Friday, December 06, 2013


BLOG 142




What is tax avoidance?  I wish I knew.  BBC Panorama  tell me that it’s using  the patent box introduced by the government (with all party support) in 2012.  Actionaid tell me that it is using double tax agreements to avoid paying tax twice.  The Times tells me that it is not paying tax in the UK because you’re making sales in Ireland (and paying Irish tax on them).  The Public Accounts Committee tell me that it is over-paying to rent your shops so that you make a loss.  Personally, I don’t think that it is any of those.  Fortunately, nor does HMRC.


I see tax avoidance as a moral issue; it is when other people reduce their tax bills in ways in which you disapprove.  But we tend to disapprove of different things.  I disapprove of complex schemes designed to create an artificial loss.  Disapprove morally that is; if one of my client wants to use such a scheme, I will try to find him one as I don’t think that I have any right to impose my moral compass on someone else and neither do I think that I should challenge his moral view.


Few people like to pay tax.  I suspect that if people are offered a choice of two ways to achieve something, one of which involves a significantly greater tax liability than the other, most will choose to pay as little as possible.  I think that’s human nature.  I am happy to assume that, for example, none of the journalists who write about tax avoidance, route any of their earnings through a company or, if they do, use the company to transform highly taxed earnings into lower taxed dividends, as it would obviously be hypocritical to lambast tax avoidance by others while avoiding tax oneself.


I avoid tax on my books.  I write them for Dawn Publishing Ltd but do not receive earnings from that company and all of its shareholders are basic rate taxpayers.  Accordingly the earnings are taxed at 21% only, instead of the 40% that I would pay if I did not put my writings through Dawn.  I’m not ashamed.  But I wouldn’t pretend that it is not tax avoidance.  My difficulty in defining the term is not because I can’t recognise it, but because I can’t assess its breadth.  Everyone has their own personal definition, which I suspect is driven either by what they would themselves be prepared to do if they had the opportunity or by jealously - it is unacceptable for people to avoid tax because I don’t have the opportunity to do it myself even though I would if I could.


Until a couple of weeks ago, there was no real need for a definition.  But now HMRC have revised their fit and proper person test for charitable trustees and the new test outlaws some of those who have been involved in tax avoidance.  HMRC now say that “Factors that may lead to HMRC deciding that a manager is not a fit and proper person include, but are not limited to, where individuals …


·         have used a tax avoidance scheme featuring charitable reliefs or using a charity to facilitate tax avoidance

·         have been involved in designing or promoting tax avoidance schemes”.


They suggest that charities ask potential trustees (and senior managers) to certify that they have not done either of these things.  The charity doesn’t actually have to send the certificate to HMRC (just keep it available in case HMRC ask) but each trustee of a new charity does have to certify to HMRC that he has read the guidance of which the form forms a part.  How can anyone sign such a certificate if he does not know what tax avoidance is?


A lot of trusts have a charity as the backstop beneficiary.  Without such a beneficiary many trusts would be ineffective for tax purposes.  So by putting money into such a trust, are you using a charity to facilitate tax avoidance?  Indeed if you create a charitable trust into which you put a capital sum, are you using the charity to facilitate tax avoidance?  Surely you are, as the whole purpose of creating the trust is likely to be that the charity can generate tax-free investment income, whereas had you received the income it would have been taxable.


Accountants and tax advisors seem to have an even bigger problem.  Tax planning is a major part of my work.  Is a strategy designed to carry out a transaction in the way that attracts the least amount of tax, a tax avoidance scheme?  On the face of it, yes.  That is precisely what tax planning aims to do.  So in future accountants cannot apparently be charity trustees.


When the legislation was introduced, the government said, “Fit and proper” is not defined in the legislation so takes its natural meaning.  HMRC will issue guidance on how to apply this test.  It seems likely that Parliament envisaged fit and proper meaning honest and competent.  That is surely the natural meaning of the phrase.  It is unreasonable for a charity to be recognised as such for tax purposes only if its trustees lean over backwards to pay as much tax as possible.  But if HMRC now intend to use entering into, or recommending, tax planning as an indication of dishonesty, that seems to be what is happening.  Of course, HMRC will not adopt the definition of tax avoidance that has been formulated by the BBC, Actionaid or the Times – at least for the time being!  But that is not the point.  They are asking trustees to confirm that they have not been involved in tax avoidance without providing a definition of what tax avoidance is – and, indeed, without giving any guidance as to what they perceive it to be.  How can anyone be expected to sign such a certificate?