Tax Avoidance Revenue Law Topic 7 - Revenue Law

Tax Avoidance,

- It is next to impossible to find a universal definition for tax avoidance that can work in all circumstances. It is important to recognise the difference between tax avoidance, evasion and tax planning. Tax avoidance is not illegal by any means, however, it is morally incorrect to do so. Tax evasion, is completely morally wrong and illegal, fraud of the Revenue, it is a easy concept you either have a tax bill and refuse to pay it or you have a source of profit which you are keeping hidden from the Revenue. Tax planning is 100% legal, it is where tax payers have the ability to plan their taxes in a way so they aren’t paying the Revenue so ‘to put the largest shovel into his stores’- Ayrshire Pullman Motor Services and Ritchie v. IRC.

- In a broad sense, tax avoidance is the engaging in a series of transactions to find a reduction and exemption in tax which legislation did not intend you to get, thus finding the loophole within the legislation for example with the O’Flynn Construction case where there was a ESR tax relief, however, in this case it was exploited to pay dividends without tax and the profits came from an exportation situation.

HISTORICAL DEVELOPMENT:

- Historically, tax avoidance had been acceptable because the wealthy had been the only class to pay tax.

-Now while today the remainder of the population pay taxes, tax avoidance is still only evident within those whom have money, and the resources to avoid tax.

-A big issue with tax avoidance is that every time the revenue try to bridge the loophole, they will attempt to close the gap making tax law.

-The original view to tax avoidance is encompasses best by the Duke of Westminister Case (Affirmed in Ireland by the O’Sullivan Case) which opened the floodgates to tax avoidance.

-As time moved on there was a sea of change, which was needed as tax avoidance became more and more morally wrong.

- The Ramsay Case, involved shams to avoid tax, where Ramsay had a scheme to create a capital loss and gain which was exempt because it cancelled out making an offset against the gain meaning there was no tax bill.

- Per Westminister this was completely legal, however the House of Lords changed the goal posts stating that the legislature did not intend schemes to work this way- Purposive Approach.

-This case created the doctrine of fiscal nullity, meaning all of the shams or artificial steps were to be ignored.

- The execution of this case however, was incorrect and this led to a bigger sea of problems;

1. Separation of Powers; where it was seen that judges re-wrote tax law.

2. Impossible to pin down what exactly is unacceptable tax avoidance.

3. ‘Mental Gymnastics’ is required, meaning it is difficult to pick out what actually is a sham and what actually is real.

-On foot of this then the Ramsay case was the leading precedent area in the UK at the time, however, the overarching problem of the Separation of Powers made the doctrine unappealing to the judges and this can be seen in the case of McGrath v. McDermott, whereby Finlay CJ in the SCT rejected the messy doctrine on that point, in the sense the “courts have not got a function to add or delete from statutory provisions so as to achieve objectives which the courts appear desirable”, and I agree it all seems a bit too arbitrary.

-The court in this case however, did not disregard the Ramsay Doctrine in its entirety and the SCT gave a little nudge to the Revenue that it was their job to introduce its own version of the doctrine in statute and can be seen in s.86 of the 1989 Act now s.811 TCA 1997.

PRE 2014, THE ORIGINAL S.811:

-There must first be a tax avoidance transaction.

1. Must give rise to tax advantage, key concept and must have been arranged primarily to give rise to this tax advantage.

-A tax advantage is; some deferral, reduction or avoidance of tax; obtaining a refund or repayment of tax, including prospective tax charges.

2. Transaction arranged to give rise to tax advantage and not something else.

3. Revenue must form the opinion that this is so.

- Two defences s.811(3);

1. Primary motivation of transaction realisation of profits.

2. Transaction does not involve misuse or abuse as the O’Flynn Construction Case used but it was proved there was abuse.

- Revenue Opinion; Revenue could decide whether it was a tax avoidance and they could recharacterize, which is a form of fiscal annulity which cancels out sham steps to put back to original tax situation.

-O’Flynn Construction: Only ever case under this piece of legislation. (LANDMARK CASE)

-Held by O’Donnell JJ to be an abuse and misuse of ESR relief. Purposive approach.

- McKechnie J dissenting stuck to a more Westminister approach and could find nothing in the ESR about what its purpose was hence why it could not result in a...