advisers, the legislators and whoever else springs to mind what they would be prepared to do (or not do) to save tax.

The questionnaire on the next page puts forward ten different scenarios, and asks the respondents to say what they would do if they found themselves in these circumstances.

I would encourage you not only to fill in the questionnaire yourselfanonymously – but to get as many people as possible to complete it as well.

We will be publicising the survey as widely as possible, and will submit the results to the GAAR consultation.


Issue: 4360 / Categories: Comment & Analysis , evasion , GAAR , Admin
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