In the media, we’re constantly hearing talk of tax avoidance, aggressive tax avoidance and tax evasion. Changing one word for another can completely change the meaning of a sentence. So when we talk about clamping down on ‘immoral’ ways to get out of paying tax, what do we mean? And what should the country do about it?
A very simplistic (and therefore, perhaps, slightly wrong) view is to say that tax avoidance is legal, and tax evasion illegal; avoidance being about finding ways within the law to minimise the tax you pay, and evasion being about deceiving the Inland Revenue over your true tax position.
The current situation goes back to one of the most famous legal cases, in 1936, with a ruling handed down by Lord Tomlin on the Duke of Westminster’s tax arrangements:
“Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow tax-payers may be of his ingenuity, he cannot be compelled to pay an increased tax.”
Those who want to legally avoid tax have relied on this ruling ever since, although it was modified slightly in 1981 in the Ramsay case. Now, a deliberate and aggressive attempt to exploit a loophole isn’t enough to save you from legally having to pay tax: a court may take into account the purpose of the legislation. To take a rather silly example, if Parliament were to introduce a tax on all red cars, then you fixed a black stripe on it and claimed ‘I don’t have to pay the tax any more because this car is no longer fully red’, you might find yourself on the wrong side of the law. Actually there’s a lesson here that politicians should be careful about how they introduce new taxes: in 1696, a law was introduced taxing people based upon the number of windows in their house, and it wasn’t long before windows were bricked up across the country with consequent lack of fresh air and health issues. Getting the law right is important.
First of all, what do we want to achieve? We want to ensure that large multinational companies pay their share in tax. We want to ensure that it’s no longer in the interests of the very rich to hire hugely expensive accountants because it’s still cheaper than paying the tax that’s owed.
But at the same time, we don’t want to harm the small business which is in a precarious situation. Whether a business voluntarily registers for VAT or not, whether mileage is calculated on the HMRC per-mile rate or based on the depreciation of the car, or whether a sole trader registers as a company or is self-employed – these decisions are often taken on the basis of what’s best for the business, and which option will pay the least tax.