And on the subject of Ritchie and tax avoidance

And the accusation that I was a hypocrite for facilitating tax avoidance flooded in from those who should undoubtedly know better. I could, of course, duck the issue, but those who know me are aware that’s something I’m not inclined to do.

Riiiight.

However the allegation that I and / or the Fair Tax Mark were facilitating tax avoidance has been made. Nick James, an accountant and regular commentator on this blog dealt with this suggestion very appropriately, saying to one of those who made this allegation:

Nor does it seem to occur to you that taking advantage of a specific law offering a specific tax relief is no more tax avoidance than deducting your legally mandated annual personal allowance from your income in order to arrive at your taxable income.

I agree. And, for the record, I have never defined tax avoidance in any other way. As I say in my briefing on this issue:

Tax avoidance is seeking to minimise a tax bill without deliberate deception (which would be tax evasion) but contrary to the spirit of the law. It therefore involves the exploitation of loopholes and gaps in tax and other legislation in ways not anticipated by the law. Those loopholes may be in domestic tax law alone, but they may also be between domestic tax law and company law or between domestic tax law and accounting regulations, for example. The process can also seek to exploit gaps that exist between domestic tax law and the law of other countries when undertaking international transactions.

The tax avoider faces uncertainty when pursuing their activities. That uncertainty focuses mainly on their not really knowing the true meaning of the laws they seek to exploit and taking the chance that either a) they may not be discovered to be tax avoiding or b) that if they are the interpretation placed on the law that they seek to exploit is favourable to them. Their risk of penalties arising as a result of their actions depends upon what the outcome of these risky situations might be.

There is no way on earth that claiming tax relief under a scheme promoted by the law, with that tax relief, if due, being wholly consistent with the spirit of that law, can be tax avoidance and there is no way anyone can accuse me of inconsistency on this issue. To do so would be as absurd as saying I am tax avoiding by claiming tax relief on my properly incurred business expenses, when the law says I may.

Excellent. So, Lady Green, a non-resident and non-domiciled not UKian taking dividends from an English company in her country of residence is not tax evasion, it is not tax avoidance and it is not tax abuse. Amazon insisting that it’s warehouses are not a permanent establishment, as international law insists they are not, is not tax avoidance. Boots claiming interest deductions is not tax abuse, Starbucks, paying royalties to the Netherlands as EU law expressly states they must be allowed to do sans tax is not tax avoidance and….well, we could go on but there’s really nothing left of all of the cases that Ritchie has been whining about all these years, is there? Google, Apple and Facebook treating the European Union as a single market when that’s exactly the intention of the Single Market rules: none of these things are of the slightest concern to any of us precisely because they are simply people using the law, entirely legally, to do what the law expressly states they may and quite possibly should.

Good, glad we’ve got that settled then. Now, what’s Ritchie going to do with the rest of his life then?

43 comments on “And on the subject of Ritchie and tax avoidance

  1. Also, what he’s suggesting here is that it is not enough merely to obey a law; you also have to know what the people who passed the law intended and ensure that you obey it in the right way and don’t obey it in the wrong way. So, in the many many cases where the purpose is not so well publicised as the ones you highlight, Tim, how do you find that out? Ask them? All of them? All the people who passed every tax law that applies to you or your company, in dozens of countries, going back, what, a couple of centuries? And if you get any one of them wrong, you’re immoral? Plus, of course, politics being what it is, a single law may have been passed for a number of different sometimes contradictory reasons. This is insane.

  2. In summary: it isn’t tax avoidance if you believe you are ethical, ethical being defined in the modern sense – having left-wing opinions and beliefs.

  3. “Tax avoidance is seeking to minimise a tax bill without deliberate deception (which would be tax evasion) but contrary to the SPIRIT OF THE LAW” (my capitals)

    So I think you’ll find that any given fact pattern remains either tax avoidance or not depending on Ritchie’s interpretation of that spirit.

