That which has been is what will be,
That which is done is what will be done,
And there is nothing new under the sun.
Is there anything of which it may be said,
‘See, this is new’?
It has already been in ancient times before us.
There is no remembrance of former things.
The above quote from Ecclesiastes 1:9–11a summarises much that can be said about taxation, especially tax avoidance. We have become accustomed in recent years to see headlines in the media, alleging unwelcome avoidance practices by multinationals and rich individuals, aided by unscrupulous advisers (see Frecknall-Hughes et al. 2017). The past year saw the most recent scandal, namely the Pandora Papers, following on from the Panama Papers and the Paradise Papers and an earlier abundance of allegations about specific companies, such as Amazon, Facebook, Google and Starbucks (see Barford and Holt 2012; Armitstead 2013; Fuller 2013). However, tax avoidance and discussion, if not argument, about it are nothing new.
There has been (and, perhaps, continues to be) considerable debate about how to define tax avoidance and how it might differ from tax evasion – and this was a problem that also troubled authorities in earlier years. For instance, the Select Committee on Income and Property Tax in June 1851 (known as the Hume Committee) considered these issues. The term “evasion” was often used compendiously to refer to a whole range of phenomena that we might now use more sophisticated terms to classify (e.g., avoidance, planning, etc.). At one point the term ‘tax management’ was used in the Committee proceedings (Stopforth 1990: 2), and it is a great pity that this did not become common, as different terms to describe ways of ‘getting round’ tax multiplied, especially in the 20th century, and created much debate and confusion as to what they meant. Use of a term such as ‘tax management’ may thus have prevented over a century of debate about how to define avoidance and/or evasion and a proliferation of terms such as ‘tax saving’ or ‘tax mitigation’ (and more recently the application of adjectives such as ‘unacceptable’, illegitimate’, ‘illegal’, ‘abusive’ and ‘aggressive’ to avoidance), and we should now be faced only with drawing a distinction between ‘acceptable’ and ‘unacceptable’ tax management, though the difficulty of classifying activities or transactions would remain.
Ways and means of ‘getting round’ paying tax are nothing new. In Chapter 10 of my book, The Theory, Principles and Management of Taxation (I did learn from the Hume Committee), I explore in greater depth some of these ways and means, so I apologise for coming back to them, but these older avoidance mechanisms still resonate with us today. There are, of course, non-contentious ways of avoiding tax, such as not buying goods on which excises are imposed (assuming such goods are not necessities, though of course, sometimes even necessities are taxed, so this may not always be possible) or using permitted legislative exemptions (e.g., investing in Individual Savings Accounts in the UK, to receive the interest free of any tax, or making gifts seven years before death so as to escape inheritance tax). However, some ways and means are more controversial. Physical flight or relocation from a jurisdiction that had high taxes to one which had low taxes (or none at all) was not uncommon. Burg (2004: 36) comments that in AD 212 many Egyptians fled from Egypt after the Roman Emperor Caracalla conferred Roman citizenship on virtually all Roman provincials, except for Egypt, which meant that the Egyptians were still subject to an oppressive Roman poll tax. He comments further (2004: xii) that when Rome’s northern borders were attacked by barbarians, many poor people deserted to the enemy or fled to escape the heavy taxes levied to maintain Rome’s northern armies. In more recent times, the 1970s, we have seen pop stars (e.g., John Lennon) leave the UK to avoid very high tax rates (at one point in the 1970s, depending on your type of income, you might have been subject to a top rate of 98%). Today we still hear of celebrities living overseas to avoid tax, and companies such as Starbucks, Google and Facebook have received much criticism for their alleged avoidance behaviour in locating some of their operations in jurisdictions which have more favourable tax rules/rates. Nothing much has changed in regard to activities.
Another way of avoiding tax might be called ‘reverse engineering’ when attempts are made to characterise activities/transactions liable to tax as something they are not, often after the fact. Prior to capital gains tax being introduced in the UK, individuals sometimes claimed that the sale of a good/asset had produced a capital profit, not a trading profit, as the latter was taxable and the former not. In Rutledge v CIR (CS 1929, 14 TC 490) a taxpayer claimed that his sale of a million toilet rolls, purchased on a business trip to Germany, was not a trading profit. The Court disagreed, opining as well that the purchase had not been made for investment purposes or for own use. (Note that to use a million toilet rolls personally, if an individual lived to be 100, he/she would have to use around 192 a week!). This re-characterisation of transactions post-event is not now so common, but we do still see differences between jurisdictions in the tax treatment of income, whereby it is taxable in one country, but not in another. We also see sometimes manufacturers changing the composition of their products to avoid using taxed ingredients, such as sugar, which is similar in concept.
There have been, as well, physical means of avoiding tax. One of the best known in England was the bricking up of windows so that the window tax levied between 1696 and 1851 did not apply. The tax was only applicable to glazed windows, and it was not illegal to brick them up. It was, however, illegal to brick up hearths/chimneys as a way of avoiding the extremely unpopular hearth tax (1662–1688). It is commonly believed that such physical means to avoid tax are employed in Greece, where steel reinforcement bars may often be spotted protruding from the roofs of houses (also seen in Mexico and other places). These result in unfinished houses, as the reinforcement bars suggest further building has yet to take place. While these bars may allow owners to plan to add future floors, there is a 60% tax reduction for genuinely unfinished houses in Greece – so the potential at least for physical avoidance mechanisms still exists. In the UK, we have seen exemptions from business rates granted for empty property, which have also been subject to alleged avoidance practices.
