Economic Issues

The Legality & Extent of Tax Avoidance and Evasion -By Olanrewaju Saints

There is a specific offence relating to the ‘fraudulent evasion of income tax’ in the Taxes Acts, which was originally introduced in 2000. However, this legislation is not frequently used, as the Revenue often prefers to rely on the common law when they prosecute.

Published

4 years ago

June 11, 2020

PERSONAL INCOME TAX

INLAND REVENUE COMMISSION Vs. DUKE WEST MINISTER 1936, AC 1 PER LORD TOMLIN

FACT ABOUT THE CASE

The most often quoted ruling on this subject confirming that tax avoidance is acceptable and legal comes from the court case of IRC v Duke of Westminster (1936). The Duke of Westminster paid his gardener a weekly wage and entered into an agreement by which he stopped paying the wage and instead drew up a covenant agreeing to pay an equivalent amount.

The gardener still received the same amount in wages but the Duke gained a tax benefit because under the law that applied at the time the covenant reduced the Duke’s liability to surtax.

SUMMARY

When the case came before the House of Lords, the judge, Lord Tomlin, stated:

“Every man is entitled if he can to arrange 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 that 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” (IRC v Duke of Westminster [ 1936 ] AC1 (HL)).

JUDGEMENT

The Duke of Westminster won the case!

Judicial and Legislative Attitude

Common Law

Very occasionally, you might find that a taxpayer is prosecuted under the Theft Act for false accounting (or possibly the Fraud Act 2006) but the majority of tax evasion cases are brought under the common law criminal offence of ‘cheating the public revenue’ (remember Harry Rednapp and PJ Proby?).

Cases brought under this common law have established that for the offence to be committed there does not have to be a dishonest act – an omission such as the failing to account or register for VAT will suffice provided that the act or omission was intended to reduce the tax bill.

Tough Penalties!

There is no maximum penalty for such an offence if found guilty so a defendant could be sentenced to life imprisonment as well as having to repay the Revenue. The previous Chancellor, Dennis Healey, famously described the difference between tax avoidance and tax evasion as being “the thickness of a prison wall”.

Unsurprisingly HMRC do not like the idea of tax avoidance and they appear to view all actions taken to reduce a tax bill as suspect unless the action can clearly been seen as taking advantage of a tax relief in the manner intended.

Tax Avoidance Disclosure

In March 2011, the Revenue issued a document entitled ‘Tackling Tax Avoidance’ which detailed how they would be approaching the problem of tax avoidance in the future.
The document states that they intend to develop the Tax Avoidance Disclosure rules, under which certain tax planning schemes have to be notified to the tax authorities shortly after they are marketed or implemented. The intention is supposedly to assist users so that they can work out the difference between what it terms ‘artificial avoidance schemes’ and ‘ordinary sensible tax planning’.

HMRC describes some specific Tax Avoidance Schemes they have encountered so far in the Spotlights section of its anti-avoidance pages from resourceful materials.

The text states that ‘the schemes featured are generally those which HMRC consider have the widest implications and about which there is the greatest need to warn potential users. They will often be schemes that have been disclosed to HMRC and have been given a Scheme Reference Number (SRN). Please note that the issue of a SRN does not mean either that HMRC ‘approves’ the scheme or that HMRC accept that the scheme achieves its intended tax advantage.’

DEFINITION OF TAX AVOIDANCE & EVASION

TAX AVOIDANCE arises in a situation where the tax payer arranges his financial affairs in a form that would make him pay the least possible amount of tax. For examples; Federal Government unveils economic recovery plan and to raise VAT on luxury items, you can achieve Tax Avoidance by avoiding affected luxury goods and services on which VAT is levied. Far from boycotting the goods and services, tax avoidance schemes are carried out after a critical review of tax laws. The Tax payer then implement devices to exploit loopholes in the tax law that would enable him to avoid or minimize tax.

Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax bill and includes, in particular, dishonest tax reporting such as;

Understating the income
Overstating expenditure
Making false claims for allowance and reliefs
Omission from tax returns of chargeable income

Its pertinent to note that: Tax avoidance is legal act with diligent tax planning while Tax Evasion is an illegal act, meant to obtain unjust financial advantages at the expense of Revenue authority.

CASE LAWS & LEGISLATION RELATING TO TAX AVOIDANCE & EVASION

CASE LAWS – TAX AVOIDANCE;

The Dictum established by the Lord President (Lord Clyde) in the case Ayrshire Pullman Motor Services & David M. Ritchie v. C.I.R (1936) on Tax Avoidance still hold, thus, stated that “No man in this country is under the smallest obligation, moral or otherwise, so to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores. The Inland Revenue is not slow- and quiet rightly- to take every advantages which open to it under the taxing statutes for the purpose of depleting the tax payers’ pockets. And the tax payer is in like manner entitled to be astute to prevent so far as he honestly can, the depletion of his means by the revenue”

See also Belgore C.J. ‘In Federal Inland Revenue Services of Inland Revenue v. American International Insurance Company Nig. Plc… Stated “Tax is an Obligation, not a duty. One is not a bad citizen if one can organize his business or trade in a legal manner to minimize his tax liability. He could and he should resist within legal means and unduly wide interpretation or unconventional implication of legislatives intent of a tax law that might increase that burden. He can do without being ashamed of walking in the street as a patriotic citizen. A shrewd business acumen and a legitimate protection of sweat of Labour are not dishonest acts or an act having any moral turpitude. It is being pragmatic and practical. Being capitalistic might leave much to be desired but among what is left is not illegality”

The possible reaction of the revenue service to where loopholes in the tax legislation have been exploited is to take steps to block the loopholes. Thus specific legislation would be passed to block the particular loopholes or loopholes such is refer to as Specific Anti avoidance legislation. With the loopholes block, the tax payer would search out for another loopholes an exploit same. There are therefore bound to be several and unending specific anti-avoidance legislation to effectively stop the tax payer willing to carry out tax avoidance schemes. As legislature can’t accurately foresee all schemes which the determined tax payer could device, consideration would be given to the promulgation of General Anti Avoidance Legislation. General Anti-avoidance Legislation which vest the revenue with the power to disregard all transactions entered into that could be proved to have been entered into, solely for tax avoidance.

UK provide for specific avoidance legislation that gives the tax authority the power to set aside certain tax avoidance schemes such as

Where there exist a pre-determined scheme, involving a number of steps, aimed at tax avoidance
Where steps are inserted for tax purpose without a commercial or business purpose regardless of whether they have a business effect.

See Ramsey (WT) ltd v. IRC (1981) STC 174 ‘Tax payer has implemented an elaborate tax avoidance scheme with sole purpose of reducing a liability to CGT by creating allowable losses. The House Lords held that “Although every transaction in the scheme was genuine. They were self-cancelling and the court should look at the effect of the transaction which was to avoid tax, the scheme as a whole produced neither gain or loss and so should be disregarded for tax purpose… see same principle extended to ‘Furniss v. Dawson (1984) STC 153.

CASE LAW – TAX EVASION

Case; David Ian Henderson v. The Queen (2016) NZCA 431

Act (s); Tax Administration Act, 1994

Keywords; PAYE Conviction- Upheld by the Court of Appeal – Apparent bias- adverse ruling during course of trial

Decision date: 10 October, 2016

Case Summary

The Court of Appeal dismissed an appeal against conviction on seven counts of aiding and abetting a company to knowingly apply deemed PAYE deductions for purposes other than payment to the Inland Revenue Department (“IRD”). The sole appeal ground was whether the District Court Judge acted with apparent bias at trial, giving rise to an unfair trial. The Court found that a reasonable lay observer, watching the whole trial and reading the Judge’s minutes would not reasonably apprehend the Judge had become partial or predetermined the overall question of guilt.

