Tuesday, December 13, 2005



I have no strong views on tax avoidance. I neither approve nor disapprove of it. To me it is fact of life. However I do have strong views on hypocrisy. I think it ought to be unacceptable.

Gordon Brown and Dawn Primarolo (the Paymaster General), who are together responsible for Her Majesty's Revenue & Customs, do have strong views about tax avoidance. They think it is unreasonable and anti-social. They believe that everyone should pay their "fair amount of tax at the right time". This does beg a question as to what is a fair amount of tax. I suspect most people would think that it is the amount that Parliament has decided - at the instigation of Mr Brown and Ms Primarolo - that a taxpayer is due to pay. However this is not actually the Brown/Primarolo view. They have together spent the last nine years rushing masses of legislation through Parliament with very little time for debtate. Their view of what is fair is what they believe Parliament would have decided had they given Parliament sufficient time to look at what they were proposing, so that Parliament could have pointed out to them that the law that it was being asked to enact was not actually the law that they had in mind. I think this view, is at the least, open to challenge.

I do not have a clue what the Brown/Primarolo view on hypocrisy might be. However I just finished reading a tax case, Barnes (Inspector of Taxes) v Hilton Main Construction. Assuming that the responsibility for HMRC actually means the ability to some degree to control what they do, I would suggest that this case indicates that Gordon and Dawn are very much in favour of hypocrisy.

The HMRC view is that they have a statutory obligation to apply the law. Fairness does not come into it. I find this impossible to square with a concept that taxpayers ought to pay tax not on what the law says, however unfair that may be to the government, but on some abstract perception of fairness, but that the government should ignore fairness and simply apply the law. In fact HMRC have been entrusted by Parliament with the "control and management" of the tax system. Most people (including me) think that this actually gives them a power to decide not to enforce the full might of the law where to do so would clearly be unfair. Although not everybody in the country pays the tax that they are legally obliged to by and large most of us tend to do so. Indeed far many of us tend to do so than in many other countries. I think that this high lvel of tax compliances is because most of us think that by and large the UK tax system is fair. I also think that if HMRC seek to apply it in circumstances where it is patently unfair, sooner or later people start asking themselves why they should act fairly in their relations with the government when the government does not do so in its relations with its customers.

Hilton Main Construction is (or possibly by now was), as the name suggests, in the construction industry. There is a tax scheme, the construction industry scheme, that basically says that where a contractor engages a subcontractor it must deduct tax from the payment it makes to the subcontractor and hand it over to the Revenue unless the Revenue believe that the subcontractor can be trusted to pay over the tax that it owes if it is not forced to do so by having it deducted at source. The question was whether Hilton Main Construction could be trusted to pay the tax that it would owe in the future. The facts were very simple.
(a) It had paid its tax late in the past.
(b) The Managing Director had kept HMRC in touch with why it was late in paying its tax, and had had a lot of meetings with them.
(c) At no time during those meetings did HMRC say that paying its tax late risked the Revenue refusing permision in the future for the business to be paid without deduction of tax.
(d) The reason the business was late in paying its tax (as the proprietor had explained to HMRC) was that the proprietor's wife had left him and taken £18,000 from the business account without his knowledge, which obviously created massive financial problems for the business.
(e) If customers have to deduct tax the business would have to close putting 51 employees out of work.
Make your mind up in those circumstances. Is it fair or unfair to put those 51 employees out of work by refusing to allow customers to pay the business gross? The High Court held that the letter of the law says that HMRC is entitled to insist on tax being deducted and the court is not entitled to override HMRC's view.

I am sure that you will all wish the 51 former employees of the business a happy Christmas on the dole. However that is not my point. My point is that if Gordon and Dawn believe that putting them on the dole is the right thing to do, because that is what the law says - and tough luck that the business had a reasonable excuse for its cash flow problems - can they legitimately complain about tax avoidance, which frankly is doing no more than complying precisely with what the law requires a taxpayer has to do?

It does seem to me that fairness ought to work both ways. I cannot believe that Parliament would have intended to put the 51 employees of Hilton Main Construction on the dole in the particular circumstances of the case. If Gordon and Dawn think it wrong for taxpayers to act on the basis of what the law says rather than what they intended it to say, shouldn't that principle work both ways? Shouldn't Hilton Main Construction be taxed on the basis of what Parliament would have intended the law to say had it envisaged those circumstances rather than on the basis of what the law actually does say?

Robert W Maas


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