1. The traditional attitude to tax avoidance is encapsulated in the judgment of Lord Tomlin in the English case of IRC v Duke of Westminster (1936):
“Every man is entitled if he can to arrange his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure that result, then, however unappreciative, the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax”
2. Whether this principle has survived in practice into the present era is a matter of speculation. In the last five years, there has been a growing tendency to conflate the two hitherto distinct concepts of avoidance and evasion together.
THE BOUNDARY WITH UNLAWFUL EVASION
3. Lawful tax avoidance becomes unlawful tax evasion where there is deliberate and dishonest making of false statements to the Revenue (whether written or not and whether by omission or positive act). Tax evasion is often prosecuted under the English common law offence of cheating the public revenue. Cheating the revenue can include any form of fraudulent conduct which results in depriving the Revenue of the money to which it is entitled. To be fraudulent conduct, the Defendant’s conduct must deliberately prejudice, or risk prejudicing, the Revenue’s right to the tax in question, while the Defendant knows that he has no right to do so.
4. Typically, fraudulent intent on the part of a taxpayer or professional adviser is demonstrated where there is evidence of collusion between the taxpayer and others, or there is evidence that documents have been forged, with the intent of deceiving HMRC.
5. Many tax avoidance arrangements fail on technical grounds because they are artificial, lack a sufficient degree of commerciality and/or have been poorly implemented. Where an avoidance strategy fails in these circumstances, taxpayers and their professional advisers will not necessarily have acted fraudulently. More often than not, the conduct is characterised by a failure to implement the terms of the arrangement as advised rather than deliberate fraud.
6. Cases where there has been fraudulent conduct are distinguishable from cases where a tax avoidance arrangement has failed on technical grounds. Failed tax avoidance will only amount to criminal tax evasion where the taxpayer or professional adviser acted dishonestly, or fraudulently, in their dealings with the Revenue.
7. Dishonesty, as a touchstone for criminal tax evasion, has two elements:
Objective dishonesty: Firstly a jury must first of all decide whether according to the ordinary standards of reasonable and honest people what was done was dishonest.
Subjective dishonesty: The jury must consider whether the defendant himself must have realised that what he was doing was, by those standards, dishonest.
8. If the jury finds what was done was not objectively dishonest, that is the end of the matter but if the jury finds it was objectively dishonest it is then necessary to consider whether it was also subjectively dishonest.
9. In other words, it is dishonest for a defendant to act in a way which he knows ordinary people consider to be dishonest, even if he claims he genuinely believes that he is morally justified in acting as he did.
10. A jury’s perception of what is honest or dishonest conduct has shifted dramatically in the last five years. That poses a considerable risk to a taxpayer who may have entered into a tax avoidance arrangement some years ago and there is a determination that the avoidance has failed due to artificiality or shoddy implementation such as not signing documents, back-dating documents, not making interest or capital repayments on loans or not devoting time to the loss-making activity in respect of which a tax deduction is claimed.
11. Will a jury give the taxpayer the benefit of the doubt that he did not appreciate what he was doing was dishonest by the standards of ordinary people?
PUBLIC PERCEPTIONS OF AVOIDANCE AS EVASION
12. Juries live in an atmosphere which is increasingly hostile even to the idea of tax avoidance. Erstwhile law-abiding individual and corporate tax avoiders are frequently publicly vilified in the media and by the authorities as morally repugnant and enemies of the public good. Senior government ministers include ‘evasion and avoidance’ in the same breath and the practice of tax avoidance/evasion at the top of the income scale with benefit fraud at the bottom. Further, while the UK’s new GAAR is said to be directed at tackling ‘abuse’ rather than ‘avoidance’ the threshold of what is considered to be an abusive tax arrangement appears from the official guidance to be astonishingly low.
NO SAFE HARBOURS
13. Jersey professionals and taxpayers should also note that section 13 Indictable Offences Act 1848 provides that an English arrest warrant may be executed against a taxpayer or professional advisor in Jersey who may be arrested and conveyed back to England to face trial or prison.
14. While the Jersey courts have stated that they have no sympathy for unlawful tax evasion, Commissioner Bailhache, when Bailiff, stressed that in cases of tax avoidance “Leviathan [a reference to the tax authorities] can look after itself”, a position much closer to that espoused in Duke of Westminster.
15. However, Jersey has been keen to signal its cooperation with the UK government in tackling what it perceives to be a problem with offshore evasion and aggressive avoidance. Jersey clearly has an interest in being perceived as a reputable jurisdiction in which to conduct legitimate business. With that in mind, the Jersey government is currently consulting with the Island’s finance industry on the viability of a so called ‘Sniff test’ to identify “aggressive tax avoidance schemes”, association with which would be “detrimental to the good reputation of the Island”. What the authorities propose to do when the ‘Sniff test’ is failed and how that action would stand up to scrutiny remains to be seen.
DIRECTION OF TRAVEL
16. The attitude of the UK authorities and public perception has hardened against tax avoidance in the last five years. That has implications both for the authorities’ willingness to bring charges and the benefit of the doubt juries are prepared to give to taxpayers and professionals. There is a heightened risk that tax avoidance schemes that fail for artificiality, poor implementation or lack of commerciality will be perceived as tax abuse or worse, evasion.
17. The attitude in Jersey to tax avoidance has been more generous than is currently the case in the UK. However if the reputation of the island as a financial centre is threatened by the perception that it is a safe harbour for unacceptable tax avoidance schemes we can expect measures to counter that perception. The message is watch this space.