Tax: an afterthought or a motive?

This article was first published in Taxation magazine on 3 October 2023. You can read the original here.

Most people will know that where there is tax, there is tax avoidance. I believe the extent to which a person will go to mitigate the liability depends on a number of factors including:

• whether this is a one-off transaction or an ongoing arrangement;
• the value of the transaction(s);
• the individual’s risk appetite;
• the quantum of tax arising as a result of the transaction(s);
• the complexity of arrangements required to mitigate the tax; and
• the net amount retained after adviser’s fees, etc.

In general, most people don’t want to save money on a transaction to lose it all paying advisers’ fees. The individuals tend to be motivated by the bottom line rather than a specific need to mitigate tax.

What’s fair?

When it comes to tax specifically, taxpayers’ choices can be affected by how effective and ‘fair’ they consider the tax system is and whether they believe they are getting ‘value for money’ from it.

When clients come to LTN having not paid taxes for a number of years, a common complaint is that there doesn’t seem to be any point as the money doesn’t seem to affect the quality of public services. There seems to be a clear breakdown of trust in the social system – an article for another time perhaps.

The rafts of anti-avoidance legislation suggest that mitigating tax liabilities in relation to almost any transaction should not be the main motive of the transaction – although one could argue, why not? Nowadays, the word ‘tax’ is used whenever additional costs are incurred – tourist tax (visitors’ charge) and graduate tax (repayment of student loans). The implication is that a tax is a cost, whatever its nature. From a commercial perspective, a tax is a fee like any other and bigger fees tend to be the ones that are easiest to reduce.

Some would argue that if the Treasury wants tax to be an afterthought and not the driver of how a transaction is structured, then tax rates on transactions need to be reconsidered. However, when we get to the multimillion pound companies, any transaction that is undertaken will result in a significant tax liability regardless of what the overall rate is. In a capitalist society, it is no wonder that tax then becomes the driver for the structure of a transaction.

Change in perspective

A more long-term solution but one much more difficult to implement is to change people’s perspectives on the tax system. On the whole, I think that if individuals believe that by paying into the system they will receive a corresponding benefit from it, the lengths to which they go to mitigate tax liabilities will be reduced.

There will always be some who decide not to pay taxes but changing people’s perception of the tax system could be a more effective way of reducing tax fraud and aggressive tax avoidance (with high fees) than implementing new penalties, powers and anti-avoidance legislation. We have seen, in any case, that ‘clamping down’ on tax scheme promoters has had little to no effect on the aggressive tax avoidance market.

Conversely, I often see clients falling foul of the tax rules because they simply did not realise there were tax implications to a particular transaction. In these cases, tax was very much an afterthought and the issue with this approach is that the penalties charged can be much higher than those charged for ‘tax avoidance’.

This suggests that active (aggressive) tax avoidance is better than a simple ignorance of the law but I’m not sure this is the perception HMRC and HM Treasury are looking to promote given the avid anti-avoidance stance the departments are pushing. Then again, proving a negative (ignorance of the law) is extremely difficult and those who put in place tax mitigation measures clearly sought advice, even if that advice is later found to be flawed or the law changed retroactively.

Teaching tax in school

It seems the only way to avoid falling foul of the tax law is to be aware of the tax liabilities and pay them without considering in any real depth how to mitigate them. Is this a reasonable expectation of society? It might be in the future, as recent news stories state that ‘Lessons in completing tax returns are being considered as part of Rishi Sunak’s plans to make maths compulsory until 18 in a bid to make the subject more practical’.

There are arguments that teaching tax in school is a waste of time as the majority of people will be employed with tax deducted at source via PAYE – though given the errors I have identified, everyone should be taught how to check their payslips! This combined with the ever-changing tax rules mean teaching the subject in any detail may not be helpful. Nonetheless, it would in my view be useful for everyone to understand the importance of taxes, what they are used for and the basic requirements for taxpayers to declare their earnings. For society to appreciate the value of a working tax system, it needs to be educated as to how and why it works – and the system has to work.

For those who have already completed their schooling, the expectations with respect to tax knowledge are unclear and seem to vary depending on the officer looking at the case, as does the quality of HMRC’s responses during tax enquiries (see ‘Shocking’ by Keith Gordon, Taxation, 21 September 2023).

If HMRC expects taxpayers to have taken advice and/or to understand their tax obligations, the department should be willing to provide correct advice and that, all year round.

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