Monday, February 22, 2016


BLOG 170


We are constantly being told by both Ministers and HMRC that we have a fair tax system.  I am not sure what “fair” means.  It seems to me to be a concept that takes its meaning from the particular circumstances in which fairness falls to be addressed.  However, at a minimum, I think it implies even-handedness.

In the context of tax I would have thought that if one pays the tax prescribed by the legislation, one has fulfilled one’s duty to society.  That always used to be the case.  However in recent years, politicians have asserted a doctrine of tax morality, by which they mean that it can be immoral to pay the tax prescribed by the legislation if that does not reflect what they describe as the intention of parliament.

Conceptually, there is a problem here, insofar as everyone who is familiar with parliamentary procedure knows parliament does not normally have an intention in enacting tax legislation.  What happens is once the Finance Bill is published, it is considered in Committees.  For a few clause this is a Committee of the Whole House, but for most of the Bill it is a Committee of around 20 people, which is roughly 3% of the number of MPs.  Erskine May on Parliamentary Procedure defines the role of such a Committee as to consider the Bill line by line and to refine it.  That happened up to the 1970s.  It no longer happens today.  A Committee is an opportunity to make political points.  There is little or no attempt to improve the legislation or even to consider it line by line.  It is considered clause by clause but almost all the debates are on either a motion that “the Clause stand part of the Bill” (i.e. that it simply be accepted as drafted) or that the Government should publish a report of the clauses operation (normally within six months and often well before the clause comes into operation at all).

Accordingly what is in the Finance Bill may reflect Ministers’ views; it may reflect the draftsman’s view; it may reflect HMRC’s view.  But it certainly does not reflect the view of Parliament.

Traditionally the courts have sought to discern the view of Parliament from the wording that Parliament has used in the legislation.  Sadly, in doing so, they have a nasty habit of arriving at a result that the government of the day doesn’t like.  Accordingly our political masters have developed a concept that what the law says is not what the law means if the result cannot have been intended by parliament.  They have gone on to introduce the concept of fairness into tax.

I have no particular problem with either morality (as long as it is for the taxpayer, not for Mr Osborne or Mr Gauke to determine what he believes to be moral) or fairness (provided that it is a two-way street).  It does however seem to me completely unreasonable for either the government or HMRC to be saying, “We think that taxpayers should refrain from asserting their legal rights when it is immoral or unfair to do so, but HMRC should enforce the law rigorously, no matter how immoral or unfair that may be”.  But that seems to me to be the position of both the government and HMRC.

This is well illustrated by two recent tax cases.  The first is Ames v HMRC.  Mr Ames invested in a company.  His investment qualified for income tax EIS relief.  The CGT legislation provided that if EIS shares are sold after the end of the EIS period and “an amount of EIS relief is attributable to the shares”, the gain is not taxable.  Unfortunately his income was less than his personal allowance, so he had no taxable income against which he could claim EIS relief in the year in which he invested.  Mr Ames consoled himself with the fact that he realised a substantial tax-free capital gain on the shares.  “Oh No,” said HMRC, No amount of EIS relief is attributable to your shares because you had no income against which such relief could be given.  Does anyone believe that in enacting the EIS legislation, parliament deliberately decided to give CGT exemption if the shares increased in value and the taxpayer had £1 of income against which the relief could be claimed but there should be no such exemption if the person happened to have no taxable income in the year he made the investment?  Does anyone think that is a fair outcome?  If the government is not prepared to treat Mr Ames “fairly” by taxing him only on the basis that parliament would undoubtedly have adopted if it had considered a person in Mr Ames position when it introduced the EIS legislation, it seems highly hypocritical for it to urge those who successfully use artificial tax avoidance schemes to pay the tax that parliament would have imposed (but didn’t) if it had contemplated the scheme at the time it passed the legislation.

The next case is Flix Innovations Ltd v HMRC.  The company raised money on the basis that the shares would qualify for EIS relief.  It had in issue a class of valueless non-voting deferred shares.  The shares were entitled on a liquidation to repayment at par but only after the par value of the ordinary shares had been repaid.  They had no other rights.  The company then issued the EIS shares.  “Sorry”, said HMRC, “One of the conditions for EIS relief is that the EIS shares must not have preferential rights.  They have preferential rights over the deferred shares so no EIS relief is due”. 

Did parliament really intend that EIS relief should not apply if a company were to strip some of its existing shares of virtually all of their rights prior to an issue of EIS shares so that the EIS investors would obtain a fair stake in the company?  I very much doubt it.

So why didn’t HMRC say, “We will ignore these valueless shares because they clearly don’t fall within the mischief that parliament had in mind when it said that EIS shares should not have preferential rights”?  That is what the government expects taxpayers to do when the law “unfairly” benefits them.

Surely we should either have a fair tax system or everyone, including the State, should accept that legislation can give rise to unanticipated results.  It is not reasonable for the State to berate those who benefit from such anomalies but itself insist on taking those unintended benefits that accrue to the State.



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