The Line Between Avoidance and Evasion Is Disappearing

by | Mar 25, 2015

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Michael Wilson rants that a long-cherished distinction between avoidance (OK) and evasion (not OK) is being eroded by political doublespeak. And that the demise of the 1936 ‘Duke of Westminster’ legal principle has gone sadly unnoticed. Where will it end?


You hardly need telling that there’s an election on the way. As the nation tries to decide whether two Eds will be better than none at all, or whether David Cameron can shed his public school image convincingly enough to shake off Nigel Farage (also a public schoolboy, but happier with a beer than a Chablis), the fighting is bound to get dirty in one way or another.


Consider, for example, Chancellor George Osborne’s pretty overt pitch for the wavering grey vote by extending the availability of pensioner bonds. (And, arguably, the whole pensions freedom business too.) On the Labour side, consider Ed Miliband’s populist assault on Guernsey’s tax privileges, or his suggestion that any company thinking of accepting an offer should first let its employees have first dibs at the shareholdings.

Then again, consider the rumpus surrounding the mansion tax in the North London street where, according to the Daily Mail, Ed Miliband lives in a £2.6 million home that was bought in his barrister wife’s name back in 2009 – and where his elderly neighbours are allegedly protesting that they bought their £2 million houses for peanuts in the 1970s, so that they can’t afford to pay a £250 per month levy now. Truth comes in various shades of reality, it seems.

Avoiding the Issue

Nowhere more so, it would seem, in the way that the term ‘tax avoidance’ is being steadily introduced into official statements where once we’d have been talking about ‘tax evasion’. If you haven’t noticed it, take a closer look, because it seems to be slipping in everywhere. The old dictum that avoidance was legit, whereas evasion definitely wasn’t, has been taking something of a hammering in the last two or three years.


And to some extent I don’t have a problem with that, because – for reasons I’ll explain – the recent growth of fiendishly complicated but nominally legal tax reduction strategies has indeed put the skids under a layman’s normal understanding of what constitutes legitimate avoidance and what doesn’t. As fraud trials have also been finding out, the sheer complexity of these avoidance stratagems can easily exceed the intellectual capacity not just of juries but also of some judges. The taxman is up against a very resourceful adversary.

Political Aunt Sallies

Let’s be clear about one thing, though. As far as the politicians are concerned, hammering non-payers and tax avoiders is a no-brainer. Nobody should seriously doubt the scale of public outrage at the antics of Starbucks, Google and the rest, as they shuffle their profits from one tax jurisdiction to the other in an incessant search for tax optimisation.

Instead, for large companies at least, the principle of paying your taxes in the countries where you make your profits seems unassailable, even if it’s likely to be hard to achieve in practice. And the same logic applies in the public’s mind toward individual taxpayers. As long as there are more poor people than rich people, that’s the way it’s always going to be at election time.


It certainly isn’t easy to make a case for overtly obscurantist tactics such as placing your assets in a Caribbean trust which isn’t required to declare its beneficiaries. If Ed Miliband hadn’t already threatened in early February to boot these hideaways onto an OECD blacklist, David Cameron would probably have had to do it for him. They might be nominally legal, but in electoral terms they’re political poison. As to whether either party will actually act on its disapproval may prove to be another matter – for the moment, it’s the invective that counts.

Semantic Creep

Unfortunately, the creeping trend toward those loose avoidance/evasion definitions we’ve just mentioned might have unfortunate consequences for advisers who point their clients toward tax saving vehicles that wouldn’t have raised an eyebrow a few years ago, but which could now land them in hot water. Perhaps retrospectively. Which, combined with the lack of a long stop, is why advisers may be right to be concerned about the implications for professional indemnity insurance, and much more besides.

So let’s return to our point. Once upon a time, there were just two practical definitions, evasion and avoidance, and the latter was considered legal. The definitive test case had been the 1936 contest between the Inland Revenue and the Duke of Westminster (19 TC 490), which had resulted in the historic finding that “every man is entitled to arrange his affairs so that the tax attaching under the appropriate act is less than it otherwise would be”. Those judicial words had formed the sacred basis of the profession’s thinking ever since. As long as a client acted within the laws of the time to reduce his taxes, then he was employing tax avoidance measures; if he broke those laws, then it was tax evasion and it might well be criminal.


