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The 1870 Report of the Commissioners of Inland Revenue, that mine of golden information and invaluable wisdom, puts the position quite clearly. Between the introduction of the income tax and 1806 the exemption limit was reduced from £60 to £50. An ungenerous alteration, you might think. But take note of the reason: "The following extract from the guide book, published by the tax office at that period, will explain the grounds for the alteration. It states 'that the regulation in the former Act by which exemption was granted on the whole of every person's income under £60 a year, which was intended to have a strict and limited operation, has been introductive of the greatest frauds upon the public. It is notorious that persons living in easy circumstances, nay, even in apparent affluence, have returned their income under £60, although their annual expenditure has been treble that sum, and to whom there was no ground for imputing extravagance. The income of whole parishes has been swept away by this fraud, such persons generally bringing their income below £60. Hence it is that the legislature found the necessity of confining the exemptions to £50, that their former returns may be made use of."

Ingenious, you must concede. And why not? No wonder that the tale of the destruction of the earlier records1 became part of taxation mythology at an early stage.

But that was by no means all. At a later stage in their report the Commissioners returned to the topic of tax evasion. "We have frequently called your Lordships' attention to the. large evasions which are practised under Schedule D by fraudulent returns. Every year, indeed, flagrant instances come to our knowledge... It was See n. 29, Chap. 1 above [1967] B.T.R. 271.

66 The Law of Tax and the Common People not, however, until recently that we were enabled to form a reliable estimate of the loss which the revenue sustains in this way. An extensive demolition of houses by the Metropolitan Board of Works gave rise to a great number of claims to compensation. Two hundred of these were examined by our officers, and in 80 cases surcharges were made and sustained on appeal—that is to say in 40 per cent, of the cases inquired into the Revenue had been defrauded of its dues... Of course, if this were a solitary instance of the kind it would be eminently illogical to build any argument upon it, but your Lordships are aware that, as an invariable consequence of claims for compensation, when the actual profits of trades or professions are divulged, we find the income tax returns largely deficient. And, moreover, this is not confined to any particular class, trade or profession: we find the same practice prevailing among legal practitioners, when on the abolition of their exclusive privileges in some particular court they have to make good their claims to your Lordships; we find it on all occasions of large demolition of shops and warehouses for public purposes, in every variety of trade, and we find it in great public companies and in firms whose business is almost a national concern, from its magnitude and world-wide reputation; we, therefore, think that we may venture to generalise upon the facts which the most recent occasion of compensation cases has furnished.

Those facts are that 40 per cent, of the persons assessed had understated their incomes to such an extent that a true return would give us an addition of 130 per cent.

We are far from saying that in all the cases in which income tax returns are deficient there has been a wilful attempt to defraud the Revenue. In many instances no doubt the errors which are committed are unintentional, but what we are chiefly concerned with, is the effect on the public income, which is the same, whatever may be the cause of the deficiency; and the real significance of the subtraction of such a large sum as we have supposed or of anything approaching that sum, is best brought home to us when we remember that 'the exemption of one man means the extra taxation of another,' and that if Schedule D gave its due quota to the Revenue we might be relieved of many an unpleasant impost.

It must also be borne in mind that on lands and houses, on dividends, and on salaries and pensions of public officers, the tax is levied nearly to the uttermost farthing which is due."

Once again the Commissioners' Report is almost contemporary in its content and comment, and precisely pertinent to our present The Law of Tax and the Common People 67 condition. Why will men and women who would scorn to lift their neighbour's wages from behind the mantelpiece clock habitually raid the community's resources by cheating in relation to tax? Does the system, in particular in its legal aspects, contribute to its own disregard? What, again so far as concerns legal aspects and legal procedures, are the remedies, if any?

Evasion and avoidance are two words which frequently get confused. Evasion is normally reserved for cheating, the dishonest and fraudulent avoidance of tax. Avoidance is a more subtle concept, difficult to define. The confusion may reflect a positive attitude of mind as much as any ambiguity of thought. The 1955 Royal Commission put it this way2 : "By tax avoidance is understood some act by which a person so arranges his affairs that he is liable to pay less tax than he would have paid but for the arrangement. Thus the situation which he brings about is one in which he is legally in the right, except so far as some special rule may be introduced that puts him in the wrong." The Royal Commission went on to analyse two distinct situations: the first, where income exists and the rules are concerned that a particular person shall be assessed upon it as being its real owner. As examples of this category the Royal Commission identified the "settlement" provisions, the close company code and the sections aimed at transfers of assets abroad. In all these cases specific situations have been countered by specific provisions.

Broadly the principle is that the income of B and C, trustees, or of B Limited, a close company, or of B and C or of C Limited if located outside the United Kingdom, will be treated as A's income from whom the income originally derived unless A's alienation of the income has been genuine, effective and intended to be permanent.

The Royal Commission examined and passed the relevant part of our tax code as working well enough but made the recommendation, already noted3 and as yet not implemented, that a review of the statutory provisions could usefully be undertaken with the object of stating the law possibly more compactly, certainly with greater clarity.

The second situation—not identified by the Royal Commission as avoidance in terms but, today, falling clearly within that category—is where but for the special statutory provision, assuming the hole to have been discovered and the plug designed, there would have been no taxable income at all. The Royal Commission found this area Cmd. 9474, para. 1016.

See above Chap. 3.

