The news outlets are awash with information from Panama’s Mossack Fonseca. Predictably, journalists and politicians are making urgent statements on the subject. These include calling for the Government to “get its house in order” (The Guardian), impose direct rule on tax havens (Labour leader Jeremy Corbyn) and demanding clarification from the Prime Minister that he is not benefiting from “dirty” money (Sky’s Faisal Islam).
There can be little doubt that it is the state’s role to enforce the law and tackle illegal activity. What is of concern is the unthinking conflation between illegal and legal activity. As lawyers we should take care to understand the difference.
As Dennis Healey once remarked, the difference between tax evasion and tax avoidance is the thickness of a prison wall. So why is so much energy is spent on avoidance, given that it is legal? This article agrees that evasion needs to be tackled, but explores the difficulties with defining avoidance, and argues the state’s approach to it is somewhat suspect.
What is tax avoidance?
This question is important because it sits at the heart of the relationship between the state and its subjects.
Tax has been at the centre of this debate since Magna Carta in 1215, when King John found himself constrained by clause 39 that required him to get consent from Parliament, which developed as a result.
Similarly, the Bill of Rights of 1689, which was drafted to restrain the monarchy, required that no tax could be levied without the express authority of Parliament.
HMRC claims its ability to raise taxation is imperilled by avoidance, but what does this mean? There have been many attempts to define avoidance but it does not have a settled meaning. Lord Hoffman once commented that ‘tax avoidance’ should be a contradiction in terms. He argued the only way tax can be imposed is by statute and the courts will either give effect to an attempt at avoidance or not.
Taking this analysis further, if an avoidance attempt is successful in court no tax is avoided as none is due. If the court finds an attempt to avoid tax is unsuccessful then tax will be imposed and no tax has been avoided.
So, in reality, tax avoidance occurs as a result of HMRC losing in court. But the ability to bring a case to court against the state is precisely the benefit of the rule of law and of our constitutional system.
Tax avoidance is a by-product of our constitutional protections working as they should.
In 2013 the Government passed a General Anti-Abuse Rule (GAAR). This states that taxpayers can no longer rely on a purposive construction of statutory interpretation to protect them from the state’s attempt to tax. All tax statutes in the UK are now limited by the GAAR, which will counteract “abuse” of UK tax law.
It may sounds benign that tax law is no longer governed by statutory interpretation on a purposive construction. However, in order to determine what the tax position is one has to consider whether the outcome of the transactions concerned were “reasonable” in all the circumstances.
The idea that one can no longer rely on the law as it is interpreted on a purposive construction by the courts is worrying.
The GAAR has been prompted by the siren calls of those who do not believe in the restraint of the state by the rule of law, as envisaged by Magna Carta.
The legal and the moral
As we would not expect the state to intervene in any other legal activity such as walking the dog, we should expect the state to restrain itself unless and until the activity in question is made illegal through due process.
There are those who wish the state to be more interventionist and call for companies to behave morally. This presumes their view of morality is correct – itself an unsettled matter.
The UK successfully divorces illegality from morality, and that has served to protect liberty for hundreds of years.
Many countries employ moral or religious police forces. In those countries activities such as adultery are offences that engage the interests of the state. I suspect if we were to go down that road there would be considerable nervousness in the Palace of Westminster.
