Tax avoidance can be good or bad
24 February 2015
Politicians love to promise ‘tax breaks’ for married couples, savers and small businesses, but what if they instead said ‘we want to promote tax avoidance, starting with married couples, savers and small businesses?’ It’s the same thing, but it doesn’t sound as good.
Tax avoidance can be good or bad. Tax evasion can only be bad.
Good tax avoidance is when people take up government incentives to do the things that the government wants them to do – give shares to employees, develop or utilise green technology, become an entrepreneur, make charitable donations, invest in a pension, give away their wealth before old age. Only a fool would be too high-minded to take advantage of such tax breaks.
Bad tax avoidance is when people do things that purport to be within the letter of the law but tend not to be within the spirit of the law. This might involve playing one country’s tax system off against another’s, with the result that no liability to tax arises in either. Or it might involve complex and artificial arrangements that have no economic purpose, but that deliver a desired tax outcome. This would be like going from Glasgow to Edinburgh via Reykjavik and Brighton.
HMRC encourages people to carry out good tax avoidance, which it describes on its website as ‘ordinary, sensible tax planning’. Conversely, HMRC takes a dim view of bad tax avoidance, which it generally regards as abusive. HMRC has recently gained a new instrument to attack bad tax avoidance – the GAAR (General Anti-Abuse Rule). The GAAR applies a version of the ‘man in the street’ test to whether a tax arrangement is within the spirit of the law.
There is another form of tax avoidance that is available only to large international businesses, which involves entering into special tax arrangements with the government of a particular country. A consequence is to place smaller businesses at a competitive disadvantage. The OECD is currently consulting on a rewrite of international tax rules to tackle this type of situation.
Tax evasion involves deliberate dishonesty and may result in criminal proceedings. It is universally condemned.
In a court case in 1929 Lord Clyde famously declared that ‘no man in this country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores’. In other words, it’s okay to do tax planning.
Tax is often described as the price of living in a civilised society, which implies a moral dimension. Certainly, there is a moral principle at the heart of a fair tax system, which is that the rich should contribute relatively more than the poor. But, equally, it is morally good and entirely sensible for an individual or a business to take tax advice and to ensure that the shovel that HMRC puts into one’s stores is an appropriately sized one.
Alastair Thomson is Tax Director in the Edinburgh office of French Duncan LLP.