68 The Law of Tax and the Common People baffling,4 "We have found it impossible to formulate any general principle by which to test the propriety of a special legislative intervention of this kind which has the effect of adding to the category of assessable income a limited class of payments to a limited class of persons without appearing to enlarge the general conception of assessable income." The example mentioned in the Report is the provision which makes a payment for a restrictive covenant subject to tax at higher rates in certain circumstances.

Ingenuity has not stood still since 1955. To the receiving by a taxpayer of sums which would not be income but for legislative intervention has been added the paying of sums which but for such intervention would create a loss or deduction calculated to reduce or eliminate the taxpayer's liability to tax on all or part of his income.

A highly sophisticated and specialised market has developed for schemes or arrangements designed either artificially to convert what would otherwise be taxable into an untaxable receipt or to reduce income which would otherwise be taxable by the artificial creation of a loss or deduction.

The causes of this development are not far to seek. They would appear to be similar to the causes of the widespread adoption of evasion. The odious imposition becomes intolerable as rates increase.

Truly, or in imagination and fancy, the load is so grievous that the adopting of almost any means to escape it becomes acceptable.

Habits are infectious. Observation, frequently misinformed, often exaggerated, suggests that others who' ought to know better indulge.

But perhaps they do know better. In any event imagined indulgence breeds indulgence. If he, why not I? Soon it becomes a conscientious duty in the interests of business, firm or family to adopt every available legal means to ensure that resources are not depleted by the payment of unnecessary tax.

The dilemma is real, and difficult. The dividing line between fraudulent evasion and ingenious avoidance narrow. After all a small cheat—e.g. the occasional private phone call charged to the office account—will be classified in most moral scales as not far in the scale from a well-planned but technically legitimate raid on the Revenue's resources. The historical background to income tax suggests why tax law was regarded as different from other areas of law and why compliance with tax law was put in a special category. The record suggests that cheating at tax is and always has been widespread.

sCmd. 9474, para. 1029.

See above Chap. 1.

The Law of Tax and the Common People 69 Within limits it has been made socially acceptable. Consider this extract from W. S. Gilbert's Ruddigore. Gilbert was a member of the Bar, an upright and honourable man. Of course, his dialogue is a witty tease. But as always his wit is revealing. Sir Ruthven Murgatroyd, Bad Baronet of Ruddigore, is cross-examined by his ghostly ancestors. Has he discharged his obligation under the Witch's curse to commit a crime a day?

"Rob. Really I don't know what you'd have. I've only been a bad baronet a week, and I've committed a crime punctually every day.

Sir Rod. Let us inquire into this. Monday?

Rob. Monday was a Bank Holiday.

Sir Rod. True. Tuesday?

Rob. On Tuesday I made a false income tax return.

All. Ha! Ha!

1st Ghost. That's nothing.

2nd Ghost. Nothing at all.

3rd Ghost. Everybody does that.

4th Ghost. It's expected of you."

If social attitudes to evasion are tolerant, judicial attitudes to avoidance are ambiguous. Inevitably one judge will emphasise the citizen's right to arrange his affairs within permitted legal limits to avoid the incidence of tax.6 Another will be critical of the expenditure of so much ingenuity and expertise in a pursuit so devoid of public benefit.7 Yet a third will find the artificial pretences involved in many schemes worthy of censure.8 Inevitably metaphors are

introduced into the discussion of policy and of individual cases:

"There is a certain fascination in being one of the referees of a match between a well-advised taxpayer and the equally well-advised Commissioners of Inland Revenue, conducted under the rules which govern tax avoidance. These rules are complex, the moves are sophisticated and the stakes are high."9 There can be few other branches of the law where the interaction of interests between community and individual is regarded as no more than a game.

Need we despair? Are the twin problems of evasion and avoidance wholly intractable? John Stuart Mill comes near to saying so 10 : He e.g. Lord Tomlin in Duke of Westminster v. CIR [1936] A.C. 119, Tax Cas. 490.

e.g. Lord Simon in Latilla v. CIR [1943] A.C. 377, 25 Tax Cas. 107.

*e.g. Templeman L. J. in IRC v. Garvin [1980] S.T.C. 295 and W. T.

Ramsay Ltd. v. IRC [1979] S.T.C. 582.

Per Donaldson L. J. in IRC v. Garvin [1980] S.T.C. 296 at 313.

John Stuart Mill, Principles of Political Economy, Book V Chap. III.

70 The Law of Tax and the Common People first identifies the conditions necessary for making an Income Tax consistent with justice. That incomes below a certain amount should be altogether untaxed. That incomes above the limit should be taxed only in proportion to the surplus by which they exceed the limit.

That life incomes or incomes from business should be less heavily taxed than inheritable incomes. We seem to emerge reasonably well from his tests with a possible question mark over higher rate tax. Mill continues: "An income tax, fairly assessed on these principles, would be, in point of justice the least exceptionable of all taxes. The objection to it, in the present low state of public morality, is the impossibility of ascertaining the real incomes of the contributors.

The supposed hardship of compelling people to disclose the amount of their incomes ought not, in my opinion, to count for much. One of the social evils of this country is the practice, amounting to a custom, of maintaining, or attempting to maintain, the appearance to the world of a larger income than is possessed; and it would be far better for the interests of those who yield to this weakness, if the extent of their means were universally and exactly known, and the temptation removed to expending more than they can afford, or stinting real wants in order to make a false show externally...

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