Status anxiety

I don’t know why I’m against tax avoidance (and I bet you don’t either)

The trouble is, there’s no distinction between the spirit and the letter of the law

21 February 2015

9:00 AM

21 February 2015

9:00 AM

On the face of it, the moral case against tax avoidance seems pretty straightforward. If you’re a UK taxpayer and benefit from public goods and services, then you should pay your fair share of tax. If you’re paying less than that, then you’re a free rider. You’re breaking the social contract.

But what do we mean by ‘fair share’? The standard defence of tax avoidance is that it’s perfectly legal — if it wasn’t, it would be tax evasion — and the social contract only obliges people to obey the law, not to pay more tax than they have to. To maintain that people are morally obliged to pay an additional amount of tax, over and above what they’re legally required to pay, is a tricky position to defend.

For one thing, it means we’re all guilty of tax avoidance. I’m not just thinking of people who buy whisky in duty free or take out an Isa. If the ‘fair’ rate of tax is higher than the actual rate, and anyone not paying the ‘fair’ rate is ‘dodgy’, then everyone who fails to make a voluntary donation to HMRC on top of their annual tax bill is at fault.


More fundamentally, where does this obligation come from? A common argument made by those who think rich people should pay more tax than the legal minimum is that they benefit disproportionally from things like the rule of law, particularly when it comes to the protection of their property. But if you calculate that benefit, it’s likely that Britain’s multi-millionaires are paying more than their fair share. After all, the top 1 per cent of income earners pay roughly 25 per cent of the total income tax take but don’t consume a quarter of public services. You could argue that the super-rich benefit in so many intangible ways — the roads, schools and hospitals used by their employees, for instance — that the total value is incalculable. But if that’s true, it doesn’t follow that they’re paying too little. They could be paying too much. We just don’t know. That’s what ‘incalculable’ means.

More sophisticated critics of tax avoidance stop short of saying people should pay more than the law requires, but distinguish between the spirit and letter of the law. Many forms of avoidance, such as filling up with petrol the day before a rise in fuel duty, are fine because they are in keeping with the spirit of the law. But avoidance that involves paying expensive accountants to exploit loopholes is wrong. Even though you’re complying with the letter of the law, you’re flouting the intentions of those who passed the law. The sin here consists in not complying with the will of our democratically elected representatives when it comes to tax, rather than not paying your ‘fair’ share, although the two arguments are often run together.

But there are problems with this position too. How are people supposed to know what the intentions of legislators are when it comes to taxes other than by examining the laws they pass? This was a point made by Lord Hoffman, a senior British judge, in a lecture on tax avoidance in 2005. ‘The only way in which Parliament can express an intention to impose a tax is by a statute that means that such a tax is to be imposed,’ he said. In other words, when it comes to tax there is no distinction between the spirit and letter of the law. They’re one and the same.

No doubt opponents of avoidance would dispute this and claim that it’s usually perfectly obvious when a tax loophole is contrary to the spirit of the law. However, even supposing that to be true, it’s a bit of a leap to argue that taxpayers have a moral obligation to look beyond the tax code and do their best to honour the intentions of the lawmakers who created it. Ultimately, it comes down to where you think the onus of responsibility lies. Is it the duty of the taxpayer to hand over more than the letter of the law requires if the law in question fails to capture the intentions of the lawmakers? Or is it the duty of the legislature to draft the law properly in the first place?

I’m framing that question in a way that favours the libertarian point of view, but the truth is I haven’t completely made up my mind. Like most people, I instinctively want to condemn aggressive tax avoidance as immoral. But I can’t come up with a good argument for doing so.

Toby Young is associate editor of The Spectator.

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Show comments
  • As I think Dan Hannan pointed out avoiding tax stretches all the way from buying an ISA (encouraged by the Government) to the highly complex schemes available only to the very rich. You might say an ISA is fine but that the complex “aggressive” schemes are not. But where do you draw the line? It’s a continuum along which at some point judgment changes from “It’s fine” to “It’s amoral”. Who decides? It’s totally subjective. Anything legal is defendable, anything borderline is not. I can imagine that if I was a Fat Cat (fat chance!) I would apply the test of asking my Financial Adviser “Can you assure me that this scheme is 100% legal and further that it is not controversial and under scrutiny by HMRC” If I got that assurance I’d go ahead. But that’s my subjective solution and not a template for others.

