Oxford University Centre for Business Taxation
Combating tax avoidance
What is Tax Avoidance?
This research proposes a classification of a variety of activities labelled “tax avoidance” in the current popular debate. It does so to bring some clarity to the debate and as a necessary first step in fashioning well-targeted actions in response. We propose the following classification
- Ineffective avoidance. This can be combated under existing laws provided the activity is discovered and action is taken. The appropriate actions will lie in the area of adequate disclosure provisions and a properly resourced revenue authority.
- Effective avoidance. This is activity which reduces tax payable due to use of a defect in the legislation or other failure in the way that the legislation is written, that cannot be corrected by purposive interpretation. The appropriate actions will be revision of the law, a General Anti-Avoidance Rule, and, better still, improved tax policy-making translating into a more principles based approach to legislation.
- Using legislation or the international tax system to one’s advantage. These cases do not involve the type of exploitation under category B. Supporting taxpayers’ rights to rely on national and international tax rules does not mean that there is no problem with the outcome. There is a growing consensus that the only way to tackle the way the international tax system works is through reform of that system. Possible radical responses include unitary taxation or a destination based cash flow taxes.
The paper discusses this classification in detail, as well as phrases such as “intention of Parliament” and “spirit of the law”. The avoidance debate has often been framed in terms of “fairness” and “morality”. The paper argues that the proper place for these discussions is alongside other considerations, to inform the policy process. In this way the widespread view of morality can be embodied in the law through proper democratic and parliamentary processes.
How successful is DOTAS?
This research analyses the Disclosure of Tax Avoidance Schemes (DOTAS) regime – one of the most recent tools in HMRC’s anti-avoidance toolkit. It also considers claims made by HMRC as to its success in the light of the evidence that is available and identifies further issues that require investigation before a fuller evaluation of the regime can be made.
The DOTAS regime has two objectives: an information objective and a deterrence objective. In the light of these objectives, the research considers whether the disclosure regime strikes the right balance between under and over-inclusiveness, to ensure adequate detection without undue cost to taxpayers or overload for HMRC. It also asks whether the disclosure regime is itself easily avoided.
The research seeks to evaluate DOTAS’s impact, and the robustness of HMRC’s claims in this respect, on the basis of the limited available public information. Overall, there is anecdotal evidence and some limited statistical evidence, to support the view that the DOTAS regime is having a measure of success. But HMRC’s claims that this is highly successful have to be set against the frequency with which DOTAS is being amended to make it more robust against avoidance, which suggests some concern as to its scope and operation.
The research concludes that further information is required to make a more meaningful assessment. An appendix to the paper lists a number of questions which seek to elicit information towards this end.
What Is the Tax Gap?
The “tax gap” has become an important issue in the public debate on avoidance. HMRC provide an estimate of the tax gap, which they define as “the difference between tax collected and the tax that should be collected”. This research analyses a limited part of the tax gap as measured by HMRC, namely that for corporation tax.
The paper identifies a number of problems with the behaviour being measured by HMRC in its tax gap estimates. In particular, HMRC’s measure of the tax gap includes transactions which courts find to be compliant with the law. Whilst they comply with the courts’ interpretation of the intention of Parliament, these transactions do not comply with HMRC’s interpretation of the intention of Parliament, and are thus included in the tax gap. This exercise might be useful for HMRC’s internal purposes; however, it is deeply misleading to suggest that this behaviour represents non‐compliance or a failure to pay tax which is due.
The paper also identifies a number of technical issues about the methods employed in the estimation exercise undertaken by HMRC.
The paper also considers a completely different approach to measuring the tax gap of corporations. This approach compares the difference between accounting profit declared in financial statements with taxable profit [the “book-tax gap”]. However, there is a major and fundamental problem with this approach, that the tax base for corporation tax differs from measures of profit in financial accounts. Even setting aside the general conceptual issues with the book-tax gap method highlighted in the paper, this particular estimate is extremely problematic as the methodology used makes unreasonable assumptions.
GAAR as a process and the process of discussing a GAAR
As a member of the Aaronson Study Group which was asked by the Exchequer Secretary to conduct a study that would consider a General Anti-Avoidance Rule (GAAR), Judith Freedman, who has been working on these issues for almost 10 years, continued her work on the GAAR during 2011-12, advising on Graham Aaronson's report which was delivered in November 2011. Following this, In February 2012 the Centre organised a major conference on the topic, “A GAAR for the UK? Building on overseas experience”, with participation from all the members of the Aaronson Committee, key officials from HMRC and HMT, many distinguished overseas speakers and a large number of participants from academia, business and tax practice.
In his 2012 Budget speech the Chancellor announced that the Government intended to proceed with a GAAR based on the Aaronson report. A consultation document was published containing the government's own proposals on 12th June 2012. Judith Freedman has continued to discuss these issues, both in the UK and abroad, giving a number of public lectures and seminars as well as holding smaller meetings with government officials and with other groups, with a view to a better understanding of the problems and issues and learning from best practice in other jurisdictions.
In a comment in the Tax Journal in June 2012 Judith Freedman argued that a GAAR is not simply a response to recent journalistic activity. The judiciary have made it clear that it is unwilling to develop a coherent anti-avoidance principle through case law, preferring to rely on statutory interpretation. As a result, not only is the law now uncertain, but an environment has been created where, despite all the provisions about disclosure and the many complex and specific anti-avoidance provisions, some still see highly artificial tax avoidance schemes as still worth trying. This does not benefit legitimate business, which needs to know where it stands and to have a level playing field. The proposals on the table for a GAAR seek to create a coherent overriding principle, together with adequate safeguards for the taxpayer. Revised draft clauses are now anticipated in preparation for the Finance Bill 2013. The Centre will continue to engage with these developments.
Transparency in reporting financial data by multinational corporations
This research was commissioned by the OECD’s Informal Task Force on Tax and Development Task Force. It is the report of a group, chaired by Michael Devereux, that included representatives of the OECD, business, NGOs and academia. The OECD identified the issue of transparency in financial reporting as being potentially important in helping development efforts in lower income economies, on the grounds that greater transparency could provide necessary information for holding both governments and multinational enterprises more accountable regarding tax revenues and payments.
The report critically examines the case for greater transparency. It addresses the fundamental questions about the objectives of greater transparency, how it can be better achieved at least cost, and to what extent it could achieve its objectives. This report reflects a broad consensus amongst the group regarding the issues involving transparency of reporting by multinational companies. It identifies and clarifies the issues, without making recommendations.
HMRC's Management of the UK Tax System: the boundaries of legitimate discretion
To operate efficiently and effectively revenue authorities require discretion, but processes must be in place to keep discretion in check. This delicate balancing act takes place against the background of a more general constitutional framework. This research begins by outlining the unique features of the UK constitution that form the background to the way in which the discretion of the UK revenue authorities (HMRC) is assessed and controlled. It then discusses a limited, yet crucial, set of discretions vested in HMRC. The research focuses particularly on the use of non-statutory guidance. It discusses the operation of judicial review, and in particular, the doctrine of legitimate expectations, in the context of such guidance. It then presents two case studies, which reveal a distinct uncertainty over the limits of non-statutory guidance. This is currently of considerable concern to the UK tax community. As the role of guidance appears to be increasing in the UK system, the case for addressing some of these causes of uncertainty strengthens. The research offers some preliminary suggestions on how the problems may be addressed.