Impact;

This Judgment provides further authority for the test for apparent judicial bias as laid down by the Supreme Court in Saxmere Co Ltd v Wool Board Disestablishment Ltd [2009] NZSC 72 (“Saxmere”). It highlights the importance of viewing Judges’ comments in context of the proceeding as a whole when considering whether there is a risk of apparent bias.

Fact

The Appellant was the sole director of a company which did not pay PAYE on its employees’ wages to the IRD for the months of April-October 2010. After a Judge-alone trial before Judge MacAskill in the Christchurch District Court, the Appellant was convicted on seven counts of aiding and abetting the Company to knowingly apply deemed PAYE deductions for purposes other than payment to the IRD.

The Appellant appealed the conviction (but not sentence) to the Court of Appeal, initially listing a series of grounds which were abandoned once counsel was engaged. The sole ground ultimately pursued on appeal was that Judge MacAskill acted with apparent bias.

Decision

The Court of Appeal dismissed the appeal (judgment given by Kós P) finding that a reasonable observer, taken as having been present throughout the entire trial and having read the Judge’s minutes would not reasonably apprehend the Judge had become partial or had predetermined the overall question of guilt. The Court of Appeal acknowledged that some of the language the judge used was unfortunate and not to be encouraged, but that in the circumstances the comments were understandable and did not indicate that guilt had been predetermined.

The Appeal and Relevant Law

The trial had been conducted in three main phases over the course of 10 months. Judge MacAskill adjourned the trial twice to enable the appellant to refocus on the merits of the prosecution case as it was clear that the appellant did not really engage with the substance of the prosecution case. The appellant was self-represented in the first and third phases, but represented by counsel in the second phase. Their Honours found that it had been a difficult trial and the Judge’s comments must be considered in this context.

The Court of Appeal applied the test as laid down by the Supreme Court in Saxmere whether a fair-minded lay observer might reasonably apprehend that the Judge might not bring an impartial mind to the resolution of the question the Judge is required to decide. Following Saxmere, the Court of Appeal in the present case found that the observer is not to be taken as legally trained but a person who is aware of the judicial oath and understands the Court process. The Court of Appeal further emphasized that an important trait attributed to the hypothetical lay observer is their ability to view matters in context.

With reference to Johnson v Johnson (2000) 201 CLR 488 and Muir v Commissioner of Inland Revenue [2007] 3 NZLR 495 (CA), the Court of Appeal noted that Judges may give forthright and robust indications of their tentative views. Such views are helpful to enable the parties to address the Judge with a view to persuading the Judge to a different view. Their Honours also observed that a trial Judge has a responsibility to ensure lay litigants do not spend time on irrelevant matters in a manner which is wasteful of the Court’s resources.

Pre-trial matters & trial phase one (Nov.2014)

The appellant had made a pre-trial application for a discharge under s 347 of the Crimes Act 1961. While not directly relevant to the appeal, their Honors observed that this was the start of a pattern of technical arguments raised in the appellant’s defense.

During the first phase of the trial, the defendant had chosen not to call any witnesses or cross-examine the witnesses called by the Crown. After the Crown had closed, the appellant applied for a s 347 discharge based on a technical argument based on the dates on the indictment. The Court of Appeal observed that “[the appellant] held a single egg in his hand and proceeded to place it in the Court’s basket.”

Judge MacAskill declined the s 347 application and adjourned the trial to provide the appellant another chance at cross-examining the witnesses. In his written reasons, Judge MacAskill commented that “the defendant had presumably concluded that there was no other reasonably arguable defense available to him, a conclusion which was not obviously wrong.” The appellant submitted that this remark, together with other comments by the Judge, gave rise to a perception of prejudgment.

The Court of Appeal found that the exchange did not show apparent bias but was a comment on the apparent lack of a defense at that point in the trial. The Judge’s adjournment for the sake of fairness to the appellant (which he was under no obligation to grant) would rather suggest that the Judge was open to consider other defenses.

Trail phase two (May 2015)

The appellant complained that the Judge’s interactions with the prosecutor were inappropriate as an observer could, in the appellant’s submission, infer from the exchanges that the Judge was unduly helping the prosecutor to improve the Crown’s case and that the prosecutor and the Judge were collaborating to amend the indictment so as to find the appellant guilty.

