Avoidance and the intention of Parliament
Posted by Christie Malry on December 10, 2012 at 10:14 pm
Tax avoidance is about getting around the law: finding loopholes and abuses never intended by parliament e.g. by routing income through a tax haven.
Parliament has always intended people should have the right to use specific allowances and reliefs in pursuit of social policy. They’re part of tax planning. They’re legitimate, intended for use and have nothing to do with tax avoidance, which is about getting round the law. So of course we can keep those reliefs and tackle tax avoidance because they’re not the same thing.
Parliament intends a few other things:
- That the UK should comply with European law. That's why Vodafone was settled rather than pursued until the end.
- That we don't tax a wife as if she were her husband's property, nor do we tax foreign residents on UK-sourced dividend income. That's why neither Sir Philip Green nor Topshop are tax avoiders.
- That businesses should be able to deduct legitimate costs of doing business in determining their taxable profits. To protect the UK exchequer from companies that inappropriately load up with too much debt (which is deductible for tax purposes) instead of equity (which isn't), Parliament introduced thin capitalisation laws. That's why Boots should be allowed to deduct its interest costs for tax purposes.
- That multinational businesses should be able to trade here. To protect the UK exchequer from companies that inappropriately fix their intercompany prices at uncommercial levels that might reduce the UK's tax take, Parliament introduced transfer pricing legislation that allows HMRC to restate uncommercial transactions as if they had transacted on an arm's length basis. That's why Starbucks is allowed to buy coffee from other group companies and is allowed to pay its parent for use of the group branding.
- That the UK should only tax businesses which are resident here. That's why Amazon and Google are allowed to trade in the UK without paying corporation tax on the market value of the transactions they facilitate here, because those companies don't have a permanent establishment in the UK.
The fact is: the main cases which UKuncut and Ritchie have championed all fail miserably under the "what did Parliament intend?" test. They are all issues that were foreseen by Parliament, as a result of which powers were granted to HMRC to prevent them. To the extent that HMRC didn't prevent them, this still demonstrates Parliament's will being respected rather than flouted. So it's tax compliance, not avoidance.
It Simply Will Not Do for protestors who have no knowledge of tax to pretend that they have insight into the will of Parliament. Because in every case, Parliament understood the risks and legislated to address them.
People who read this post also read:
Do you really think that the rules on thin capitalisation, transfer pricing and what does and doesn't constitute a permanent establisment are being used and applied in the manner which was intended by Parliament when the relevant laws were debated often many years ago?? Or that there is not a body of highly qualified tax specialists who seek to exploit ambigiuities and poor drafting in such rules and laws to obtain maximum advantage for themselves and their clients with all their intention being on exploiting poor drafting, the failure of Parliament and HMRC to update the rules/laws to reflect changes in how business is conducted, and the inability of HMRC to challenge robustly the interpretations made of the rules/laws because of lack of resources. I wouldn't complain too much about the backlash that has arisen because of the assumption that legality and morality/ethics are the same thing - the more sensible approach would be to recognise that the concepts are different and to start to develop a tax framework and a profession where this is recognised.
The current witch hunt however shows a mob mentality rather than a legal framework. Why would any business choose to base itself in Britain when we are telling the world we don't care what the legal tax owed is, we want more and we are willing to make your business suffer to extract more regardless of the legality.
I'm making plans to shift my business overseas, to places where tax payable are based on law rather than the mob. I'm far from the only one.
I'd say that the thin cap and transfer pricing rules are not being used nor applied in a manner intended by Parliament. HMRC stretch them into almost unrecognisable shapes to disallow far more than I think Parliament could reasonably have intended.
For example, the HMRC Manual states that transfer pricing is a "one-way street" - it only ever works to disallow deductions, you can never ever have a TP adjustment that increases the deduction in the UK (unless it's a compensating adjustment). So they'll quite happily argue that non-arm's length agreements are appropriate if they work in HMRC's favour. If they work one way one year and the other way the next, then the TP rules flicker on and off. I can't find that in the legislation: so far as I can see, if the TP rules apply to a provision then you replace the whole of it with the arm's-length equivalent. But no, non-arm's-length is fine if it benefts HMRC.
[...] So is it the will of Parliament or the will of Richard Murphy that really matters here? If it's the latter, he must accept he's a raging megalomaniac. If the former, a great deal of what he has previously described as avoidance is simply the will of Parliament. And therefore cannot be avoidance. [...]