Tax oddities

I am puzzled. On Thursday 5th January, there was a report on the BBC's Newsnight programme which outlined five ways in which people and organisations might seek to avoid tax:

1. by changing the location of transactions to take advantage of lower tax rates
2. by changing the timing of payments
3. by changing the identity of the person or organisation to which the taxable income is allocated
4. by changing the type of transaction to one that attracts a lower tax rate
5. by obscuring information

Now, all of these can be perfectly legal methods of minimising tax bills, although the last can run dangerously close to unlawful evasion. Most of us use some of these methods of avoiding tax - for example, giving gifts to grandchildren to reduce inheritance tax (point 3), or accepting part of our remuneration in shares instead of money (point 4 and possibly point 2). And indeed, no-one in the report suggested this activity was unlawful, though Richard Murphy of Tax Research UK did say it was unethical.

The report then went on to give, as an example of tax avoidance of borderline legality and dubious ethics, the Vodafone settlement with Her Majesy's Revenue and Customs (HMRC). This is a complex issue involving a German acquisition, so involves both UK and European tax law. The reporter said that the Vodafone dispute was ended last year when Vodafone made a payment of £1.25bn. But this isn't quite right. Yes, Vodafone has settled its dispute with HMRC. But UKUncut protestors, footage of whom outside a Vodafone shop formed the background to this part of the report, argue that Vodafone's settlement with HMRC was itself dubious and claim that HMRC was complicit in reducing Vodafone's bill to a lower amount than that which UKUncut believe they really owed. This is currently being investigated by the National Audit Office (NAO). Until they report, we really can't say for certain whether this was an example of illegal tax evasion (with HMRC's involvement, so government corruption too), lawful tax avoidance, or even simple interpretation of the European tax laws with no tax benefit intended. Allegations fly, but nothing is proven.

Following this, footage was then shown of Bob Diamond, CEO of Barclays Bank, failing adequately to explain to the Treasury Select Committee the breakdown of Barclays' payments to HMRC in 2010. Now, Diamond's behaviour is in my opinion mendacious - I simply don't believe that a CEO as capable as he has shown himself to be wouldn't know how much of his headline corporate tax bill was payroll taxes (income tax and employers' & employees' National Insurance, deducted at source and paid by the employer on behalf of the employee) and how much was corporation tax. But the implication in this report was that Barclays was deliberately avoiding tax. In fact the 2010 corporation tax bill was unusually low due to prior year losses carried forward.  Barclays had suffered severe losses in the financial crisis of 2008-9 which it offset against profits in 2009-2010. Carrying forward losses in effect gives companies a tax rebate when they return to profit after making losses, and can make a difference between marginal profitability and insolvency. It is a completely legal accounting practice and does not constitute tax avoidance unless the loss itself was engineered for the purpose of obtaining the tax rebate, which no-one is seriously suggesting in this case. Despite this there have been continual calls for Barclays to pay more tax, and suggestions that the law should be changed to prevent banks (but not other companies) carrying forward losses. Why banks should be discriminated against in corporate tax law is one of the things that puzzles me.

So neither of the two cases chosen by the BBC was a reliable example of deliberate tax avoidance. One is still under investigation and the other isn't tax avoidance at all.  I'm sure there are enough examples of genuine tax avoidance and evasion to fill a hundred BBC documentaries, so why did the BBC choose these two? Surely it isn't simply because they have been the subject of noisy protests and newspaper headlines? If it is, that is lazy research and sensationalist reporting. As a publicly-funded organisation, the BBC should do better than that.

Following the report, there was a discussion between Simon Hughes MP (LibDem) and Jesse Norman MP (Conservative), hosted by Emily Maitlis, about Graham Aaronson's proposal for a General Anti-Avoidance Rule (GAAR). At this point I became even more puzzled. There was no discussion of the five "tax avoidance" methods outlined in the report. Instead all three participants were discussing the general principle of preventing "abusive" tax avoidance practice. What did they mean by "abusive"? And how does it relate to the five legal methods of avoiding tax outlined by the BBC reporter?

