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Report No. 29

101. Attitude towards tax avoidance in England.-Two varying attitudes seem to have been shown towards tax avoidance in England. The traditional attitude of the judiciary was, that a tax-payer is entitled to avoid the payment of tax so long as he could do so by legal means. There is no rule of law against the subject's making genuine and lawful arrangements to reduce taxi1-2.

1. Latilla v. Inland Revenue Commissioners, (1943) 1 All ER 255 (256) (HL).

2. For a detailed discussion on "evasion", "shifting" and "minimising" of tax, see Encylopaedia of Social Sciences (September 1951 Reprint), Vol. 14, p. 535 under "Taxation" (Robert Murray Haig).

102. This traditional attitude is represented by the following view expressed by Lord Quickswood1-2:-

"Taxation is prima facie a wrong, for it consists in taking from the taxpayer what belongs to him; and that is prima facie wrong. Taxation is justified only by the authority of the State, which is expressed in the law. The taxpayer is morally bound to obey the law, but is not bound beyond the law; for, apart from the law, taxation would be blackmail or racketeering. There is not, behind taxing laws, as there is behind laws against crime, an independent moral obligation. When therefore the taxpayer has obeyed the law, he has done all that morality requires.

It is said, that by avoiding a tax he throws a load on to some other taxpayer. But this is not quite accurate; for the deficiency might be met by reducing expenditure ..................is it not a good thing that there should be this last lawful remedy against oppressive taxation by a majority, that human ingenuity can always find a way by which the minority can escape from tyrannical imposts?".

1. Lord Quickwood, Letter to the Times, February 20, 1943, cited in Mannheim, Criminal Justice and Social Reconstruction, (1946) p. 146.

2. See also Lord Tomlin in I.R.C. v. Westminster, 1936 AC 1: 1935 All E.R. Rep., 259 (267).

103. Lord Tomlin's observations may also be cited1:-

'Apart, however, from the question of contract with which I have dealt, it is said that in revenue cases there is a doctrine that the court may ignore the legal position and regard what is called "the substance of the matter", and that here the substance of the matter is that the annuitant was serving the Duke for something equal to his former salary or wages and that, therefore, while he is so serving the annuity must be treated as salary or wages. This supposed doctrine (upon which the commissioners apparently acted) seems to rest for its support upon a misunderstanding of language used in some earlier cases. The sooner this misunderstanding is dispelled and the supposed doctrine given its quietus the better it will be for all concerned, for the doctrine seems to involve substituting "the uncertain and crooked cord of discertion" for "the golden straight mete wand of the law".' (4 Inst. 41).

'Every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less that it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax. This so-called doctrine of "the substance" seems to me to be nothing more than an attempt to make a man pay notwithstanding that he has so ordered his affairs that the amount of tax sought from him is not legally claimable.'

1. I.R.C. v. Duke of Westminster, 1936 AC 1 (19): 1935 All ER 259 (267, 268) (HL).

104. The following observations of Viscount Simon1, LC., however, illustrate a change of attitude2:-

'My Lords, of recent years much ingenuity has been expended in certain quarters in attempting to devise methods of disposition of income by which those who were prepared to adopt them might enjoy the benefits of residence in this country while receiving the equivalent of such income, without sharing in the appropriate burden of British taxation. Judicial dicta may be cited which point out that, however elaborate and artificial such methods may be, those who adopt them are "entitled" to do so.

There is, of course, no doubt that they are within their legal rights, but that is no reason why their efforts, or those of the professional gentlemen who assist them in the matter, should be regarded as a commendable exercise of ingenuity or as a discharge of the duties of good citizenship. On the contrary, one result of such methods, if they succeed, is, of course, to increase pro tanto the load of tax on the shoulders of the great body of good citizens who do not desire, or do not know how, to adopt these manoeuvres. Another consequence is that the legislature has made amendments to our income-tax code which aim at nullifying the effectiveness of such schemes.'

1. Latilla v. Inland Revenue Commissioners, 1943 AC 377 (381): (1943) 1 All ER 265 (266): 25 TC 107 (117) (HL).

2. Detailed study as to tax avoidance will be found in

(i) notes by A. Farnsworth in the Modern Law Review, 1942, p. 75; 1943 p. 243 and 1944 p. 84; and

(ii) article by Wheatcro "The attitude of the Legislature and the Courts to tax avoidance, (1955) 18 MLR 209.

105. But it would appear, that there has, again, been a trend in the reverse direction.

1. Vestey's (Lord) Executors v. I.R.C., (1949) 1 All ER 1108 (1113, 1115, 1124), (per Lord Simonds and Lord Normand).

2. Potts Executors v. I.R.C., (1951) 1 AC 443: (1951) 1 All ER 76 (81, 82, 88) (HL)

3. I.R.C. v. Wolfson, (1949) 1 AER 865 ( 868).

4. Attorney General v. A.W. Gamogo Ltd., (1949) 2 AER 732 (734).

106. The following observations of Lord Simonds would be of interest in this connection1:-

"The determination of these appeals involves a consideration of certain sections of two Acts of Parliament which were designed to bring within the ambit of taxation to income-tax and sur-tax income which would otherwise escape that burden. For that reason and because the ways of those who would avoid liability to tax are often devious and obscure, the sections are framed in language of the widest and most general scope and in the case of one of the Acts [I refer to the Finance Act, 1936, section 18(4)1 the operative sub-sections are reinforced by a provision which appears to exhort the assessing authority, and presumably the court, to let the balance, wherever possible, be weighted against the taxpayer. But, this notwithstanding, I think that it remains the taxpayer's privilege to claim exemption from tax unless his case is fairly brought within the words of the taxing section, and it is in this light that I examine the applicability of the Finance Act, 1936, section 18, and the Finance Act, 1938, section 38, to the circumstances of the late Lord Vestey and his brother Sir Edmund Vestey."

Reference may be made to the observations of Lord Normand2:-

"Parliament in its attempts to keep pace with the ingenuity devoted to tax avoidance may fall short of its purpose. That is a misfortune for the taxpayers who do not try to avoid their share of the burden, and it is disappointing to the Inland Revenues. But the Court will not stretch the terms of taxing Acts in order to improve on the efforts of Parliament and to stop gaps which are left open by the statutes. Tax avoidance is an evil, but it would be the beginning of much greater evils if the courts were to overstretch the language of the statute in order to subject to taxation people of whom they disapproved."

1. Vestey's (Lord) Executors v. I.R.C., (1949) 1 All ER 1108 (1112, 1113) (HL).

2. Vestey's (Lard) Executors v. I.R.C., (1949) I All ER 1108 (1120) (HL).



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