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HMRC internal manual

Technical Teams Operational Guidance

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HM Revenue & Customs
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Code of Practice 8 cases: Identification of Code 8 cases: Tax avoidance

‘Avoidance’ is not defined in the Taxation Acts and attempts to define it have not in the past been successful. One definition is ‘a situation where less tax is paid than Parliament intended, or more tax would have been paid, if Parliament turned its mind to the specific issue in question’. At a practical level the problem is then essentially one of deciding what Parliament would have intended and identifying who should be asked to decide this.

This highlights an important issue. All fiscal authorities are becoming less and less concerned with fine distinctions between tax planning and tax avoidance and more and more concerned with the effect on the yield to the Exchequer.

That said, Investigators need to have in simple terms a working concept of ‘avoidance’ in order to properly identify cases which can be worked under Code 8.

The starting point should be that one would normally expect taxpayers to pay tax on their income or profits. Although, in Ramsay v CIR (54TC101) Lord Wilberforce reaffirmed that taxpayers are entitled to arrange their affairs to effect reductions in their tax liabilities, it is reasonable to assume that where a commercial transaction is carried out in a particularly convoluted way, then avoidance is afoot.

Although tax planning is legitimate and arrangements to avoid specific charging sections or to maximise tax allowances, reliefs or exemptions may be perfectly acceptable, it does not follow that this planning always works. An example of an unsuccessful attempt to gain a tax advantage is to be seen in the case of Magnavox Electronics Company Limited v Hall at 59TC610 where the taxpayer simply sought to ensure that a chargeable gain made on a sale to a replacement purchaser arose in the same accounting period as a gain on the sale under the original contract would have done.

In relation to a tax planning scheme Tucker J approved the HMRC challenge (in the Roux case) saying “the taxpayer entered into these schemes presumably after taking professional advice, in the full knowledge of what was involved and with the sole object of avoiding payment of tax. He must have known, or must be presumed to have known, of the risks of Revenue disapproval [of the Pension Scheme] and of all that involved, but he must have considered the fiscal advantages sufficiently attractive to warrant the taking of the risk”.