I was so puzzled by this that I spent about three hours reading the Aaronson report. But this didn't help. I couldn't find anywhere in the report itself any reference to the five tax avoidance methods outlined by the BBC reporter. In the appendix there is a suggested draft GAAR which includes the following:

3. (1) For the purposes of this Part an “abusive tax result” is an advantageous tax result (see section 15) which would be achieved by an arrangement that is neither reasonable tax planning (see 
section 4) nor an arrangement without tax intent (see section 5).

(2) For the purposes of this Part an abnormal arrangement is contrived to achieve an abusive tax result if, and only if, the inclusion of any abnormal feature (see sections 6 and 7) can reasonably be 
considered to have as its sole purpose, or as one of its main purposes, the achievement of an abusive tax result by –
(a) avoiding the application of particular provisions of the Acts, or
(b) exploiting the application of particular provisions of the Acts, or
(c) exploiting inconsistencies in the application of provisions of the Acts, or
(d) exploiting perceived shortcomings in the provisions of the Acts.

So "abusive", it seems, means deliberately benefiting from the fact that tax legislation is incomplete, inconsistent and avoidable. I can't help wondering whether it would be better to simplify, streamline and broaden the legislation so it is less easily abused, rather than spending huge amounts of time and money chasing abusers. And to be fair Aaronson does suggest this, particularly in relation to trust law. But the more significant points that Aaronson raises in the body of the report are firstly, that most tax planning is simply prudent management of finances and not abusive; that the aim of the GAAR would be to end the minority of abusive tax avoidance cases, not make normal tax planning impossible; that changes to reduce the incidence of abusive tax avoidance must not make the UK tax regime unattractive to business; and that there are features of the UK tax system that are INTENDED to reduce tax liability in certain cases and that people and businesses should not be prevented from taking advantage of these when appropriate. It would be HMRC's responsibility to prove abusive tax avoidance, not the taxpayer's to defend; and there would be safeguards to stop HMRC using the threat of GAAR as a weapon to enforce payment of disputed taxes.

None of this told me where these "five methods" came from. Aaronson identifies the following characteristics of tax arrangements (legal structures and transactional processes) that would in his view constitute abusive tax avoidance:

(a) they may understate taxable returns from a transaction
(b) they may overstate the tax-deductible expenses associated with a transaction
(c) they may deliberately misprice a transaction with the intention of reducing the tax payable
(d) they may be inconsistent with the legal obligations of the parties to a transaction
(e) they may include a person, a transaction, a document or significant terms in a document, which would not
be included if the arrangement were not designed to reduce tax liability
(f) they may omit a person, a transaction, a document or significant terms in a document, which would not
be omitted if the arrangement were not designed to reduce tax liability
(g) they may include the location of an asset, a transaction, or the place of residence of a person, which would not have been so located if the arrangement were not designed to reduce tax liability

These sort of relate to some, but not all, of the BBC reporter's five methods of tax avoidance:

- Point g) is changing the location of transactions to take advantage of lower tax rates (method 1)
- Points e) and f)  involve changing the identity of the person or organisation (method 3)
- Points a), b) and c) all involve changing the nature of a transaction

Point d) looks much like money laundering to me, which isn't mentioned by the BBC. And Aaronson doesn't mention timing of payments or obscuring information.  So I was left still wondering where the BBC reporter got his definitions from. Evidently it wasn't from Aaronson.

Now oddly enough, Richard Murphy issued a blog earlier on 5th January. In it he outlines the following methods of tax avoidance (I have summarised them here, follow the link to read the full version).
  1. Reallocate their income to a person or entity that has a lower tax rate than the individual whose activity really generates the income
  2. Change the location of a transaction
  3. Change the nature of a transaction so that it appears to be something different from what it actually is
  4. Delay recognition of income e.g. delaying a bonus so that it is taxed later
  5. Obscure the information available on a transaction
How odd. Apart from the order in which they appear, these match the BBC reporter's definitions exactly. I can't believe this is coincidence. It would seem that Murphy not only appeared on the programme, but was a consultant to it. I do think the reporter should have acknowledged his sources. He gave the impression that these definitions were from Aaronson's report, since that was the subject of the subsequent discussion. It seems they weren't - they were Richard Murphy's definitions. Now, Murphy gave evidence to the Aaronson committee in his capacity as tax advisor to the TUC, but he was not a member of that committee. The Aaronson committee was made up of academic professors, legal experts and industry practitioners who are acknowledged experts in the area of tax. Why did the BBC reporter ignore what these people said and instead use definitions from someone who represents a particular special interest group, namely trade unions?