The Court of Appeal found that a reasonable observer would have understood the Judge to be ascertaining the prosecution’s position on a particular point, which was not inappropriate. Even though one particular exchange, if viewed in isolation, might suggest to someone hearing only that legal discussion that the Judge had rather teamed up with the prosecutor, their Honors found that a reasonable, informed lay observer would not reach that view, given the whole context.

While many comments were expressed in robust language, especially during the Judge’s engagement with defense counsel (for example expressions such as “I am astonished” and “Don’t muck me around”) the Court of Appeal found that a reasonable observer would understand that the expressions were an understandable reflection of the Judge’s frustration in the face of a difficult and lengthy trial and that the Judge was taking a robust approach to managing the trial, rather than predetermining guilt. Other comments were found to be appropriate expressions of tentative views.

The Court of Appeal found that certain language was unfortunate, such as the Judge’s reference to events “proved” by the evidence, and the use of expressions “defense spin” and “tactic that crossed the line into illegitimacy”. Even though such language was not to be encouraged, in the Court of Appeal’s view the comments were understandable in the circumstances and did not indicate that guilt had been predetermined. Furthermore, the Judge’s willingness to adjourn for a second time for the sake of fairness to the appellant indicated his continued open-mindedness.

Further adjournment (June 2015) and Trial Phase three (September 2015)

When the trial did not resume as planned in June 2015 due to on-going issues, the Judge issued a minute in which he noted his provisional view of the Crown case. The appellant submitted that this was a further indication of predetermination. The Court of Appeal found that the comments in the minute were expressly tentative and in any event only responded to one technical aspect of the defense case. In their Honors’ view, the observer would have understood the ultimate question of guilt to still be open in the Judge’s mind. No issue was taken with any comments made in the third trial phase.

See; Queenstown Airport Corporation Limited v Commissioner of Inland Revenue [2016] NZHC 1299, also, Obasi Uba Ekagbara and Chukuemeka Mba V. Governor Ikpeazu Okezie of Abia, suit No. FHC/ABJ/ CS/1086/2014 at Federal High Court on Tax Fraud

LEGISLATION ON TAX AVOIDANCE AND EVASION

The concern of tax authority is to bring all incomes within the tax net, nevertheless the Legislation in respect of this could create vacuum to be exploited by Tax Payer via proper tax planning to reduce tax liability. The Tax payer, in most instances, stretch the loopholes to the extreme and such, Tax authority will disregard these by applying anti-avoidance legislation;

Section 33, sub.1 of CITA, Cap C21, LFN 2004 thus” Notwithstanding any other provisions in this Act where in any year of assessment, the ascertainment of total assessable profits from all sources of a company results in a loss, or where a company’s ascertained total profits results in no tax payables or tax payable which is less than the minimum tax, there shall be levied and paid by the company the minimum tax as prescribed by subsection (2) of this section”

Same provision is entrench in Section 17 of Personal Income Tax (Amendment) Act, Cap P8, LFN 2011 & Section 13, Petroleum Profit Tax (Amendment) Act, Cap P13, LFN 2004.

ARE NIGERIAN JUDGES SYMPATHETIC TO EVASION AND AVOIDANCE OR HAVE NO KNOWLEDGE OF ITS EXISTENCE? Negative or Positive Position!

No court judgement is pick on the shelve, It’s based on fact of the case and several enabling acts/treaties and legislation in respect of the matter before the court; see David Ian Henderson v. The Queen (2016) NZCA 431 above.

Also, Judicial Precedent (Stare decisis) plays a prominent role in outcome or judgement of the court, nevertheless, the Judge can make a chance remark (obicta dictum) while delivering the verdict and such hovering within enabling act not in absentia.

Invariably, Nigerian Judges are not sympathetic to Tax Avoidance or Evasion rather interpret the provisions of the law as entrench for this purpose.