Apologies for the late posting of this: I’m catering at a scout camp over the bank holiday weekend, and preparing for that has taken more of my spare time recently than I anticipated. I am also likely to be rather incommunicado (in said field) for the next week or so: further apologies for the resulting delay in replying to any comments.
This post has been put together in fits and starts, so yet more apologies if it doesn’t quite hang together.
Sorry about apologising so much, too 🙂
My fundamental point is that Quentin’s model creates false positives, and to eliminate them he makes concessions which then create false negatives.
Following on from my previous post, David Quentin (and Iain Campbell) pointed out to me that I was not taking into account what Quentin said in his paragraph 33:
“It should be emphasised that we are talking here about tax risk that has been deliberately created qua tax risk, and not tax risk which has arisen as a result of deliberate but non-tax-motivated behaviour. If you do something in pursuit of your commercial objectives and it gives rise to tax risk, you are not in the “avoidance” zone. You are over on the left of the curve in the zone where you want tax advice to eliminate tax risk, not create it.”
He followed this up on his blog by saying, as a response to my previous post:
“If the tax adviser told it to do something different (e.g. some sort of structured work-around) because that would increase the certainty of being able to claim capital allowances, this would be an upwards movement in “tax advice risk space” (as described in paragraph 12 in my paper) and would not constitute tax avoidance”.
I cannot agree with this: I feel that if a tax advantage is not clearly due, and a taxpayer takes steps with the sole purpose of making as sure as possible that the tax advantage is actually obtained, then this would frequently be regarded as avoidance.
In fact, the phrase “structured work-around” could be used as a fairly close definition of “avoidance” in most non-tax contexts (I avoid problems with accounts and tax software by working around them in Excel, for example).
Taking Google’s situation of selling from Ireland to the UK (rather than selling in the UK) as an example: if the aim is to ensure that for tax purposes sales are recorded in Ireland rather than the UK, and Google issues instructions to its staff as to how they should act to ensure that they keep the sales in the desired place, then issuing those instructions (which may have no, or even adverse, economic impacts) looks to me rather like an avoidance step – but it would not be under Quentin’s analysis. So here we have a false negative.
One could simply say that being careful to minimise the tax risk you create is still creating risk, so overall there is a downward movement and hence avoidance. But I think that the way the model walks through the tax risk space means looking at individual steps, not at the big picture; and I think that outside observers would tend to do so.
I also think that Quentin is seeing too much of a clear divide between doing “something in pursuit of your commercial objectives [which] gives rise to tax risk” on the one hand and a company doing something “because its tax adviser told it to” on the other. It’s true that in many cases clients do go ahead merrily with their original plans and we then try to make sure the tax is as certain as possible (documentation! Please, somebody think of the documentation!), but ideally one does rather hope that commercial actions do change as a result of what tax advisors say. Tax being a deal-breaker is not uncommon, and tax affecting the form of a transaction is (fairly) routine. I’m frequently asked whether a client should buy or lease a car personally or through their company, for example – people are perfectly prepared to change the economic form based only on tax factors (usually without specifying the car – which I regard as a somewhat crucial variable in the equation – but hey ho).
OK, that is probably a poor example given that as the eventual tax treatment is fairly certain (assuming mileage records are rigorously kept) I doubt it would count as avoidance under Quentin’s model (or many others), but the general point stands: it is often hard to disentangle behaviour which is “tax-motivated” from that which is not.
The borehole example may be better: one point of capital allowances (see the annual investment allowance in particular) is to induce businesses to make investments they otherwise wouldn’t make. So if the business is umming and ahhing about whether to bore the hole, deciding to do so because the advisor has told it that allowances will make it worthwhile sounds like the sort of step Quentin does include in his model:
– It is done due to the taking of tax advice; and
– It creates a tax risk
Quentin would then take it out of “avoidance” territory because it’s done in the pursuit of commercial objectives, although the fact that it would not have been done in the absence of the tax advice might appear to bring it in.
So Quentin has to say that if the action taken by the taxpayer has a significant non-tax impact then it’s not within his model, even if it does have a tax motivation. That is, you are within the model if you have a tax motive but can be taken out by a non-tax one. That would take the car and borehole examples completely out of the avoidance question. But this seems to be simply returning to the “no economic substance” test, and renders Quentin’s risk test irrelevant – or at least, as suggested above, overly narrow and leading to false negatives. It also needs a definition of “significant non-tax impact”, if leasing a car personally rather than through the company is significant but locating your European headquarters in a particular jurisdiction is potentially negligible.
Or, looking at the same example another way: if you would put the borehole in anyway, then you have a choice: you can claim allowances, or you can not. If you claim them because your advisor says you have a shot at getting them, although the position is not clear, that would seem to be something done which is very clearly tax-motivated and creates a risk (of interest and potentially penalties, as well as the tax underpaid), and which cannot have a commercial purpose in itself because the borehole is already sunk. The claim seems to be avoidance in Quentin’s model, even if the sinking of the borehole is not.
Similarly with undertaking R&D because the tax credit makes it worthwhile: this seems to count as avoidance, if it’s not clear that the credit will be available, and is another potential false positive.
Now I am actually OK with calling this avoidance: in my mental model of avoidance (see below), any step you take to reduce your tax bill is avoidance, whether you use an ISA or Cup Trust; the difference for me is whether the avoidance is acceptable or not, which is an entirely different question. But Quentin seems to regard all avoidance as unacceptable, or at least undesirable (apologies if I am misreading here).
So overall I think that Quentin’s model is interesting, and should certainly be taken into account when looking at avoidance; but it seems not to count some cases of avoidance as such, and it would seem to class some normal tax planning as avoidance, and so it doesn’t seem to be complete. It is too narrow in one dimension (looking only at cases with little economic impact), and too broad in another (covering all cases where there is some risk).
It seems to work better as a potential hallmark of avoidance, but one which is neither necessary nor sufficient.
Perhaps to improve the model the tax risk space needs to be three-dimensional, to include economic impact? Travelling down and right on Quentin’s graph is objectionable if you stay in those two dimensions; but if you also posit a z-axis of increasing economic impact, is travelling south-east acceptable so long as you go uphill while doing it? If so, does the steepness of the slope matter?
I think the better model of avoidance is to look at a two-step process:
1) Define avoidance as the situation where the tax bill has been reduced as a consequence of an action taken by the taxpayer (this is very broad);
2) Classify avoidance as acceptable (ISAs, R&D) or otherwise (BEPS, IR35)
In this scheme, the question of whether an action taken serves only to reduce tax and increase tax risk, as set out by Quentin, would be taken into account when looking at part 2: was the avoidance undertaken for acceptable reasons?
The sort of transaction Quentin is targeting reduces the tax bill with no concomitant economic impact but just an increase in tax risk, so one cannot say the tax consequence is justified; this is unacceptable avoidance (or perhaps “abuse”, depending on how egregious it is).
The borehole example, on the other hand: investing in plant gives one allowances, which reduces the tax bill, so tax has been avoided; this is done in a way which does not simply increase tax risk but has economic effects, the tax consequences of which are clearly in accordance with Parliament’s intentions; so this is perfectly acceptable avoidance (or “planning”, perhaps).