And here's something that puzzles me even more. In that blogpost, Murphy is severely critical of the Aaronson recommendations. He claims that they are simply ineffective in relation to his five definitions of abusive tax avoidance:

....none of them will be touched in any significant way by Graham Aaronson’s General Anti-Avoidance Principle which Cameron claims will beat tax avoidance. 

But back in November, when the Aaronson report was published, Murphy was very supportive of it:

Graham Aaronson QC’s report for HM Treasury on the desirability of a General Anti-Avoidance Rule (GAAR) for the UK is published this morning, and I warmly welcome it.

He went on to write two more blogposts (here and here) supporting Aaronson's recommendations and promoting their adoption into law. But now he is claiming that they are pointless. Now as far as I can tell Aaronson's report has not been changed since November and its proposals have not been watered down - in fact the Government seems to be planning to implement them in full. So why on earth has Murphy's opinion of this report undergone such a sea-change? He must have missed something in his initial reading of it. I am puzzled.

In fact I end this very long blogpost more puzzled than when I started. I don't understand why the BBC prefers the opinions of special interest groups over the findings of acknowledged experts, and I don't understand why two groups who are both seeking to curtail abusive tax avoidance are failing to present a united front. The Newsnight programme explained nothing and raised more questions than it answered. It was no credit to anyone.


  1. Frances

    "I don't understand why the BBC prefers the opinions of special interest groups over the findings of acknowledged experts..."

    You are surprised?

    I would suggest one or more of the following (non-exhaustive) list...
    1. the views of those special interest groups accord with their own weltanschauung;
    2. they haven't bothered to find out the views of the experts (i.e. actually read the report)
    3. the expert view/conclusion is at odds with their agenda;
    3. they are lazy, incompetent liars or charlatans!


  2. Oops

    That 4 in the list - should read the preview!


  3. I'd argue that various of Aaronson's "abusive tax avoidance" practices actually constitute evasion. None of a-d need a 'GAAR', they just need an audit. They are either bona fide errors (which can be corrected) or they are deliberate evasion (which HMRC can already deal with quite happily).

    As for Murphy falling out with the report, well he has a tendency to (or so it appears) be particularly critical where he has a personal beef with a person or organisation (witness his vindictive crusade against the guardians of St Pauls which, as I understand it, could be linked to a known personal gripe). Alternatively, it may simply be that the Aaronson recommendations are now bad recommendations because the Tories may implement them.. and the last thing he wants to have to do is say 'well done Osborne, you've done exactly what I think you should have done'.

    Finally, all mainstream reporting of tax matters is.. let us not mince our words.. absolute horseshit. They don't know what they are on about.. because none of the journalists involved are accountants, tax practitioners, or anything of the sort. Imagine the outrage if the BBC filled the Match of the Day studio with jobbing journos who've been to a couple of Arsenal games and have a vague idea of the offside rule.. rather than ex-pros and managers. When it comes to reporting on tax (and, for the most part, economics in general) it seems that any old muppet will do. It's a shocking state of affairs. Ben Goldacre does a great job of exposing this kind of crap in science journalism.. but nobody at all is doing the same for the number-monkeys.

  4. An interesting post.

    You are spot-on about the need to reform and clarify tax law rather than introduce more law: the vaguaries of the law allow organisations (and their lawyers) to interpret the law in their favour - which they then need to argue with HMRC (hence the apparent relationships that are being investigated by NAO).

    Every chancellor increases the complexity of tax legislation, rather than clearing up the mess created by their predecessors; Gordon Brown in particular generated a huge amount of tax law.

    There is undoubtedly abuse of the system by multinational companies - most likely via "transfer pricing" (1 and 3 in your list of avoidance methods) - routing transactions through particular jurisdictions and charged between subsidiaries at internal prices set to minimise profits.

    I completely agree that it is strange for government to legislate on a particular industry - in this case, banking and finance: but the history of tax is full of such curiosities: some industries are easier to tax than others, and in the current climate, there are unlikely to be any votes in defending the banks!


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