Friday, February 21, 2014


BLOG 145


I was intrigued by the Foreward of David Gauke MP, the Financial Secretary to the Treasury, to the above Consultation document.  He appears to have taken to heart Humpty Dumpty’s well known maxim that “When I use a word, it means just what I choose it to mean – neither more nor less”.  David thinks that “the behaviour of a small minority … undermines the honesty of the majority”.  It would be interesting to know if he has any basis for such an astounding statement.  Astounding because honesty, as I understand the word, denotes a code of personal morality.  I am honest because I believe that is the basis of the moral code to which I adhere.  If someone burgles my house, the fact that he has committed a crime of which I am the victim will not make me disbelieve in honesty.  I will not say to myself that because that person is dishonest, I should abandon honesty.

I know that there are people who are dishonest when it comes to paying tax.  They do not declare all, or in some cases any, of their income.  I am over 70 and I have know that, at least since I started in tax about 50 years ago.  But at no time in that 50 years has my knowledge that tax fraud exists made me wish to be dishonest myself.

I also know that some honest people don’t like to pay tax and seek legal means to minimise the amount they owe the Exchequer.  Indeed, I think that most people don’t like paying tax and most would seek to minimise the amount they owe the Exchequer.  Unfortunately, because they receive the majority of their income under PAYE, the opportunities to minimise their tax are very limited.  But that does not mean that most would not do so if they could.  As my secretary said to me in relation to the Jimmy Carr exposure, “If I had the choice between paying 4% or 40%, I would pay only 4%; who wouldn’t!”.  She didn’t say, “If Mr Carr can find a way to only pay 4%, I will seek to commit tax fraud (i.e. I will become dishonest).  What sort of world is it that Mr Gauke inhabits if he seriously believes that anyone, let alone the majority of people, are likely to become dishonest if they see a small minority of people avoiding tax?  It is certainly not the world that I and my friends inhabit.

Personally I would have thought that if the honesty of the majority of people is conditional on others adopting a particular moral stance, they would have turned to dishonesty at the time of the MPs expenses scandal.  If you see a person who earns getting on for three times the average national wage making a massive tax-free profit on a house bought on the back of a huge subsidy by the taxpaying public (by way of paying his mortgage interest), and who is entitled under the laws that he and his colleagues have passed to claim tax-free expenses that he and his colleagues have decreed are taxable if paid by an employer to an employee in a similar situation, you would surely have abandoned the principle of honesty long ago if you regarded it as such a fragile precept.

Mr Gauke goes on to say that the government has taken significant strides to make the UK’s tax system one of the most modern and competitive in the world and, to maintain the integrity of this system, “it must apply fairly and consistently to everyone”.  Leaving aside the fact that many people (not including me, I hasten to say) believe that his “most modern and competitive” system is in fact scandalous as it exempts large US corporations operating in this country from paying tax here, shouldn’t “fairly and consistently” mean that it operates in the same manner for rich and poor?  That both can expect to be able to plan their affairs on the basis that the tax law means what it says – or at least what the courts interpret it to mean.  But that is not actually what Mr Gauke wants.  He wants the law to apply unequally.  He wants some people to say to themselves, “Although this is what the law says, I think that parliament didn’t get it right as it creates a tax deduction for me and accordingly I should ignore it and make a guess at what parliament would have legislated if it had had my transaction in front of it”, whereas he wants others to follow the law as written.  What that has to do with consistency is anyone’s guess.

He goes on to explain that the consultation is about “a new measure to require taxpayers to pay the tax they owe if they have used the same avoidance scheme (or a similar scheme) as one which a Court or Tribunal has already ruled against”.  There are two worrying assumptions there.

Firstly courts do not rule for or against tax schemes.  They consider the appeal made by a taxpayer and determine whether that particular taxpayer has displaced the assumptions made by HMRC when they make an assessment, amend a self-assessment or refuse a claim.  There are lots of reasons why a court might rule against a taxpayer.  It might decide that his interpretation of legislation is incorrect.  It might decide that transactions the taxpayer has entered into do not have the effect the taxpayer believed them to have.  It might decide that a transaction is a sham.  It might decide that the facts do not reflect what the taxpayer purported to have happened.  It might decide that construction placed on a document is incompatible with a non-tax area of the law.  Accordingly the fact that A uses the same avoidance scheme as B, does not mean that a court will reach the same decision if asked to consider A’s tax position.  Even if everything else is identical, a court is largely influenced by the arguments put before it – if it were otherwise it is hard to see why a professional Bar should have developed – and the arguments that A wishes to put before the court may differ from those B used, or if presented in a different manner might be perceived differently by the court.

If A has simply used a “similar scheme” to B I find it impossible to draw any conclusions as to what is likely to happen with A’s tax position from B’s failure to convince the courts in relation to a different transaction.  Where, as in this case, it is HMRC, not the courts, that decide whether or not the schemes (or, perhaps more accurately, serious of transactions that HMRC have labelled as a scheme) are similar, the fundamental concept that a person is entitled to be taxed in accordance with the law, not at the whim of a government official, seems seriously at risk.

My second problem is that even if the courts have found that B’s scheme is ineffective, I cannot see how A “owes” tax, when his own case has yet to he heard by the courts.  Until that has happened, he surely owes nothing.  Indeed, he owes nothing even if the law requires him to pay the tax that HMRC perceives to be due as a condition of appealing at all (as applies to VAT) or as a condition of continuing to pursue his appeal (as applies to an appeal from the FTT).

If Ministers who have come through the English education system are incapable of using the English language in the manner that is generally accepted, no wonder that so many people question the effectiveness of that system.



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