A comedy of errors?

The subject of tax avoidance has been in the news a great deal of late as the tax affairs of a whole slew of celebrities have come under the journalistic spotlight. What used to be almost solely a subject for so-called investigative reporting and pompous editorials now reaches even to the depths of celebrity tittle-tattle in the red-tops.

If the journalists on the broadsheets could rarely be expected to generate light rather than heat in their “examination” of this topic, the gutter press’s performance is even more lamentable. The Daily Mail’s “exposé” of the comedian Frankie Boyle’s daring raid on the treasury coffers by informally liquidating his company and distributing retained profits as capital gains rather than as income would be merely laughable were it not for the fact that what it really exposes is journalists’ quite incomprehensible ignorance and inability to conduct even the most basic of research. The fact that Frankie Boyle could not have used this “scheme” without his advisers first making a formal request in writing to his tax office might have been seen as relevant. One might reasonably suppose that the realisation that there is an extra-statutory concession which specifically permits such a series of transactions and, in effect, a clearance procedure which ensures that the tax office must be satisfied that the concession is not being used for tax avoidance purposes, might have scuppered the story. But maybe not – establishing the truth seems no longer to be a priority to journalists pandering to a celebrity-obsessed readership.

The story to which the Frankie Boyle episode was a mere sequel – David Cameron’s naming and shaming of Boyle’s fellow comedian Jimmy Carr and his tax arrangements and the latter’s admission of an “error of judgement” (in breaking the 11th commandment, one suspects) is itself instructive. The fact that a sitting Prime Minister thinks it appropriate to discuss an individual’s tax affairs in this way when by rights they should be a private matter between Carr and his tax inspector shows the depths to which Governments everywhere have sunk in spreading their propaganda. We would be very surprised if Cameron or his colleagues have not themselves been at some time in their privileged lives the beneficiaries of rather similar arrangements. So who are the hypocrites?

The UK's ne General Anti-Abuse Rule

The UK’s new General Anti-Abuse Rule

We now have a draft of the legislation which will enact the new so-called “general anti-abuse rule” following on from the Aaronson report and its recent acceptance by the Government.

What’s in a name?

A new concept has emerged. Generations of tax professionals have learned the difference between straightforward tax mitigation and planning, more complex yet still legal tax avoidance and blatant tax evasion – but the word abuse has not hitherto been used. It is, of course, a word with unpleasant and nasty connotations – one needs only to think of other contexts in which it is routinely employed – and there is no doubt that its application in this context is quite deliberate. Tax avoidance is now to be bracketed, linguistically at least, with cruelty to animals, wife-beating and paedophilia.

However, in the courts and in discussions with HMRC, the import of this word is not likely to be significant. We discover that there are two types of action taken which might result in a reduction in one’s tax bill; those which are reasonable and those which are unreasonable. Unreasonable = abusive. So why not just say unreasonable in the first place?

So what’s unreasonable?

At the moment, nobody really knows. One can expect there to be guidance on the kinds of activity that HMRC will attack as unreasonable (although there is currently nothing of the sort). But even that will not necessarily provide certainty. It is well known that there are tax avoidance schemes that HMRC do not like which have succeeded when examined by the Courts. Essentially, the GAAR is to HMRC as the .44 Magnum was to “Dirty” Harry Callahan. And it appears that the question being asked of those who are unsure whether the GAAR applies to them is also “do you feel lucky, punk?”

Surely I can ask for a clearance?

No, you can’t. Too expensive, apparently. You can instead go to a tax adviser and ask them whether it will work. They may offer an opinion but in the end they are likely to say they don’t know – which is unfortunately the truth. Oh, and you can expect the fact that you sought tax advice and ever expressed any doubts about whether your proposed course of action was caught by the GAAR to be used as evidence that indeed it was. Joseph Heller could have written a book about it.

So where does that leave us?

In a world of uncertainty, at least for the time being. Clarity will be achieved in ten or fifteen years when disputes on the applicability of the GAAR will finally be settled in the highest courts. But in the meantime, the GAAR will have achieved its real purpose by discouraging, without explicitly making illegal, all kinds of activity which might or might not have been caught by it anyway.

The future of offshore

The future of “offshore”

Each of the governments of developed (and many of the developing) countries propagandises on the subject of tax havens and decries their existence – nasty, seedy places, they say, where shady money is stashed away out of their reach.

But is this really so? Might part of the problem be the overarching greed of tax authorities throughout the world?

Some of the earliest tax advice is to be found in the Bible. The gospel of Saint Matthew extols us to render unto Caesar that which is Caesar’s, and what was being rendered to Caesar at that time was taxes charged by the invading Roman Empire.

As they grow in power and reach, states have a habit of taking on the worst characteristics of empires. The United States is the most obvious example today. Its citizens are taxed on their worldwide income; it imposes rather than agrees tax treaties with other nations (while the rest of the world uses the OECD model for their treaties, the United States uses its own model which it “offers” on a “take it or leave it” basis).

The United Kingdom is not much better in this respect. It routinely enacts legislation which is in contravention to its agreed double tax treaty obligations and the laws of the EU.

But offshore financial centres are not merely tax havens. They remain some of the safest and most secure places for banking in a global economy fractured and poisoned by dodgy lending and financial mismanagement in those markets which are at the heart of these greedy countries and whose citizens are now being asked to pay heavily for the mistakes and wrongdoings of others. They provide flexible and transparent trading and asset ownership structures. They enable cross-jurisdictional co-operation in trading and investment which would not be possible in those many countries which take a heavy-handed and inflexible approach to these matters, adding attritional transaction and withholding taxes, bureaucracy and red tape to the cost of doing business and holding assets.

For all of these reasons, we can probably conclude that the future of offshore is certainly secure for now.