It was Gordon Brown who first fudged the definition by declaring, in 2006, that some IHT avoidance trusts in operation since the mid-1980s had been evasive in their intentions, and that they should be wound up forthwith or they would attract penalty charges. But it was George Osborne who moved the situation on in 2012, I think, by focusing on what he called “aggressive tax avoidance” – something he described in September 2013 as “morally  repugnant” (alongside tax evasion, of course).

Please note that I’m not picking a fight with the Chancellor on the sentiment that he was trying to convey. As most of us are aware, there have indeed been a few bad apples, some of which have been structured in deliberately complex ways.  But, as Daniel Ben-Ami commented in a particularly fine article on Fundweb (

“David Cameron, for instance, publicly criticised Jimmy Carr for using an entirely legal Jersey-based avoidance scheme…..This moral offensive has had important practical consequences. The government has, in effect, redrawn the legal distinction between evasion and avoidance. Even those who have not set out to break the law can [now] be accused of aggressive avoidance or abuse – labels which are inherently hard to define.”


Collapse of the Duke of Westminster

As Ben-Ami also notes, the final crushing of the 1936 Duke of Westminster case came with the General Anti-Abuse Rule (GAAR), published in April 2013, which came with a guidance note from HMRC that says it:

“Rejects the approach taken by the Courts in a number of old cases to the effect that taxpayers are free to use their ingenuity to reduce their tax bills by any lawful means, however contrived those means might be and however far the tax consequences might diverge from the real economic position.”

The Treasury has explained that the GAAR “targets only avoidance schemes that are clearly abusive. By ‘abusive schemes’, we mean schemes that can be seen from the outset to be simply highly contrived and artificial arrangements designed to enable people to get around the tax law and avoid paying tax.”


And in that, we should add, it has the ringing endorsement of all political parties. Ed Balls’s only criticism was that “it is currently a GAAR without teeth. Those who are caught have to repay the tax they tried to avoid, but they do not face a penalty. There is still no disincentive to try and game the system.”

That, says Mr Balls, is “why Labour will bring in a tough penalty regime for the GAAR, with fines of up to 100 per cent of the value of the tax which was avoided. For the first time, this will provide a tough and genuine deterrent to those who try to abuse the system and avoid paying their fair share of tax.”

The Net Tightens

More recently, as you’ll be aware, HMRC has been stepping up its onslaught against tax evasion (oops, sorry, avoidance), with some 800 schemes currently under investigation.  Unfortunately, for many, it also coincides with the introduction of so-called ‘Accelerated Payment Notices’ which can require investors whose vehicles are being examined to submit all the tax that may potentially need to be repaid to HMRC until a firm ruling has been achieved.

Let’s pause for a moment and consider that. According to industry estimates, there are currently about 65,000 cases currently in the HMRC backlog and awaiting rulings, and some of the cases under examination date back to 2004. As things stand, the Treasury hopes to raise a quick £800 million during 2015-16 by requiring these upfront payments. And not everybody is happy.

The Institute of Chartered Accountants in England and Wales, for example, said that the extension of upfront payments would impact on some very old tax avoidance schemes – some of which had only been officially notified to HMRC as a matter of formality.

“In principle, we believe that retrospective legislation of this nature is wrong,” the Institute said. The new powers would put HMRC in a position “akin to prosecutor, judge and jury with no right of independent appeal.” Adding: “The proposals lead to a potential position that taxpayers are guilty until proven innocent, with wide powers given to HMRC at the expense of taxpayers that could be abused and be used in inappropriate cases.”

Ingenious Approach

As we were going to press, news came in of a successful application by Ingenious Media for a judicial review of the Accelerated Payments regime, on the grounds of its contention that the payment notices, including the denial of the right to appeal, were unlawful and might even impinge on human rights legislation.

Ingenious has an estimated 1,300 clients in its partnerships, including prominent figures such as Dame Clara Furse (formerly of the London Stock Exchange and the Bank of England’s financial policy committee), David Beckham and Lord Hollick. The current value of the tax in question here had been said by the presiding judge to be “of the order of £1 billion. On any view, this is major tax litigation.”

Indeed, but the case seems likely to snowball further as other providers and appellants come on board. HMRC’s guidance states that Accelerated Payment Notices” relating to tax avoidance cases were expected to be issued to about 33,000 taxpayers, and to concern £5.1 billion of disputed tax.

It’s going to be big. Expect fireworks.


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