    Ritchie only asks that everyone obey the letter and spirit of the law. Being the Law itself, Ritchie’s may be exercising double standards but he cannot possibly be a hypocrite.

  4. I am loathe to defend this pillock, but there is one obvious avenue, and that is to claim that perfectly legal tax reduction strategies followed by large corporations are not “in the spirit of the law” and that clever lawyers are able to exploit laws to spot ways of reducing taxes that were not intended. I mean legislators really did intend for you not to pay taxes on your business expenses. It’s less obvious they really did intend for Starbucks to set up a structure where it pays an entity in the Netherlands for intellectual property (or whatever it is, I forget)

  5. Luis,

    “I am loathe to defend this pillock, but there is one obvious avenue, and that is to claim that perfectly legal tax reduction strategies followed by large corporations are not “in the spirit of the law” and that clever lawyers are able to exploit laws to spot ways of reducing taxes that were not intended.”

    But in the case of the EU, that was what was intended.

    And most of the loopholes are because of government, because it deliberately makes tax laws too complicated for political reasons. VAT is fantastically complex, costs a huge amount to administer and could be replaced with sticking it on income taxes or better still, LVT.

  6. As a lifelong F1 fan (until recently) every season one team or another will arrive at the first race with an innovation that obeys the word of the rules but not the spirit of them. Whether you think this is engineering genius or despicably unsportsmanlike depends on nothing more than whether or not it is your team taking advantage of it.

    Ultimately though all that matters is the word of the law and if those enforcing it don’t like the way it is being used it is up to them to close any loopholes.

  7. @Luis.

    You are right, but you are not the first person to think of that. So what actually happens in UK tax disputes is that HMRC can dispute on the grounds that the transactions ‘lack economic substance’. That option directly addresses your concern and offers a well worn remedy.

    How can I be so sure? I’n my day job I am formally recognised by the High Court as an Expert in my field, and I am often called upon to opine on the economic substance of a trade/structure/firm in my chosen sector. In part based on my expert opinion, the court is able to determine that – despite the fact that the structure was technically legal – it has no economic substance, and could only have been devised with the purpose to defraud tax. That is, in effect, a ‘spirit of the law’ defence.

    So since your concern is already addressed, the question becomes – why would we want an a-legal duplication? There are not many (any?) good answers to that question.

  8. Luis

    RE Starbucks, the Dutch company is where the roasting plant is. Royalties started when the roasting operation transferred there from the UK.

    The fact it’s called a license fee and paid at a commercially established rate seems intended to put the subsidiary in the same position as the twenty or so independent licensees who pay Starbucks on those same terms.

    The key difference between Starbucks using an arms length price for intragroup services and the Fair Tax Mark applying for EIS relief is that the latter is not mandatory.

    Starbucks had no choice but to come up with a market price for the services provided by the Dutch entity, but there is no requirement whatsoever for the Fair Tax Mark to consider EIS relief.

    It’s quite possible by the looks of things that FTM provides EIS-excluded services anyway. But their statement of intent does confirm that they consider FTM to be trading with a commercial view of realising profits.

    So it is quite an odd thing for a “not-for-profit” organisation to do….

  9. So I had a flick through the FTM criteria for UK-only businesses (e.g. Ultimate Beneficial Owners must be clear from the website, etc).

    I note in passing that the FTM organisation is not itself FTM-compliant. I know it doesn’t have to be because they are the good guys and it depends *why* you are avoiding tax (see RM on Unite tax avoidance for example), but still…

  10. Ben Saunders

    I didn’t realise the roasting plant was in the Netherlands; that causes one to view it in a completely different light.

    Luis

    The ‘Spirit of the Law’ might be a legitimate argument, but not from him.
    For evidence look at his propsoal to limit an employer’s allowable deductions on wages and salaries to, if I remember, £260,000 p.a. Having read on this blog (oh yes you did Richard) that this would reduce the tax take for the Treasury and so the taxpayer couldn’t possibly be ‘subsidising’ the payment of high wages as he thought, he changed track whilst pretending not to.
    Instead he started arguing that he wans’t intending to change anybody’s behaviour or the amounts paid in wages, he just wanted to deny the employer the relief for ‘excessive wages’ without reducing them. Furthermore he distinguished ‘excessive wages’, with which he claimed to have a real problem, from the same amount taken as a proprietor’s drawings or as dividends. Apparently he “hasn’t a problem” with profit; just excessive wages.

