In the current regulatory environment and the ever-increasing scrutiny of individual, corporate and trust tax affairs, planning arrangements and investigations into possible unacceptable tax avoidance and evasion it is of fundamental importance for tax professionals to understand and appreciate fully the scope of their obligations and potential liabilities arising from contract law, professional negligence (tort law), professional regulators and the Government.
The tax professional must be particularly vigilant to ensure that tax advice is given which correctly falls within the ambit of the applicable legislation as to the scope of any tax liability, any exception to such a liability, including the availability of any applicable relief. The regulation of tax professionals is in essence designed to ensure that only tax mitigation is adopted by clients and not tax avoidance (to the extent it is regarded as not being within the spirit of the tax legislation). In IRC v Willoughby and Another [1997] STC 995 (HL), Lord Nolan drew the following distinction between tax mitigation and tax avoidance:
‘The hallmark of tax avoidance is that the taxpayer reduces his liability to tax without incurring the economic consequences that Parliament intended to be suffered by any taxpayer qualifying for such reduction in his tax liability … Where the taxpayer’s chosen course is seen upon examination to involve tax avoidance (as opposed to tax mitigation), it follows that tax avoidance must be at least one of the taxpayer’s purposes in adopting that course, whether or not the taxpayer has formed the subjective motive of avoiding tax.
My Lords, I am content for my part to adopt these propositions as a generally helpful approach to the elusive concept of “tax avoidance’, the more so since they owe much to the speeches of Lord Templeman and Lord Goff of Chieveley in Ensign Tankers (Leasing) Ltd v Stokes (Inspector of Taxes) … respectively …’
If a tax professional provides advice on matters which trespass into the category of tax avoidance, then it is necessary for the adviser to ensure that their advice is clear as to why the tax rules operate in the way which is being advised on to the particular facts, and to identify why, as a matter of statutory interpretation, the rules apply to give the tax result which is being advised on. It is well established that there is no requirement for anyone to organise their commercial affairs so as to maximise his tax burden. It is therefore perfectly legitimate to organise commercial transactions in a way which minimises the tax burden. This was made clear by the House of Lords in IRC v Brebner [1967] 2 WLR 1001 where Lord Upjohn said:
‘My Lords, I would only conclude my judgment by saying, when the question of carrying out a genuine commercial transaction, as this was, is considered, the fact that there are two ways of carrying it out – one by paying the maximum amount of tax, the other by paying no, or much less, tax – it would be quite wrong as a necessary consequence to draw the inference that in adopting the latter course one of the main objects is, for the purposes of the section, avoidance of tax. No commercial man in his senses is going to carry out commercial transactions except upon the footing of paying the smallest amount of tax involved.’
More recently, in the Supreme Court, Lord Neuberger stated in Secret Hotels 2 Ltd v. HMRC
[2014] STC 937 at [57]:
“…one must be careful before stigmatising the contractual documentation as being “artificial”, bearing in mind that EU law, like English law, treats parties as free to arrange or structure their relationship so as to maximise its commercial attraction, including the incidence of taxation…”
Ultimately, the crucial question for a tax professional is to determine whether all that is proposed to be done by the taxpayer (in reliance on the adviser) in structuring his affairs to minimise the incident of taxation is permitted in a way that Parliament had intended. Often a tax professional will be reliant on his client (or another professional adviser, e.g. a valuer or transfer pricing specialist) in determining whether the proposed transactions are commercial and/or entered into on an arm’s length basis. For any tax professional it is of fundamental importance that they understand the underlying facts (i.e. transactions, entities involved etc) before advising on the tax issues (and in doing so the adviser must have up to date knowledge of the law). If the tax consequence from any proposed planning is not intended by Parliament and/or the transactions have been structured on a uncommercial basis, then the tax professional and their client can expect the close scrutiny of those transactions and tax planning advice by the tax authorities. Such forms of planning are likely to require detailed analysis by a tax professional, among other things, as to the scope and application of the applicable statutory provisions, what Parliament intended, anti-avoidance case law, the Disclosure of Tax Avoidance Scheme (DOTAS), Promoters of Tax Avoidance Scheme (POTAS) and DAC 6.