The tax avoidance distinction is unsupportable
Posted by Christie Malry on September 22, 2010 at 9:31 am
There's a very thoughtful post by Mark Lee over at his Tax Buzz blog, in which he reassures people that ISAs are not a form of tax avoidance. This follows some profound flip-flopping from various hapless Liberal Democrats as they try to sound tough on people who avoid paying their fair share of tax but without wanting to actually say what they mean. ISAs were the example Kirsty Wark provocatively put to Vince Cable on Newsnight when he failed to produce an answer of his own.
Mark attempts to draw a line between tax avoidance and tax planning by defining avoidance in terms of reducing one's tax bill by breaching the spirit of the law as intended by Parliament.
I think he's wrong. There's no such thing as the spirit of the law; merely our impressions as to what is fair and what is unfair. What's worse - our impressions, largely formed in unprofessional (i.e. non-expert) space, are based on considerations outside what was in the minds of either those who wrote our tax law or who voted it through Parliament.
I'm afraid that's a rather clumsy way of pointing out something rather obvious - the spirit of the law is not a concept that's fixed in time from the moment a law is written. It's a complex amalgam of opinions and emotions, most of which are added long after the law was written.
While I'm happy for the time being to defer to Mark's experience when he states that ISAs are "simply good tax planning to make use of the facility to save money in a tax-free structure (ISA) specifically intended for this purpose", I think it's also plausible that, at some point in the future, when there are people who can afford to live off the entirely tax-free,income from their ISA investments, policy makers will seek to argue that this is tax avoidance. They will make a case that this is a use of ISAs that was 'never intended' when the law was originally passed and will close this 'loophole' that permits rich people to 'avoid' paying the tax they should legally be paying. Paranoia? I don't think so.
There is further evidence on the lack of an objective 'spirit' of the law. While some newspapers described Darling's bank bonus tax as a failure, other newspapers hailed its 'windfall income'. Was the intention of Parliament to raise money or to send a message to bankers?
Similarly, Labour - and in particular Gordon Brown - became synonymous with the use of stealth taxes to raise money from the population without seemingly raising the middle class tax take. If taxes are hidden from the population in this way, how can their intention be apparent to those who are meant to decide how to comply with their spirit?
The size of the tax system nowadays makes it virtually impossible for any tax expert - let alone an average taxpayer - to understand the full corpus of tax law. Given the complex ways that taxes, concessions and benefits interact with each other, it is quite literally impossible to synthesise that body of law into something as trite as the 'spirit' of the law. It simply cannot exist. What tax laws mean are what tax advisors, politicians, the public and ultimately judges say they mean - no more and no less. And if they say something the politicians don't like, they'll change them. But that's government's prerogative to change the law; it's not evidence that taxpayers were avoiding tax. That tax was never due because the laws - as supported by the courts - said tax was not due.
Accordingly, the campaign to stamp out avoidance is doomed to failure from the start. It is likely to be racked by accusations of hypocrisy. Therefore, government would be advised to focus its resources on closing the most blatant loopholes after they've happened and by ensuring they draft properly-written laws in the first place.
The spirit of the law is a subjective thing, but it exists. That's not to say judges should pay it any regard, they shouldn't. But that doesn't mean you can't make a reasonable stab at what Parliament intended when it passed a law, surely? And what Parliament intended is often not what Parliament did.
Agreed that distinguishing between legally avoiding tax in a way that you guess Parliament to have intended for you to do so and legally avoiding tax in a way you guess Parliament didn't intend is specious, though.
If the spirit of the law is so obvious, why is Parliament so inept to vote in a law that does not adequately describe that spriit? Or if it is later pointed out that what is written doesnt match what was intended, why are they so slow in changing it?
One would think that if the mistake (ie that what is written doesnt properly embody Parliament's intention) is publicly identified and Parliament does nothing about it within, say, 6 months, then the default assumption should be that Parliament has effectively accepted what is written.