    • Tox66

      The law decides and it would be simple for parliament to specify which things are and are not legal.

      Mind you, the Labour party is very keen on the EU and allowing people to be resident in any EU country and be paid there is pretty central to the movement of people so they’re going to end up looking quite silly if they (God forbid) ever do get into power and try to follow up on their silly promises.

      That’s the thing, though, isn’t it? The lawyers and accountants within Labour know this but they prey on the emotions of idiots in the hope of votes.

      • Tremulous

        The “law specifying which things are and are not legal” is the reason we have 15,000 page tax code. One of the largest and most incomprehensible in the world.

        If you can specify it in 5 pages or less, it’s too complicated and none of our legislators will read it let alone understand it.

        • Tox66

          True indeed and this reinforces why the “avoidance = evasion” crowd cause more problems than they solve. We should indeed simplify the tax code but, whether we do so or no, the international treaties we sign also impact tax law.

  • richardvine

    Taxes all over the western world are too high and will remain so in order to create the unachievable “Fairer” society. What does not seem to be fully understood is that this high level of tax (coupled with consumer protection legislation) is achieving the exact opposite. It is ensuring that there are fewer work opportunities and more claimants on the system. The vast majority of higher rate tax payers actually take very little from the system. Those that take the most want to be able to take more. Now that those who take outnumber those who pay the dynamic is altered permanently in favour of the takers and for that reason the payers will seek redress through avoidance. The higher the tax rates the higher the avoidance. Until it is recognised that income redistribution through taxation doesn’t work the West will continue to haemorrhage jobs and investment to low tax regimes.

  • Alanadale

    This blog is based on a misunderstanding of what comprises tax avoidance and on an Aunt Sally about what is a fair share of tax.

    A fair share of tax can be taken as the amount that Parliament generally intended a person or corporation to pay. It is a separate argument as to whether Parliament should enact higher or lower tax rates for the wealthy.

    Tax avoidance is not about accidentally falling into some difficulty about distinguishing between the letter and the spirit of the law. Tax avoidance is engaging in totally artificial and highly contrived schemes designed by lawyers and accountants in the hope that they can be supported by complex legal argument to within the letter of the law by controversial interpretation of statute and precedent tax cases. No-one gets involved in this activity except by design and intention. The intended outcome is, for example, to create substantial artificial losses, when in fact no loss at all has been incurred, in order to offset the so-called loss against taxable income. These schemes do not exist because the legislature was a bit careless with its drafting; they exist because there is a tax avoidance industry out there seeking to cream off its share of tax that it hopes to be avoided.

    Please try to look at the situation through the correct end of the telescope.

    • Tox66

      No that isn’t so.

      I pay myself in dividends instead of through PAYE and thus legally avoid tax. No expensive scheme, no off-shoring and no contrivance – I simply choose one method over another both of which are in the tax code of the UK. I also put money into a pension scheme and ISAs in order to avoid tax on regular savings which is, again, avoidance.

      Saying that only schemes such as that joined the Jimmy Carr are avoidance is plain wrong. You may WISH that it were different but it isn’t.

      • Alanadale

        I do not know your personal circumstances, but dividends are taxable.

        I dispute that ISAs and making genuine pension contributions are avoidance.

        • Tox66

          I know dividends are taxable but at a lower rate than PAYE (and they don’t attract NI either). So I avoid tax by choosing a lower rate of tax.

          You can dispute whether choosing ISAs and pensions are avoidance or not but that is what using them constitutes legally. You may feel there is a moral difference but the law draws no moral distinction.

          • Darnell Jackson

            Very well said.

    • britishinjustice

      I agree with you entirely Alanadale with the exception of your assertion that “These schemes do not exist because the legislature was a bit careless with its drafting”

      Tax advisors from the big 4 accountancy firms and representatives of big businesses have been allowed to sit on the committees that advise governments on tax legislation. The same big 4 accountancy firms who are a part of the tax avoidance industry you spoke of.

      So having helped to write the tax legislation that enables tax avoidance, these same tax advisors have gone about creating tax avoidance schemes on an industrial scale.

  • Tremulous

    A good argument I can see is that if people aren’t paying what they should (the intention of the law, forgetting for a moment that with a 15,000 page tax code the intention must be to give people opportunities to avoid tax) the rest of us have to pay more to compensate.

