Tax Avoidance - L4 Flashcards
Lecture 4
What is the difference between tax avoidance and tax evasion?
Evasion is illegal (e.g. lying on returns); avoidance is legal but reduces tax using schemes not intended by lawmakers.
What was the traditional court approach to tax avoidance?
Allowed schemes if they followed the law exactly (IRC v Westminster [1936]).
How did governments traditionally respond to tax avoidance?
By passing specific new legislation to block each scheme (Targeted Anti-Avoidance Rules – TAARs).
What is the Ramsay principle?
The courts can disregard steps in a pre-ordained tax avoidance scheme with no commercial purpose.
Which case introduced the Ramsay principle?
Ramsay (WT) v IRC [1982].
What case formulated the new approach to avoidance?
Furniss v Dawson [1984]: disregard inserted steps and reconstruct events for tax purposes.
Why was the Furniss v Dawson rule criticised?
It involved reconstructing events, not just interpreting statutes.
What case reformulated the new approach?
Tower MCashback LLP 1 v R&C Comrs [2011]: Look at facts realistically, interpret statute purposively.
Why is the new approach controversial?
It’s vague, unpredictable, and raises constitutional concerns.
What is the main constitutional criticism of the new approach?
It may involve judges making tax law, which is Parliament’s job (Craven v White [1989], McGrath v McDermott [1988]).
Why might judges be unqualified to judge avoidance?
They may misunderstand financial issues, leading to unfair decisions (Staveley).
What is DOTAS?
Disclosure of Tax Avoidance Schemes – requires early reporting of schemes to HMRC (Finance Act 2004).
What are the benefits and drawbacks of DOTAS?
Provides early warning to HMRC, but adds complexity and compliance burdens.
What did the National Audit Office say about DOTAS?
It has not proven effective or value for money.
What did McCann say about DOTAS in 2024?
It’s now ineffective and too limited in scope.
What is GAAR?
General Anti-Abuse Rule – targets abusive avoidance (Finance Act 2013).
How is “abusive” defined under GAAR?
Arrangements that cannot reasonably be seen as a reasonable course of action – the “double reasonableness” test.
What happens if GAAR applies?
Tax advantage is counteracted on a just and reasonable basis; penalty of 60% applies.
Who gives guidance on GAAR?
GAAR Advisory Panel – provides opinions but courts make final decision.
What are criticisms of GAAR?
It’s vague, hard to distinguish abuse from planning, and advisory opinions are limited.
Why do some argue GAAR is still useful?
It deters avoidance, even if rarely used (Freedman, 2023).
What are further reforms post-GAAR?
Name and shame rules, cash flow restrictions, diverted profits tax (Finance Acts 2014–2024).
What does the Finance Act 2014 introduce?
Name and shame for promoters, upfront tax payments, new investigatory powers.
What does the Finance Act 2015 introduce?
Diverted profits tax to stop profit shifting by multinationals.
