Published on Halsbury's Law Exchange here.
Jimmy Carr and his K2 tax-minimising cohorts have attracted their share of detractors for using a tax-avoidance scheme which reduced the amount payable on their income to about 2%. It is a familiar debate: where is the line drawn between tax avoidance (legal) and tax evasion (illegal)? Is tax even moral to begin with? (Those of a libertarian disposition think that it is far too high at present, morally entitling or even obliging people to avoid as much as possible, whilst those of the old left think it too low.)
Recently, Mr Carr has had a slightly unlikely apologist in the form of the Rev Dr Peter Mullen, a priest of the Church of England and former Rector of St Michael, Cornhill and St Sepulchre-without-Newgate in the City of London.
Dr Mullen, writing in the Telegraph, argues that
“… reasonably and legitimately, within the confines of the law, to avoid paying more tax than one needs to pay is no more dishonest than, say, the effort of a working man to sell his labour to the highest bidder.”
Of course the simple answer is for tax loopholes to be closed. And of course that is very much easier said than done. Thus we are left with the endless game whereby HMRC closes one loophole and another is discovered. With a tax system as complex as Britain’s, it seems that the battle will never be over. Nor is it anything new: Alan Coren’s feuilleton Tax Brittanica was probably not far off the mark, with his fictional Roman accountant, Dubious Abacus, running rings around the hapless tax inspector Miscellaneous Onus in 408 AD.
However, Dr Mullen goes on to a rather wider issue. He writes:
“There is a very deep issue here. For if something that is allowed as quite legal and above board is at the same time, as some in these same high places have declared, unacceptable and immoral, then that sets up a fatal disjunction between law and morality.
Is it seriously being maintained that the law – the way according to which we all agree to rule our lives – is immoral? Argue that, and you are doing much worse than shooting yourself in the foot. You are undermining the principles of any rational social ethic. And consequently rubbishing reason itself.”
Here Dr Mullen is entering some murky waters. One would hope that each of our laws has a moral justification, allowing for the fact that even within an ethical framework such as the modern conception of Judeo-Christianity that forms the basis of English law there will always be room for disagreement on particular issues. But it is a philosophical truism that not everything legal is moral, still less than that everything immoral should be illegal. That is one reason why the prosecuting authorities, under the aegis of the Attorney-General, have the discretion not to prosecute any individual act of criminality.
Suppose, for example, I break a bylaw by driving my car in a municipal park, in order to rescue someone who has had a heart attack. Technically I have broken the law, but no-one would suggest I have acted immorally, and (I would hope) the prosecuting authorities would take note.
Alternatively, suppose by some bureaucratic foul-up the government has built a new road but the road technically has not had a speed limit applied to it. It might be legal for me to drive at excessive speeds on the road, but it would certainly not be moral.
Back to Jimmy Carr and his fellow tax-minimisers. Assuming tax to be moral to begin with, is it immoral for the very wealthy, who can afford the advice, to use whatever loopholes available to avoid paying the rate that they would normally incur? The majority of wage earners do not have that option, because they are taxed at source and could not afford the advice anyway. The intention of the law is that those earning over a certain amount pay at a certain rate. If that law is morally just, then arguably it is not moral for Mr Carr and co to exploit the fact that the law is badly drafted.
On the other hand, it is not as if there is a moral imperative to pay more tax than is due, and on countless occasions individuals and corporations make decisions on company structures, trusts and individual transactions based on what would minimise tax. So far as they do not break the law, they are not being immoral so much as sensible. This argument is encapsulated in the famous quote from Tomlin LJ in Inland Revenue Commissioners v Duke of Westminster  All ER Rep 259:
“Every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than 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 be has so ordered his affairs that the amount of tax sought from him is not legally claimable”.
The Chancellor of the Exchequer would have done well to have recalled that quotation earlier this year when speaking of “aggressive tax avoidance”, which is not a concept known to the law.
Certainly it would not be justifiable to impose some sort of windfall tax, even in the case of an abysmal loophole which cost the treasury billions: the rule of law requires the law to be fixed in advance, so far as possible, and does not permit retrospective penal or revenue laws.
Nevertheless, there are still some difficult questions of law and morality involved, not of the open-and-shut variety Dr Mullen seems to assume. In Mr Carr's case, it would pay to recall that the Revenue looks to the substance of any transaction, and there seems on the face of it no purpose to Mr Carr's scheme and its constituent transactions other than to get around income tax.
Mr Carr might not have acted illegally or immorally, depending on how all the questions above are answered. But, having lampooned tax avoiders in the past as part of his well-remunerated stand-up comedy routine, he is certainly guilty of one charge – hypocrisy – and for that reason he has brought the unsympathetic press on himself.