The final avoidance mechanism is, perhaps, what may broadly be called ‘schemes’, which involve proactive use of the law, with a high degree of artificiality and financial ‘engineering’ – violating the spirit of the law, but not its letter. Much ink has been expended on writing about such schemes and what ‘the spirit of the law’ actually means. Essentially, such violation involves using, interpreting or otherwise exploiting the law for purposes which are not favoured by a tax authority in its own interpretations. In the UK, the authority ‘clamp down’ seemed to start with the then-Inland Revenue’s onslaught on the Rossminster schemes (Tutt 1989). It is not often appreciated that the scheme examined in the well known case of Ramsay (W.T.) Ltd. v CIR (AC 300) in 1982 started out life as a Rossminster scheme (see Tutt 1989: 96, 169) – and on that occasion the Revenue was successful in promoting the idea of ‘substance over form’, which has essentially been the guiding principle in subsequent cases, although the Inland Revenue/HM Revenue & Customs have not won all cases brought to Court. The general principle underlies much of the most recent anti-avoidance mechanisms nationally and internationally. We may think of schemes as a development of the 20th century – so relatively recent – but in fact they are not.
A much earlier case often escapes notice. In 1783, in Magistrates and Town Council of the City of Glasgow v Messrs. Murdoch, Warren & Co (2 Paton 615) a scheme to ‘get round’ the payment of a two pence Scot duty (a type of excise) came before the House of Lords. The duty was payable in Glasgow on each pint of ale or beer brewed, brought in or sold in the city and suburbs. The brewers were based at Anderston, which was at that time far enough away to be considered as not in the city or suburbs, and announced that they would cease to supply the city. They made a contract with a Mr Munro, who bought the beer and supplied it to customers from the Anderston premises. Lord Mansfield, the foremost judge, had no qualms about disallowing this scheme and ignoring the “device of the intermediate contract with Munro” (Ferrier 1981: 306).
In conclusion, while tax avoidance has presented itself in many guises, and will no doubt continue to do so, at root there is little new about any of it, as the underlying activity has remained similar over time. We do not seem to benefit unduly from looking back at history, which brings me back to my opening quote. We did, as noted, develop more sophisticated ways of talking about and classifying avoidance and evasion, although many of the descriptions used have themselves been superseded. There have, of course, been many ways introduced to tackle tax avoidance, such as the introduction of the tax avoidance registration scheme whereby tax practitioners had to register avoidance schemes that they design and ‘sell’ to taxpayers, with those taxpayers required to include registration numbers on their tax returns. This was a way of keeping the Government ‘in the loop’ of what was going on in the UK/industry, which allowed the law subsequently to be amended to close loopholes. Another blog would be required to talk about ways of tackling avoidance, but it will be interesting to see how some of the newer initiatives work in future, for example, digitisation/automation in tax avoidance/evasion as governments depend much more on information technology to identify and ‘track’ activities, and impose sanctions. Moreover, we await the impact of the global minimum corporation tax rate of 15% proposed at the G20 Summit at Davos in autumn 2021. We will continue to live through interesting (tax) times!
Click here for references
Armitstead, L. (2013). Big Four accountants blast tax scheme claims. The Telegraph. Retrieved 18 August 2013 from http://www.telegraph.co.uk/finance/personalfinance/consumertips/tax/10018397/Big-Four-accountants-blast-tax-scheme-claim.
Barford, V. and Holt, G. (2012). Google, Amazon, Starbucks: The rise of ‘tax shaming’. Retrieved 29 December 2012 from http://www.bbc. co.uk/news/magazine-20560359.
Burg, D.F. (2004). A World History of Tax Rebellions. An Encyclopedia of Tax Rebels, Revolts, and Riots from Antiquity to the Present, New York and London: Routledge.
Ecclesiastes 1:9–11a, Holy Bible, The New King James Version.
Ferrier, I. (1981). The meaning of the statute: Mansfield on tax avoidance, British Tax Review, 5: 303–8.
Frecknall-Hughes, J. (2014). The Theory, Principles and Management of Taxation: An Introduction, Oxford: Routledge.
Frecknall-Hughes, J., Moizer, P., Doyle, E. and Summers, B. (2017). An examination of the ethical influences on the work of tax practitioners, Journal of Business Ethics, 146(4): 729–745.
Fuller, C. (2013). Big Four to appear before Public Accounts Committee. Accountancy Age. Retrieved 18 August 2013 from http://www.accountancyage.com/aa/news/2237667/big-four-toappear-before-public-accounts-committee.
Stopforth, D.P. (1990). Settlements and the avoidance of tax on income – the period to 1920, British Tax Review, 7: 225–250.Tutt, N. (1989). The History of Tax Avoidance, London: Wisedene Limited
 See https://www.routledge.com/The-Theory-Principles-and-Management-of-Taxation-An-introduction/Frecknall-Hughes/p/book/9780415432344
 Perhaps an even more striking example of not taking account of history – although not related to tax avoidance – was the 1990s poll tax riots (against the introduction of the Community Charge to replace domestic rates). Although there have existed poll taxes in Great Britain in the past, the British seem to object to the principles underlying them, especially in terms of their (perceived) equity: there was a major rebellion in 1381 in the so-called Peasants’ Revolt.
Jane Frecknall-Hughes, Professor of Accounting and Taxation, Nottingham University Business School
Web page link: https://www.nottingham.ac.uk/business/people/lizjf1.html
Jane joined Nottingham University on 1 November 2016. She has worked at a number of UK universities and held chairs in different subjects, viz., accounting/taxation, law and revenue law. Her research focuses on taxation, especially from an interdisciplinary perspective as is reflected in her publication record.