    So ‘tax expert’ Richard Murphy becomes the Champion of Capital, Norfolk’s risposte to Thomas Piketty.

    I would suggest the hasn’t a clue what he means by ‘Spirit of the Law’ so why should anyone accept his argument that it should be a central consideration?

  11. yes I am not suggesting we need to take him seriously, merely that there is a potentially valid argument to distinguish between varieties of legal tax reduction, without having to take the accept one accept all test of consistency Tim suggests in the OP.

    Gary, yes I suppose the only remaining avenue is to claim that legal opinions concerning economic substance, provided by the likes of your good self, are too lax and biased towards the interests of corporations. Whilst I don’t mean to impugn your judgements personally (I don’t know anything about you) it’s not beyond the realms of the possible that notional economic substance tests end up being too cosy with large corporations. You don’t have to be a conspiracy theorising radical to take regulatory capture seriously, in fact lots of right wing economists think such things happen, they just turn that into an argument against regulation.

  12. Re ‘not beyond the realms of the possible’, Luis, the law reports are freely available. Why not give us an example of where the Court of Appeal/law lords have got it wrong?

  13. Luis, I take your comments in the constructive sense. No offence taken.
    But the court/tribunal has me pitching up as an expert in the sector appointed by HMRC; the other side appoints one too. The Judge/Chair makes a decision. I might be beholden to big business even though HMRC appointed me, but both of the experts? The structure and process makes that implausible. We are talking about a court with a combative structure and an appeals process, not the fascists (i.e. no appeals) structure of FTM.

  14. Gary,

    fair enough I take your point about the strengths of the structure and process, I am not sure that’s sufficient to allay all concerns, but I am in no position to judge. .

    Interested.

    OK, I shall just dedicate a few days research to that now.

  15. Luis,
    Yes it may be not be enough to cover your concerns. That’s because its not your day job to make that call. For other people who *do* claim competence on such matters (yes I’m looking at you Mr Murphy), they should be able to describe:

    – What the Economic Substance/’spirit of the law’ test already looks like in UK tax.
    – How it works and why it does or doesn’t work.
    – Why an a-legal duplication with no appeals process would be preferable.

    I’m not saying you should have those answers to hand, but an expert should. And he is silent on this, which leaves us with some potential conclusions or inferences, none of which are flattering.

  16. I don’t have any concerns! But I wouldn’t rule out a priori the possibility that in practice tests of economic substance are too lax. That’s all I have claimed. Yes you are right Murphy et al should have something substantive to say to your points.

  17. His latest blog post is hilarious:

    ‘Paxman, and me
    So Paxman’s retiring. I’ve only been interviewed by him once. But I can’t resist sharing it. Start at 5 minutes in.’

    The man is a fanatical egotist, wrapped up in a narcissist, inside a megalomaniac, inside a dickhead.

  18. EIS was introduced before I started practising tax, and as it was a successor to BES, even further before, I can’t be certain, however, I’m fairly certain that application of EIS relief to an I&P society with non-profitable aims is not in the spirit of the law.

    In any event, I can find 3 ways in which it fails EIS criteria before even actually looking at the detail, so the concept that they would take this model and potentially make it EISable would, at the most basic level, be tax led structuring decisions, not commercial ones, and hence immediately fall foul of the LHTDs definition of tax avoidance.

  19. @ Luis. You may well be right, so why don’t we argue it out in front of a Judge, with a right of appeal, and…oh, wait…

  20. We should ask R Murphy what the contribution of the Fair Tax Mark’s arrangements are going to be to the UK Tax Gap (estimated, from memory, to be in the order of £1 trillion or so).

