Last week featured an excellent article in Taxation magazine. I don’t agree with it, but it was nonetheless though-provoking, and deserves a reasoned reply. So here goes.
Iain Macleod of EDF Tax Limited contributed an article in defence of the broad sweep of UK tax planning, and challenged the notion that morality should play a part in determining whether tax planning is appropriate. In particular he suggested that “all who criticise the morality of others’ behaviour should at least make clear their presuppositions – ‘where they are coming from’”, and that they should “justify their own underlying moral position”. He is of course correct to say this, so, taking a deep breath, I will try to do precisely that.
There is, as Mr Macleod rightly says, a long history of tax avoidance activity in the UK, harking back to window tax and bricked up windows. We also suffer with a tax system that has ‘grown like Topsy’, not informed by any set of underlying principles, and subject to the influence of the latest government’s world view or pet love or hate of the moment. Like the classic story of the man trying to give complicate directions; “I wouldn’t start from here”.
Mr Macleod quotes Lord Tomlin’s classic words about the rights of taxpayers to order their affairs to reduce tax liabilities as well as Lord Rowlatt’s comment, to use the vernacular, that ‘tax is what it says on the tin’. However, he also rightly acknowledges the modern trend toward purposive interpretation of tax legislation.
I am a member of the Chartered Institute of Taxation, and twice a year I act as a group leader for a discussion group at the CIOT’s residential conference, at which topical tax issues are debated. It will surprise no-one to discover that tax avoidance has been a hot topic over the past few years, and as a result I think I have got a reasonable feel for what taxation practitioners are thinking about the issue. We have also recently seen strong comments from the chief executive of the Institute of Chartered Accountants in England and Wales on the subject of aggressive tax avoidance schemes. So there is a clear shift of professional opinion here, and it is worth considering why.
The long list of tax avoidance cases stretching back to Ramsay in the 1970s demonstrates that artificial tax avoidance schemes have been with us for a long time, and that HMRC has been attacking them in the courts and blocking them with legislation for about as long. Indeed, my sole personal experience with implementation of artificial tax avoidance schemes was with the various national insurance planning schemes of the 1980s.
At the time I do not recall taxation practitioners in general taking any sort of moral view on what was taking place; it was part of the ‘game’ of reducing clients’ tax liabilities. No-one seemed to stop and think about the impact on government finances, possibly because government finances were not at that point such a major issue. We still had plentiful supplies of North Sea Oil and a functioning banking system; we had the occasional recession, notably in the late 80s / early 90s, but no-one muttered darkly about the ‘tax gap’ or used emotive phrases such as ‘abusive’ about tax avoidance activity. And by and large, to borrow a paragraph heading from Mr Macleod’s article: “It was ever thus”.
So something changed, or more accurately a lot of things changed. So what were they, and why did they justify a moral stance being taken against certain kinds of tax avoidance?
In the 1980s, Margaret Thatcher could say “there is no such thing as society” without everyone laughing at her. It was a time when ‘every man for himself’ was an acceptable watchword, when great public monopolies were sold to the population at large and council housing was offered on generous purchase terms to its tenants. It was a time when a Thatcherite view of the world had acquired sufficient appeal that it enabled the Conservative party to comfortably win four elections in a row, and it was entirely consistent with that view to argue that every individual had a right to do whatever he or she legally could to reduce tax liabilities. That was the moral view that prevailed in the 1980s, and indeed for much of the 1990s also. Indeed it prevailed without people necessarily being conscious that it did so.
Things started to change, albeit very slowly, with the landslide election of the Labour government in 1997. Although much Conservative policy and world view had been commandeered by Tony Blair for his own purposes, Gordon Brown’s effective monopoly on domestic policy meant that the concept of society began to return. Notions of collective rather than individual responsibility came gradually back into fashion, although this was definitely a process of evolution rather than revolution.
These years were also the years of plenty; Gordon Brown could claim, with great irony in retrospect, to have ‘brought an end to the years of Tory boom and bust’. So if particular companies and individuals still sought to engage in aggressive tax planning, the impact on government finances was still not perceived to be significant; it still wasn’t a big deal. Certainly government anti-avoidance activity was ramped up, with the advent of the DOTAS regime and the introduction of pre-owned assets tax, but it still did not feel like an issue that affected all of us intimately. For most tax practitioners, let alone members of the general public, aggressive tax avoidance was something that other people did, and it did not impinge on our everyday professional lives.
My recollection is that the first breach in this position was a dawning realisation among tax professionals that, in view of increasing litigation accusing our fellow practitioners of negligence, we needed to be aware of what planning was out there so that we could inform our clients, to be see to give them a full picture of the available options. As Mr Macleod puts it “there is the view that clients should be aware of all the options available”, although I would suggest it was not so much a view as a self-defence mechanism for many tax practitioners.
