FIVE WAYS OUT OF TAX: AN ANALYSIS OF AVOIDANCE DEVICES

Publication Date01 February 1994
Pages133-149
DOIhttps://doi.org/10.1108/eb024801
AuthorGRAHAM MANSFIELD
SubjectAccounting & finance
FIVE
WAYS OUT OF TAX: AN ANALYSIS OF AVOIDANCE
DEVICES
Received: 10th January, 1994
GRAHAM
MANSFIELD
DR
GRAHAM MANSFIELD
HAS
ALTERNATED BETWEEN ACADEMIC LAW,
AS
A RESEARCHER, WRITER AND LECTURER,
AND
REGULATORY PRACTICE AS A SOLICITOR.
THE
RESEARCH UPON WHICH THIS PAPER IS
BASED
WAS CONDUCTED AT THE OXFORD
UNIVERSITY
CENTRE FOR SOCIO-LEGAL
STUDIES*.
IT
ALSO
DRAWS ON HIS EXPERIENCE
WHILE
AT THE SECURITIES AND INVESTMENTS
BOARD;
AND IN THE USA, THE INLAND
REVENUE
SERVICE AND THE SECURITIES AND
EXCHANGE
COMMISSION.
ABSTRACT
This paper is about apparent failure in an
aspect of financial regulation: non-
compliance with regard to taxation. An
idealised compliance model of tax advice,
from the Inland Revenue perspective,
merely involves application of revenue law
to the facts to determine fiscal liabilities. A
less compliant approach involves, for
example, creative accounting to amend
figures and so reduce such liabilities. The
focus here, however, is on legal creativity
to reduce or even cancel tax bills: just how
tax advisers match, mismatch or rematch
their clients' facts interactively with malle-
able interpretations of both revenue and
other laws. Following classification of
various tax devices with three examples
for each of five
categories
recurrent con-
cepts, themes and techniques of avoidance
are then further
analysed.
This analysis
not only confirms that legal creativity
makes compliance problematic but also
offers a novel exposition of just how that
paradoxical use of the law
occurs.
INTRODUCTION
Tax evasion breaks the law through
reliance on non-disclosure of facts;
tax avoidance, rather than ignoring
the law, achieves savings through
reliance upon it.1 Tax avoiders treat
law as a vehicle for exploitation and
development: a means to the ends of
lower or no tax bills. A schism is
created between the letter and the
spirit of the law. But how is this
schism created? How is tax avoided?
Analyses drawn from research into
avoidance have demonstrated else-
where specific instances of avoidance
devices in action.2 This paper pro-
vides further instances of such
*Wolfson College Oxford, with Dr Doreen McBarnett, in a project funded by the
Economic and Social Research Council on tax evasion and avoidance (award numbers
E0625033 and R000231235).
133
JOURNAL OF FINANCIAL REGULATION AND COMPLIANCE VOLUME TWO NUMBER TWO
- MANSFIELD -
devices and then seeks to offer a
more general categorisation of
methods of tax avoidance. Using a
range of devices as illustrations, the
analysis suggests five broad ways out
of tax; and then, in turn, attempts to
point up how legal creativity may
obstruct the spirit of the law.
Drawing this distinction between
the letter and the spirit of the law
raises the question of how the spirit
of the law, legislative intent, can be
divined. Certainly some tax laws
embody policy which mitigates
maximum Exchequer revenue for
secondary ends such as the pursuit
of more investment through wider
share ownership (eg tax breaks
through Personal Equity Plans).
Indeed, some features of the UK tax
system seem destined to generate tax
avoidance. For example, before 1965
capital gains were not taxed at all
and, until aligned in 1988, they were
charged at a lower rate than higher
rate income tax.3 Leaving aside these
concessions which obscure legislative
intent by combining ancillary policy
objectives with straightforward tax
collection, the unanswerable ques-
tion is side-stepped here by letting
the avoidance devices speak for
themselves. They demonstrate not
only that if avoidance was intended
then tax law is grossly inequitable
(owing to inequality of access to the
considerable creative resources and
willingness to take the legal risks
necessary to achieve it) but also,
more self-evidently, that no legisla-
tion could be so perverse, intuitive
or prescient as to provide means so
different from the ends attained
through recourse to such devices.
How is tax avoided by legal
routes? There are five basic, fre-
quently overlapping, approaches.
First, one can use tax policy to the
full and beyond, by 'stretching out'
exemptions. This approach builds
upon exemptions or reliefs by re-
structuring situations to which they
would not apply so that they do.
Second, 'smoothing out' juggles
timing to alter the interrelationship
of income and the period in which it
accrues: tax liability is dissipated or
concentrated according to which
produces the smallest tax bill. Third,
'cancelling out' exploits the provi-
sion that losses can be offset against
gains,
or expenditure against
income, by buying, generating or
contriving such contra-items. Fourth,
'moving out' of the tax jurisdiction
need not involve physical removal
where 'fiscal emigration' is attainable
through the interplay between tax
and other areas of law governing
trusts,
companies, residence and
domicile. Fifth, 'making out' enables
movement from an unfavourable tax
category into a favourable one by
recasting the legal form of trans-
actions even where the underlying
substance is sustained.
Three schemes, drawn from some
routine and some esoteric avoidance
ploys,
are chosen to demonstrate
each of the avoidance devices. They
often incorporate more than one of
the five approaches analysed
these
approaches are not mutually exclu-
sive,
nor do they represent a contin-
uum from tax compliance to
criminal evasion. Many of the
schemes described have been closed
or invalidated by specific legislation
or general litigation, or sometimes
both.4 The examples of devices here
are variously drawn from over the
past twenty years. Although there is
some
updating of the relevant law (in
the references), outlawed or out-
moded devices are included along-
side some current ones because they
134

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