  21. “Tax avoidance is seeking to minimise a tax bill without deliberate deception (which would be tax evasion) but contrary to the spirit of the law.”

    That’s wrong, period.

    Tax avoidance is the minimization of a tax bill by legal means. Period.

    If it’s legal, it’s avoidance. If it isn’t, it’s evasion. Period.

    The “spirit of the law” has nothing to do with it. The law itself is what has everything to do with it. Period.

    That’s Tax 101.

    The fact that Murphy hasn’t had his charter revoked leads me to believe that the profession in the UK isn’t quite as shit-hot (relative to the profession in the USA) as its members all too often profess to be.

  22. “Yes I am not suggesting we need to take him seriously, merely that there is a potentially valid argument to distinguish between varieties of legal tax reduction, without having to take the accept one accept all test of consistency Tim suggests in the OP.”

    That’s pure piffle, Louis.

    There is no “potentially valid argument” to distinguish between “varieties of legal tax reduction”. That’s because in the eyes of the LAW, there is only that which is LEGAL and that which is ILLEGAL.

    I’m not even sure what “varieties of legal tax reduction” means. I’m not sure you do, either. What do you mean? Do you mean the tax strategy employed? The particular statutes or sections of tax code used?

    If you are trying to suggest that some “varieties of legal tax reduction” are more legal, or more moral, or more whatever, I’d suggest you’re being every bit as silly as Murphy.

  23. Gary
    May 1, 2014 at 12:23 pm

    Luis, I take your comments in the constructive sense. No offence taken.
    But the court/tribunal has me pitching up as an expert in the sector appointed by HMRC; the other side appoints one too. The Judge/Chair makes a decision. I might be beholden to big business even though HMRC appointed me, but both of the experts? The structure and process makes that implausible. We are talking about a court with a combative structure and an appeals process, not the fascists (i.e. no appeals) structure of FTM.

    Gary, thanks for providing the explanations, very informative.

    From other posts Ritchie has made, and I don’t have the time or will to go through his past offerings, the bit I have emphasised is his problem. In his world HMRC, with him as a non-exec directory dictating policy, would be the sole and final arbiter of what is avoidance.

  24. Luis Enriqu

    “yes Dennis, the law sees things that way but we don’t have to”

    Do you want to start thinking through the implications of what you’ve said, Luis.

    “I’m going to take this item of your property, Luis.”
    “You can’t! That would be theft.”
    “”Yes Luis, the law sees things that way but we don’t have to”

  25. I see from his blog that he is reverting to the usual insults to people who have said things like ‘Starbucks complies with the law’ and ‘ aren’t you a hypocrite for claiming EIS?’ etc.

    I just wish someone like Starbucks, or Vodafone would apply for FTM & defy them to not give it.

  26. Yeah max but they wouldn’t get it would they? And with no appeals procedure, no open records, who wins?
    They claim defamation but the court rules that fair is an arbitrary idea and the FTM had one plausible idea of fair. FTM wins.

  27. “yes Dennis, the law sees things that way but we don’t have to”

    That’s right. You only have if you want to be taken seriously by the adults in the room.

    And I can’t help but notice that you haven’t bothered to provide an answer to my question regarding your “varieties.”

    Written your check to Ritchie yet?

  28. I wonder if this will be Ritchie’s Ratner moment. For him to publish a “clarification” so quickly means he’s been copping it from his friends and allies as well as the usual crowd, I think.

  29. In truth tax professionals (genuine professionals; not unqualified chancer ‘experts’) cannot really provide a catch-all definition of avaoidance. The lines between mitigation, planning and avoidance are mile-wide blurs.

    But the ‘it’s legal so it’s fine’ line doesn’t really hold once you get to the circular non-commercial transaction or inte-group arbitrage arrangments to which Gary is alluding.

    It’s a debate that will rage (or whimper) till the end of all governments.

