Tax avoidance and the law of unintended consequences

08 September 2015

George Bull

From the perspective of tax authorities worldwide, tax avoidance is a massive example of the operation of the law of unintended consequences. When they enact legislation, the last thing that governments want is for tax avoiders to use the law for unintended purposes or to get round it in ways which were not foreseen.

At a time when tax authorities around the world are rushing to crack down on tax avoidance, it’s therefore worth asking which steps that are being taken now might subsequently have completely unintended consequences.

A recent tax case illustrates the problem of working out what Parliament intended when enacting a particular piece of tax law.

Leekes Stores is an independent retailer of homewares. For the year ended 31 March 2010, Leekes claimed tax relief for the losses of a business it had acquired. HMRC challenged Leekes’ claim for tax relief. Earlier this year, the Tax Tribunal decided in Leekes’ favour. That’s good news for the company and its shareholders, but what’s the wider significance? This is the important point: simply put, it’s clear from the decision that for years both HMRC and the tax profession had misunderstood the way the relevant legislation was meant to operate.

If that has happened once, it can happen again. So where does that leave us now?

In a new era of legislation to prevent tax avoidance, an era in which HMRC is entitled to receive money up-front and then ask questions afterwards, an era in which offenders risk being publicly named and shamed for trivial errors, new dangers emerge.

Specifically there is a serious risk that, if the intention of legislation is not absolutely clear, then the professions and HMRC will together agree what interpretation applies. This ought to minimise the risk of reputational damage for taxpayers who follow that guidance to navigate their way through complex legislation. However, as the Leekes Stores case clearly shows, there are situations where both HMRC and the tax profession can misinterpret a significant piece of legislation.

With waves of new tax legislation hitting the Statute Book every year, there will be ever more situations where the intention of the legislation is not absolutely clear. But if, with the best of intentions and full transparency, HMRC and the tax profession agree what interpretation applies, the rule of law is challenged and the independence of the Judiciary is undermined. That’s an unintended consequence which none of us should allow to happen.