Of course being required to familiarise ourselves with what to most had been an alien area of tax planning meant that we had to form a view on particular schemes and providers, and offer our clients advice when they inevitably asked “what do you think?” It is here that I start to diverge from Mr Macleod’s point of view. The motives he attributes to those who object to aggressive tax avoidance schemes are numerous, and include:
Exposure of the inadequacies of statute to the detriment of Parliament
Moral issues relating to doubts as to whether particular arrangements deliver the advertised benefits
Undermining of our status as trusted professionals by those who devise and market such planning
Resentment at not sharing in the fees from such advice
Loss of clients to’purveyors of aggressive tax avoidance schemes’.
Actually, in my experience from ‘the other side of the fence’ as it were, Mr Macleod is wrong. We could have made a fortune by strongly advising clients to undertake aggressive tax avoidance activity; the commissions paid by those who market these expensive schemes are very generous. But we owe a duty of care to our clients, and in particular we have a duty to know our clients, and their attitude to risk.
I have never had a client, of a number who I have introduced to what Mr Macleod describes as ‘purveyors of certain arrangements’, who has actually taken up one of those arrangements. And that is because the vast majority of those clients are ‘risk averse’. Not risk averse in a general business sense, because by definition if they are potential users of an aggressive avoidance scheme they are highly successful business people, which does not often go along with being risk averse, but risk averse in the sense that, as David Gauke put it the other day; “if an avoidance scheme promises results that seem too good to be true, they probably are”.
Doubts about the effectiveness of the schemes were one big factor in client aversion to schemes, another was cost (we are talking eye-watering expense in terms of fees) and the third was concern that HMRC would be all over the client’s tax affairs like a rash for a significant period. To be fair, I would only refer clients to a scheme provider which I considered to be honest about all of the implications of taking up one of their schemes, and their commendable honesty was probably the main reason why clients always ended up saying “no thank you.”
I am not suggesting that the clients’ response to schemes was moral aversion; I do not believe that to be the case at all. I am simply saying that the vast majority, even of highly successful business clients, could find ample reason not to undertake aggressive avoidance schemes.
So that was where we stood in 2007, when the world changed (I suspect even Mr Macleod would not seek to argue that there was not a seismic shift in views of all manner of matters economic and fiscal as a result of the banking crisis). And the world changed, very much for the worse, for two main reasons (at least in terms of public perception), greed and banks, the former often being exhibited very clearly in the behaviour of the latter.
Now if asked to name the major market for large scale aggressive tax avoidance schemes, I for one would name banks. So here were organisations that on the one hand were undertaking elaborate tax planning exercises to deprive governments of tax revenue, and on the other hand were expecting those same governments to dip their hands into their pockets to an utterly unprecedented extent to bale them out of the consequences of their own greed. Do you see now, Mr Macleod, where the seeds of public and professional antipathy toward aggressive tax avoidance were sown?
The results of government decisions to bale out the banks were stark in the extreme; we had basically been obliged to mortgage our own and our children‘s future in order to prop up these essential but undeserving organisations. We were all innocent victims of a monumental series of errors of judgement, and were going to remain victims for the foreseeable future.
So not only had we said goodbye to the economic prosperity of the previous 10 to 12 years, but there was little enough prospect of it returning any time remotely soon. We were all going to be paying for the banking crisis for a very long time to come through increased taxes and through economic slowdown. I will repeat that with emphasis for Mr Macleod’s benefit; “we were ALL going to be paying for the banking crisis”.
No longer was the public in general or the tax profession in particular going to maintain its moral neutrality on the subject of aggressive tax avoidance – “nothing to do with us, mate”. In times of crisis, we all have to stick together: “united we stand, divided we fall” anyone? And anyone who thought that they were morally justified in opting out of that situation by adopting a clever tax avoidance scheme was always likely in that context to be in for a nasty shock, and so it has proved.
The media in this country is very far from perfect, and thus the debate on tax avoidance has thus been conducted through a haze of misunderstanding, misplaced indignation and plain ignorance. Nonetheless, the British public has got the general idea that shirking one’s tax responsibilities, particularly on the grand scale implied by the use of an aggressive tax avoidance scheme, is not an acceptable course of action in our current dire economic straits.
Thus, Mr Macleod, whilst your reading of tax history is entirely reasonable, you have not factored in the events of the past 5 years or the seismic changes in economic, financial, moral and philosophical circumstances that they have wrought. With the impending advent of a General Anti-Avoidance Rule, of which I note Mr Macleod says not a word, his entire argument collapses; then we will have legislation that outlaws the type of avoidance schemes which he defends so impressively.
And those firms who market such schemes will presumably become the latest victims of the financial crisis, their products and services rendered obsolete every bit as much as those of Kodak were by the advent of the digital camera. And on the basis that they produce nothing of any value for society as a whole, I fear that few will mourn their passing.
So that is where I am coming from, Mr Macleod. The moral climate of the 21st century is very different from that of the 20th, and for very good reasons. On a personal level I feel extremely sorry for you, but the legislative clock is ticking and your business model is about to become untenable. In the 19th century we sent children up chimneys and down mines, and now we don’t. The moral climate changes, sometimes very dramatically, and there are victims as well as beneficiaries. Aggressive tax avoidance schemes are now beyond the pale, and the sooner we all get used to that idea, the better.