    My objection is to a snake oil salesman passing himself off as both an economist and ‘tax expert’ and telling people who have done the hard yards for years that they in the pay of ..(fill in your own plutocrat) or at the least lack real world experience.

    P.S. He also passes himself off as a Christian; he’s a Quaker!

  30. Ironman

    I agree that tax professionals don’t agree over the definition of tax avoidance. And there is even less agreement than ever among the public at large.

    It’s hardly surprising when one of the biggest media rent-a-gobs around cannot even maintain a consistent definition between sentences.

  31. Presented without comment:

    Not one of those companies was tax compliant, as was glaringly obvious.
    They did not break the law.
    That is a long way from the same thing.
    Your further comments will all be deleted.

  32. Tyler (#36)

    You beat me to it – that last paragraph should be his epitaph, and destroy any vestige of credibility (although for me he had none left) the man possesses…

  33. I’m far, far from an expert on tax but as I understand it ultimately comes down to a judge ruling on the law. So even if Richie was King of HMRC would he not just end up wasting a ton of money on stupid law suits?

  34. @ Van_Patten

    It’s all very 1984. Doublespeak and groupthink – Big Brother is watching.

  35. @Dongguan John Yes, but to be fair to him, when he has expressed ambition it has more been along the lines of being in a position to change the law, not heading up HMRC. If was someone else (Hodge the Dodge?) who said that he should be an HMRC non-exec.

  36. A further comment from the great man:

    “There is an entrepreneur deep in me.”

    Originally I thought the person in question must be Ivan Horrocks, but he is a mere IT lecturer.

  37. “In truth tax professionals (genuine professionals; not unqualified chancer ‘experts’) cannot really provide a catch-all definition of avaoidance. The lines between mitigation, planning and avoidance are mile-wide blurs.”

    Sigh.

    Tax mitigation is tax avoidance. The distinction lacks a difference. No blur there.

    Tax planning has two elements: 1) planning to ensure technical compliance (getting returns filed correctly and on time) and 2) reduction of tax paid by any and/or all means legal means available.

    There is a gray area between avoidance and evasion, and in the USA that is where the (federal) tax courts come in. They interpret the tax code in light of specific facts and circumstances on a case-by-case basis. The writers of tax code cannot anticipate every possible circumstance that can arise. They know that, and that’s why they established tax courts.

    The important thing to understand here is that one doesn’t just wake up day and find one’s self in Tax Court. Believe me, there are months (and at time years) of interaction between taxpayer and the IRS on specific items in dispute before a taxpayer chooses to go to tax court. Very rarely are facts in dispute in tax court… what is being disputed is interpretation and/or application of tax code in a specific case.

    That’s your gray area… interpretation and/or application of tax code in a situation with a set of very specific facts and circumstances.

    The first element of tax planning is to discover the threshold for just how aggressive a client wants to be in pursuing tax avoidance. The risk is that one can end up in expensive litigation in tax court (with an uncertainty with regards to success) versus the reward of lower taxes. Tax planners don’t make that determination… clients do. Not much of a blur there, either.

    This friendly neighborhood C.P.A. with small business and individual experience measured in decades states that unqualified chancer ‘experts’ attempt to make this issue a lot more complicated that it actually is. In Murphy’s case (and those of his ilk) it is to advance his own interests.

    I’ve given the correct definitions of tax avoidance and tax evasion in this thread. Anyone who claims I’ve got it wrong either (1) doesn’t understand the issue at hand, or (2) is selling something.

  38. Tyler

    I agree it’s straight out of Orwell – sadly, the guy is so hidebound and yet ,paradoxically, also hypersensitive, mention any literary or historical analogy with Communism, he simply starts hyperventilating and throwing out, in tourette-like fashion, the terms ‘NeoLiberal’ and Troll’ interchangably, then finally falling back on that old classic ‘Section 5 of the comments policy’.

    Interestingly, ‘Section 5’ used to be accompanied by publication of the comment – it seems a degree of self-realization of how stupid it makes him look means he’s forced once more down the censorship line…

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