    That is to say, if everyone paid more, everyone would pay less.

    Did that make sense? :p

    • Tox66

      How do you divine the intention of the law except by its wording? Are we to look only at rubric? Media coverage of the ministers who passed the law?

      • Tremulous

        The law is so complex, nobody understands it. Particularly our legislators. 15,000 pages? It’s designed to be impossible to understand unless you’re an “expert” and even then you’re likely only to ever understand a small sub-section of it.

        It needs simplification – 5 pages or less so that the people who vote on it could actually have read it.

        • Tox66

          Yes you said so before. It is true and simplification is required but how do you divine what constitutes avoidance? I am happy with a flat tax, surely, with all income from whatever source being taxed at x% in Britain.

          That in itself still won’t stop avoidance per se. What if, say, Holland has a flat tax of x-5% and somebody chooses to become resident there whilst working here? That “avoids” 5% of the total bill and moreover switches the payment to Holland. How does that work?

          And if you must pay tax where you work then how can you be said to contribute to the society in which you live? And that might seem simple from a UK perspective but Scotland may soon have a separate tax regime from the rest of the UK.

  • Joe Mckay

    Leo Katz wrote a book on this topic. The line between avoidance and evasion is very tricky. Check out ‘Ill Gotten Gains: Evasion, Blackmail, Fraud and Kindred Puzzles of the Law’.

  • Joyce

    Isn’t it the treasury who decides on what is and isn’t taxable ? If the government itself sets up systems for tax avoidance, how is anyone entitled to complain ? Am I being simple ?

    • britishinjustice

      Joyce,

      No you are not being simple. It is made very long winded and extremely complicated for a reason i.e. so the vast majority of us don’t understand.

      The treasury are a part of government, headed up by chancellor of the exchequer and he/she set the rules for tax. HMRC are then responsible for applying the rules set by the chancellor and collecting the taxes due.

      Among the issues that are now being talked about and rightly questioned is that professional tax advisers from the big 4 accountancy firms (KPMG, Deloitte, PWC & Ernest & Young) have been advising governments on what tax laws to write (and charging them of course) then advising big companies and mega rich individuals how to avoid paying tax based on the rules they have just helped the government to write.

      There are 2 ways we can complain:

      1) Speak to our MP’s
      2) When we vote

      • Joyce

        Thanks for the information. My own tax avoidance method is a very basic one. This tax year I ceased for the time being to pay income tax because the chancellor set the limit below my income. As far as I can I avoid firms that charge VAT

  • grutchyngfysch

    A lot of the confusion evinced not only on the part of anti-avoidance campaigners but also in this article stems from the problem of morality in the secular age. Whence comes the idea that anyone is morally obliged to do anything above the letter of the law? It comes from an age where law was the *extension* of spirit, the natural product of divine order. Intrinsic to that idea was the sense of moral obligation to something eternally defined – the idea that there was good and evil, and a Judge who would not be swayed by clever lawyers or by men declaring that night was day.

    Obviously most people are not going to be able to go along with a religious understanding of that – but if I might make an observation: much of the root of the complexities described above lie in the fact that the state has effectively become the repository of public morality. We no longer ask whether the state measures up to the requirements made by a deity – but instead ask whether citizens can be considered to be “good” by the state (that is, by complying with its requirements and paying its dues).
    I’m not honestly sure how you could have a system of morality that is capable of holding a state to account without some sort of metaphysically divine basis to an alternative morality. Any theological attempt to describe law is inevitably going to be “personal opinion” in the secular state. God is dead, apparently, so all that remains is a law which does not save (either individually or socially) and leaves a lot of people feeling that something is missing when lawyers and judges casually nod in agreement that only the letters on the statute book matter.

    • britishinjustice

      Morality has nothing to do with the problems being discussed. The morality element of this whole debate has been introduced by successive conservative, labour and coalition governments to divert criticism and ridicule away from them and towards the individual.

      The real issue here is the writers of the law i.e. politicians. These public servants ,elected by us to serve the needs of our nation as a whole have been infected with the global disease that is capitalism and it’s insatiable greed, regardless of the consequences to the huge majority of mankind.

      Long gone are the days of common good, fellowship, shared responsibility, and to coin Mr Cameron’s phrase “we’re all in this together” and replaced with individualism, selfishness, secrecy, power, greed and all the idealisms of capitalism.

