AVOIDANCE: critically evaluate whether the law is dealing adequately with tax avoidance.
Making money whilst avoiding tax is the name of the game. Unlike the illegal
tax evasion, tax avoidance uses legally designed scheme to reduce tax, per
Wheatcroft in “Tax Avoidance”. However, tax avoidance is unethical and has been
developed to a global issue, e.g., the ‘big four’ accounting firms can make billions of
pounds annually by selling avoidance schemes, which causes the government to have
severe loss in tax revenue. Hence, this essay will critically evaluate whether the
current law is sufficient to deter tax avoidance.
Sumption JSC in HMRC v Pendragon argued against tax avoidance as it would
produce inequity between taxpayers and give rise to social cost as it reduces
government revenues for vital public spending on health, education etc. Hence,
HMRC has acted to reduce possible chances for people to escape paying taxes.
Traditionally, the courts in IRC v Westminster allowed avoidance provided the
law is right. At that time, the government tended to use the TAARS (Targeted Anti-
Avoidance Rules) approach: they responded to avoidance by passing new statutory
rules each time an unacceptable scheme occurred. Yet, TAARS was highly criticized as
each reform adds complexity to the tax code, let alone it is not a general solution –
the law is evolving, taxes would have already been lost before the scheme is blocked
off.
The New Approach
Subsequently, the House of Lords in Ramsay v IRC created ‘the new
approach’, which was then strictly adopted by the courts to strike down two ‘circular’
schemes without clear explanation in Ramsay and IRC v Burmah Oil.
Some thought the new approach would only affect circular schemes as there
was no clear explanation. In fact, it also struck down the linear schemes in Furniss v
Dawson. Here, Lord Brightman held that any transaction will be considered as
avoidance if it was inserted without commercial purpose apart from tax avoidance.
Fictitious steps will then be inserted to replace the inserted steps if necessary, to fill
in the gaps as merely disregarding steps left a nonsensical situation as acknowledged
by Mustill LJ in Craven v White. Furniss shows that this included the deferment of
tax liability, not just its complete avoidance.
Accordingly, the Supreme Court (SC) in Tower MCashback v RC unanimously
rejected Furniss due to its rigidity. Their lordships alternatively suggested the courts
to look at the facts realistically and interpret the statute purposively.
Making money whilst avoiding tax is the name of the game. Unlike the illegal
tax evasion, tax avoidance uses legally designed scheme to reduce tax, per
Wheatcroft in “Tax Avoidance”. However, tax avoidance is unethical and has been
developed to a global issue, e.g., the ‘big four’ accounting firms can make billions of
pounds annually by selling avoidance schemes, which causes the government to have
severe loss in tax revenue. Hence, this essay will critically evaluate whether the
current law is sufficient to deter tax avoidance.
Sumption JSC in HMRC v Pendragon argued against tax avoidance as it would
produce inequity between taxpayers and give rise to social cost as it reduces
government revenues for vital public spending on health, education etc. Hence,
HMRC has acted to reduce possible chances for people to escape paying taxes.
Traditionally, the courts in IRC v Westminster allowed avoidance provided the
law is right. At that time, the government tended to use the TAARS (Targeted Anti-
Avoidance Rules) approach: they responded to avoidance by passing new statutory
rules each time an unacceptable scheme occurred. Yet, TAARS was highly criticized as
each reform adds complexity to the tax code, let alone it is not a general solution –
the law is evolving, taxes would have already been lost before the scheme is blocked
off.
The New Approach
Subsequently, the House of Lords in Ramsay v IRC created ‘the new
approach’, which was then strictly adopted by the courts to strike down two ‘circular’
schemes without clear explanation in Ramsay and IRC v Burmah Oil.
Some thought the new approach would only affect circular schemes as there
was no clear explanation. In fact, it also struck down the linear schemes in Furniss v
Dawson. Here, Lord Brightman held that any transaction will be considered as
avoidance if it was inserted without commercial purpose apart from tax avoidance.
Fictitious steps will then be inserted to replace the inserted steps if necessary, to fill
in the gaps as merely disregarding steps left a nonsensical situation as acknowledged
by Mustill LJ in Craven v White. Furniss shows that this included the deferment of
tax liability, not just its complete avoidance.
Accordingly, the Supreme Court (SC) in Tower MCashback v RC unanimously
rejected Furniss due to its rigidity. Their lordships alternatively suggested the courts
to look at the facts realistically and interpret the statute purposively.
