“Taxation – a ‘moral’ issue, or a legal one?”

“Taxation – a ‘moral’ issue, or a legal one?”

 Chris Thorpe - Tax Director Haines Watts Chartered Accountants Exeter

As one of the two certainties in life, taxation is thus important – albeit one that is thoroughly disliked. Nonetheless it is accepted by society generally that taxation is a necessary part of life in order to defend our country and maintain law and order in order to provide an environment within which to live our lives. In the last 100 years an additional call upon our pockets is the provision and maintenance of public services. Income tax is the tax of which we are all aware (it was only supposed to be temporary, introduced in 1799 to pay for the war against France – hence its annual renewal by our Chancellors). In line with this legal requirement to pay income tax, the taxpayers of this country have been entitled to expect some certainty and proportionality on the part of H M Treasury. We have the right to be judged and held accountable to universally-applied laws passed by our elected representatives; those laws tell us how much tax to pay year after year, they tell us what actions are acceptable and which are not and the repercussions of straying over the boundaries of the law. Adam Smith, the founder of the theories of modern economics laid down the fundamental principles behind taxation in his “Canons of Taxation”. As well as “Equality” (payment being proportional to income) and “Convenience of payment” (collection at a time and manner convenient to the taxpayer), there is also “Certainty” (tax liabilities should be clear and certain) and “Economy of Collection” (taxes should not be expensive to collect and should not discourage business). Certainty is a very relevant point; but more significantly it has been coming under attack a great deal of late.

Looking again at those “canons”, how in tact are they in the UK today? Equality? Our tax system is progressive i.e. the more you earn the more you pay – but that’s not equal, 40% is a greater proportion than 20%, whereas 20% of £300,000 is much more in taxes raised than 20% of £30,000. However, out of political necessary, the UK, like most other countries adopt this seemingly fair system. What about Convenience of Payment? Most people pay income tax through PAYE, and the other through Self Assessment Tax Returns – so that one is probably a tick in the box. Economy of Collection – taxes should not be expensive to collect, but H M Revenue & Customs do sometimes seem to make it an overly-arduous task; as for not discouraging business our tax system is wonting there – but that’s for another day. Certainty – until recently it could probably be said that our tax system was certain (if not necessarily clear!); but there is a new trend afoot amongst certain sections of our society which is undermining this fundamental principle.

Our tax statutes (the growing number of them), duly interpreted by the courts, tell us how much tax we should pay. Fellow members of my profession are often called upon to clarify the law, but essentially our tax regime is still governed by laws which are available and equally applicable to all. But to some people the outcome of this is unsatisfactory. Well-advised companies and individuals will follow the letter of the law and do what they are allowed to do to minimise their tax liability. In the House of Lords, Lord Clyde famously stated (in the 1929 case Ayrshire Pullman Motor Services v. Inland Revenue) that:

“No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel into his stores”

i.e. as long as you are obeying the law you can do as you please to lower your tax bill – or carry out “tax avoidance”. That is in stark contrast to “tax evasion” – which is a crime e.g. lying about your income, committing fraud etc.  However, we now have the likes of Margaret Hodge MP, Chair of the Public Accounts Committee and our tax conscience, condemning individuals for engaging in tax avoidance. It is apparently immoral. If it is immoral and so offensive to the common man, then it should not have been made law. What is so offensive is to have laws in place legalising an action but then being told that what you are doing is “immoral”, “egregious”, “not adhering to the spirit of the law”, “not paying your fair share” etc. Instead of obeying the law, we are being expected to obey the opinions of certain self-righteous individuals, many of whom are ignorant of our tax system and some of whom may well dabble in some egregious and immoral tax avoidance themselves. If we are to follow their call and pay our fair share and stop avoiding tax – then what is “our fair share”? How do we quantify it? What types of “tax avoidance” are acceptable? Is getting tax-free interest from an ISA acceptable in their view? Or getting tax relief on pension contributions? Do we have to consult Margaret Hodge on each of these matters and others to get the answers? We shouldn’t have to – we have the laws of the land that tell us what we can do and we should not be forced to follow these subjective and uncertain parallel rules laid down by the opinions of a few individuals.

We have a new development now - the General Anti-Abuse Rule (or GAAR). The word “Abuse” used to read “Avoidance” at the consultation stage of this new piece of legislation which came into effect as part of the Finance Act 2013. The GAAR is now an over-riding arbiter as to what is acceptable tax planning under the law. The change from an anti-“Avoidance” rule, to one of anti-“Abuse” is seemingly an acknowledgement of the fact that tax avoidance is legal and that the purpose of this new law was to combat abuses of the system. The change in words gives this law a more-acceptable face – abuse is never a good thing. Abuse is far worse than anything deemed as being Avoidance, but there is perhaps a fine line between the two as something that is abusive is more often than not still within the boundaries of the law.

Whilst it’s a shame it’s come to this, the GAAR would seem a sensible solution to the problem of abuse. The great thing about it is that at the very least it is a law. It is on the statute books. Some uncertainty with still linger for a while before its judgments over individual actions are passed and digested and passed on as guidance, but instead of the hysterical cat calls from a few individuals, we now have a law telling us how to obey the law. 


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