      I agree with those you refer to who feel that something is missing, but it has nothing to do with morality, or the lawyers and judges as they are servants of the law and can only apply what is written. The thing that is missing is that politicians have forgotten who put them in their position of trust, who pays their wages and over inflated expense claims and who they were elected to serve.

      The solution? Empower ourselves with knowledge. The knowledge of what’s in their political manifestos. The knowledge of what politicians are really up to. The knowledge of all their dirty tricks and not so hidden real agendas.

      And then when we have all the knowledge, use it in the most powerful tool available at our disposal, use it when we VOTE.

  • Recce

    I think that sometimes is easy to see when someone is breaking the spirit of a tax law while staying within the letter of the law. Whether someone can be prosecuted under those conditions is a different question. If you have a tax break for the film industry which is then exploited by people setting up / investing in companies that have no intention of actually producing a film, then it is against the spirit. But how detailed should tax law be? “You have purchase or hire film equipment to the value of X every year, and not re-lease it to a 3rd party. And you should have a qualified key grip on staff for at least 3 months a year”? It would be ridiculous

    • Zalacain

      That’s why tax breaks and subsidies are generally a bad idea.

  • If the law creates undesitable conditions for people to legitimately avoid tax then change the law.

    • fundamentallyflawed

      This should be the easiest attack line for the conservatives to take but they seem reluctant to do so. Presumably as their chums benefit most from the mess

  • hohum

    Tax Avoidance is entirely created by government and politicians. Whom are under a delusion that yet another new tax on x,y or z solves society’s problems. The sugar tax is one fine example. I fully expect that there will be just as many fat kids after the tax as before.

  • Jack Rocks

    I’m kind-of in two minds about it Tobes old chap. On the one hand every £1 that isn’t paid in tax by someone else is £1 muggins and friends (us plebs) have to cough up to government, or at least right now, hand down to our children and grandchildren to cough up to government (debt).

    On the other hand I know that most of those £1s in tax havens aren’t sitting in vaults or sheds, they’re out there doing work in the global economy. If one assumes that £1 invested by a despicable tax avoider is doing more useful economic work than £1 spent by the government (not an unreasonable assumption given the mess various Communist states got into), then I suppose it’s not such a bad thing.

    I think perhaps the right to hide taxable income offshore to avoid taxes should be extended to those of us on PAYE too. That would be fair and, dare I say it, progressive. In other words if I can’t do it, why should someone worth 1,000 times more than me be able to?

  • tjamesjones

    if you fall foul of HMRC where you’ve kept the spirit but not the letter of the law, you’ll find there is no such thing as the spirit of the law.

    • fundamentallyflawed

      I agree – Tax avoidance is legal. If the complex rules allow to much avoidance then the politicians should change them. Don’t whine about “fairness” as it doesn’t exist in law. Its either legal or illegal

  • GripperStebson

    Perhaps his pappa’s preferring not to pay “excessive tax” was a protest at the way the previous government threw around money like drunken sailors. His dear child’s current spending plans on things like “climate change”, vanity train sets, submarines that we’re supposed to believe will attack Vladimir Putin and hosing money at all and sundry in the third-world just makes me ache to pay even more tax.

  • Zalacain

    I agree with you Toby. In the end, the onus is on the politicians to frame simple fair laws that reduce tax avoidance.

  • gonefishing01

    The reality is that Britain’s complicated tax code exists because HM Treasury and the government of the day wants to impose forms of tax at such rates that if they were applied uniformly, the incidence of taxation would be such that it would, long-term, reduce inward investment and tax revenue because the tolerance of higher earners (both individuals and companies) to higher taxes is, ironically, lower than that of middle and lower income earners (because these lower earners are more rooted to this country and less able to simply upend and move somewhere else); or because they wish to encourage (or at least not discourage) certain forms of behaviour (e.g., savings). In other words, they wish to avoid reducing long-term economic output through uncompetitive taxation.

    However, when these exceptions seem to produce what they believe to be perverse results, they jump up and down and complain about it. This, despite the fact that they are quite capable of changing the tax rules in order to prevent these “abusive” forms of avoidance (at the expense of reducing long-term revenue, ceteris paribus). In short, it’s a case of governments wanting to have their cake and eat it.

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