THE ATTITUDE OF THE LEGISLATURE AND THE COURTS TO TAX AVOIDANCE*
| Published date | 01 May 1955 |
| Date | 01 May 1955 |
| Author | G. S. A. Wheatcroft |
| DOI | http://doi.org/10.1111/j.1468-2230.1955.tb00295.x |
THE
MODERN
LAW REVIEW
Volume
18
May
1955
No.
3
THE
ATTITUDE
OF
THE
LEGISLATURE
AND THE COURTS
TO
TAX AVOIDANCE*
WHAT
is tax avoidance? The shortest definition
I
know is “The
art of dodging tax without actually breaking the law ”-a phrase
which owes its origin to the title of Mr. Stephen Potter’s book
on
gamesmanship“ The art of winning games without actually
cheating.’’ A more precise definition
is
not easy to frame.
First of all, tax avoidance must be distinguished from tax
evasion. Avoidance is legal; evasion illegal. The man with a
new
Swiss
watch in his pocket who says to the Customs
‘‘
I
have
nothing to declare” is evading tax and should be clearly distin-
guished from the man who keeps within the law and
does
not use
fraud
or
concealment. The man
who deliberately adopts one
of
several possible courses, because
that one will save him the most tax, must be distinguished from
the man who adopts the same course for entirely different reasons.
A tax avoidance transaction is one which would not be adopted
if
the tax-saving element had not been present.
The motive of the legislature must also be taken into account.
Several of our taxes are imposed for economic
or
social reasons
as well as for fiscal ones; the high tax
on
spirits was intended to
reduce drunkenness, just as the additional profits tax
on
distri-
buted profits was imposed to reduce dividends. A taxpayer
who
acts as the legislature intends him to, and reduces his drink,
or
his company’s dividend, cannot fairly be described as a tax avoider.
Hence, we must define tax avoidance as a transaction which
(a) avoids tax, (b) is entered into for the purpose of avoiding tax
or
adopts some artificial
or
unusual form for the same purpose,
(c)
is
carried out lawfully, and (d) is not a transaction which the
legislature has intended to encourage.
Tax avoidance is nothing new. The conveyance of land to
A
to
the use of
B
was used
in
the fifteenth and sixteenth centuries
A
University
of
London Special Lecture
in
Laws, delivered at the London
209
Motive is
also
an essential element in tax avoidance.
School
of
Economics and Political Science
on
February
21,
1955.
VOL.
18
I4
210
THE
MODERN
LAW
REVIEW
VOL.
18
to avoid incidents of manorial tenure, and the Statute of Uses
is one of the earliest examples of anti-avoidance legislation.’
Although of respectable antiquity, the art of tax avoidance did
not really come into its own until after the First World War, for
it
was not until then that the rate of taxation was sdciently high
to make the tax saving outweigh the expense and inconvenience
of tax avoidance measures. But by
1920
it
was generally realised
that high taxation had come to stay and a large number
of
ingenious devices have since been invented and perfected to enable
the well-advised taxpayer to pay less than he otherwise would.
Naturally, the increase in taxes occasioned by the Second World
War encouraged the practice still further, particularly in relation to
income tax, surtax and estate duty, which
in
the top levels can
take
95
and
80
per cent. respectively of the income
or
capital
concerned.
How
TAX
AVOIDANCE WORKS
Tax avoidance takes many forms and a comprehensive list of all
tax avoidance devices current since
1920
would fill a book. Here
are some examples of the principal methods which
I
have
on
my
list.
(1)
Schemes which depend
on
getting the taxpayer
or
his
property
or
both outside the jurisdiction of the
U.K.
tax laws.
These range from the taxpayer .going bag and baggage to the
Channel Isles, to elaborate schemes in which he stays here but
his property is transferred to foreign trustees
or
to a foreign
holding company.2
(2)
The purchase
of
a defunct company which has made a heavy
loss
so
as to use up that loss against future profits.
An
enter-
taining spectacle in English commercial life is the bargaining
on
such a sale where the vendor does his best to emphasise how
insolvent his company is. A variant
on
this theme is the Schedule
D
taxpayer who farms his country estate at a loss
in
reduction
of his surtax but improves
it
all the time,
so
that
it
ultimately
sells for a nice capital profit.
(8)
Taking in a new partner
or
retiring an old one whenever
it
suits a partnership to claim a cessation of the old partnership
under the complicated rules resulting from tax being normally
assessed
on
last year’s profits.
(4)
Accumulating income by means of a trust
so
as to avoid
surtax. Previously this was also done by using a company which
did not fully distribute its income
or
by delaying the winding up
of
the estate of a deceased person and using income to pay debts.4
1
See
Holdsworth’s
History
of
English
Law,
Vol.
IV,
pp.
446
et
seq.
2
The latter
now
have
a
formidable obstacle
in
I.T.A.,
1952,
8.
412.
3
See now
I.T.A.,
1952,
as.
245-264.
4
See now
I.T.A.,
1952,
8s.
418-424.
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