The future of tax avoidance

We don’t know much about tax avoidance. Not how much it costs us. Nor how to stop it. We barely know what it is. But we’re pretty sure we don’t like it. And we now know – thanks to Deutsche Bank and UBS – that the Supreme Court doesn’t either.

Last week’s decision concerned a scheme dating back to the early 2000s. Glory days for tax advisers who found, come bonus round, a willing buyer in every board room in City. The Deutsche Bank and UBS arrangements were variants on a scheme that lasted a number of years. You’d line up willing – and few weren’t – participants. To them you would deliver, instead of a cash bonus, shares in a cashbox company. It would declare a dividend in the amount of the cash bonus. Employees would pay a lower rate of tax – or even none at all.  And there’d be a nice little NICs saving for you too.

We barely noticed, prior to 2008, this stuff. And when we did we didn’t care. But true to history – which tells us tax avoidance is the most reliably pro-cyclical industry of all – this all changed with the financial crisis. Who could we find to blame? Whose shoulders might bear the burden? From whose had it, well, slipped a little?

We soon found out.

That our judges sit aloof from the winds of public opinion is an article of public faith. But the faith of tax lawyers quickly lapsed. Points that, before the financial crisis, HMRC lawyers had regarded as so hopeless as not even to bother to argue acquired, a mere few years later, the fixed status of orthodoxy.

The speed of this process caused concern in the legal community. Government appointed a ‘study group’ to help it decide whether to adopt a General Anti Abuse Rule to tackle tax avoidance. That group included, amongst others, a retired Law Lord and a serving High Court judge. It agreed, unanimously, that when confronted with avoidance judges adopted a “stretched interpretation” to the law. And quite how stretched depended on how much her or she disapproved of the transaction before her.

The GAAR was to solve all of this by giving judges an objective legal framework within which they might articulate their instinct to fairness. But it’s now been on the statute books for almost three years and a judge has yet to have the chance to use it. So the judicial activism continues.

Both Deutsche Bank and UBS had enjoyed success in the lower courts. Judges had not been able to find in the language of the legislation an intention that the bonuses should be taxed as HMRC contended.

But you didn’t need to read further than the first paragraph of the Supreme Court decision to know that this time would be different. When judges start the conversation with talk of the “sophisticated attempts of the Houdini taxpayer to escape from the manacles of tax” it's rarely as a precursor to offering the tax freedom our would-be Houdini desires. It found that the result contended for by the banks would be “positively contrary to rationality, bearing in mind the general aims of income tax statutes” and dismissed their arguments.

A thrilling denouement to the story of tax planning. Few politicians intend that the highly paid should be able to apply the expensive emollient of good tax advice to slip the shackles of taxation. Not least because the British public, unlike those who flocked to Houdini, tend not to applaud when they do.

But is an extra set of judicial leg-irons really a good thing?

Yes - if your mind’s eye sees a judge who wears a blindfold and balances the scales with an invariable thoughtfulness and care. But there are reasons to be cautious too. There are times when we genuinely don’t know whether a transaction is “avoidance”. And if the reality does look like that subscribed to by the GAAR study group – judges applying a personalised sniff test – our tax system could come to deliver a little less than law and, sometimes, only a little more than popular opinion.

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