This piece was originally posted on Joylon Maugham’s blog (waitingfortax.com) on 13 November 2014. It is reproduced here with permission.
The recent debate on tax in the UK has strayed into the murky area of questioning the relevance of morality. Chair of the Public Accounts Committee Margaret Hodge has stated that exploiting the complexity of tax law to reduce tax liability is “morally reprehensible”. David Cameron meanwhile recently voiced the opinion that there is a “moral duty” to cut taxes in order to allow people to spend more money on their families. What has perhaps been overlooked in relation to these assertions is that philosophers and jurisprudes for centuries have struggled to understand not only what influence morality has on the law, but also what influence it ought to have. As such, it appears unlikely that there will be a speedy resolution to the debate about tax law and morality.
Leaving aside the issue of what part morality ought to play vis-à-vis reducing tax bills; it is interesting to note that in certain circumstances there is no rigid figure as to the tax which must be collected by HMRC. Taxpayers may find their tax bills to be less than that which is strictly owed under the law, without resorting to the use of ‘gimmicks’ or abuse of reliefs. Accordingly, the tax which is raised from taxpayers is relative in the sense that it may legitimately be less than the amount Parliament has stipulated and this generally arises in two instances: first, where the law is fuzzy and second, where the law cannot practically be applied. The thesis of this post is that this relativeness is likely to play a more substantial role in the collection of tax than morality.
2. Theory of relativeness
To explain this relativeness, it is worth recalling that HMRC’s primary duty is to collect and manage taxes and credits (Commissioners for Revenue and Customs Act 2005, s. 5). Within this duty, however, there is a wide managerial discretion:
“In the exercise of these functions the board have a wide managerial discretion as to the best means of obtaining for the national exchequer from the taxes committed to their charge, the highest net return that is practicable having regard to the staff available to them and the cost of collection” (R v IRC, ex parte National Federation of Self-Employed and Small Businesses  AC 617 (HL), at p. 637 (Lord Diplock))
This discretion however is limited to an extent:
“It does not justify construing the power so widely as to enable the commissioners to concede… an allowance which Parliament could have granted but did not grant” (R v HMRC, ex parte Wilkinson  UKHL 30, para. 21 (Lord Hoffmann))
Taken to its logical conclusion, so long as the Revenue does not contradict the intention of Parliament, this discretion permits the use of cost-benefit analysis:
“In particular the [R]evenue is entitled to apply a cost-benefit analysis to its duty of management and in particular, against the return thereby likely to be foregone, to weigh the costs which it would be likely to save as a result of a concession which cuts away an area of complexity or likely dispute” (R (Davies and another) v Revenue and Customs Comrs; R (Gaines-Cooper) v Same  UKSC 47, para 26 (Lord Wilson))
As a result of this discretion and legitimated use of cost-benefit analysis, HMRC is entitled to collect less tax than might be strictly due under the law. Thus, in the case of complex or fuzzy law where it is unclear as to the true amount of tax which is due, HMRC are empowered to arrive at a working interpretation which objectively satisfies the will of Parliament and in their opinion would raise the greatest amount of money in relation to that tax, over the course of all taxpayers. This same principle applies where the law itself is clear but would be impractical or unworkable in a certain set of circumstances. Where this arises, the Courts have found time and time again that it is proper for HMRC to forego the full collection of tax, so long as it is done with a view to raising the greatest amount of money for the exchequer overall. By focusing on morality in the tax system then, we ignore the other factors that in practice have a greater impact on how HMRC collect tax and how much tax they collect.
3. Application of relativeness
As this discretion is contained within the fundamental duty of HMRC, it pervades much of what they do. Three instances of the corresponding relative nature of tax appear especially pertinent to the differentiation between tax collection in practice and the normative collection of tax. The amount raised from settlements need not be the true figure which is prescribed as due under the law. Likewise, the decision to take or not take test cases rests solely with HMRC. This decision pivots on analysis of the benefit and likelihood of success rather than the desire to clarify law where it is unclear. HMRC may similarly spread their resources for the everyday collection of tax in a manner which would not collect all that is strictly payable. In each of these cases, what ought to happen is at conflict with what actually happens.
One of the most controversial elements of tax collection in recent years has been the negotiation of settlements with large businesses. Sir Andrew Park, former High Court Judge and perhaps the most widely respected Tax Silk of his day, was commissioned to investigate HMRC’s conduct in relation to large settlements. Ultimately, the report concluded that the 5 settlements examined were ‘reasonable’ in terms of fair value for the Exchequer and public interest. As to the parameters of ‘reasonableness’, the report further provided as follows:
“[Reasonableness] included considering whether the settlement was as good as or better than the outcome that might be expected from litigation, considering the risks, uncertainties, costs and timescale of litigation” (Park Report, p. 5)
These cases concerned a complex smorgasbord of issues and must be held against the backdrop of resource constraints. It is for this reason that the question of reasonableness was resolved, not on the basis of what is due under the law, but on the basis of what might be gained from litigation. This is strictly what the exercise of managerial discretion requires (although the revised ‘Litigation and Settlement Strategy’ somewhat circumscribes HMRC’s power).
More generally, this report provides an insight as to the way HMRC may go about settling cases and litigation. Where the law is unclear and the litigation of the case would not be cost-beneficial, HMRC may arrive at a settlement for tax, below that which might be strictly due. The cost-benefit analysis is further engaged by the fact that, on their table, HMRC have a backlog of cases to get through. In other words, HMRC must look at the entire catalogue of disputed cases, given that the resources must be stretched across all, and will be entitled therein to settle for less than the true amount in any individual case, provided this is done so as to obtain what in their view is the highest net practicable return. Further depletion of resources or further increase in complexity will necessitate prudent decisions on HMRC’s part which will be strictly at odds with what the particular legislative provisions will require.
What HMRC have done in practice however, with the revised ‘Litigation and Settlement Strategy’ (‘LSS’), is further constrained this authority. The binary framework of the LSS, which facially proceeds on an all or nothing basis, delimits HMRC’s discretion and overlooks the relativeness of the tax due. As this was a managerial decision to put the LSS system in place, it would be interesting to see empirically whether or not it in fact raises a greater amount of tax than would occur in its absence.
B) Test Cases
As regards test cases, the managerial discretion ensures that much deference is given to HMRC as to what cases they choose or do not choose to pursue. Put another way, the decision to take test cases rests solely with HMRC. To this end, accusations that HMRC have ‘picked’ on certain taxpayers have fallen on deaf ears.
As with the jurisdiction in relation to settlements, HMRC is entitled when deciding which cases to pursue to take account of the legal advice as to the chance of success, which in turn is balanced against any likely return. The more unclear the law is, the greater the return must be from a successful outing in order to justify taking a test case forward. Further, test cases do not arise in a vacuum and HMRC must decide which ones to contest, given the lack of resources to take every case. Where they do not pursue taxpayers for amounts which might in fact be due under the law, liabilities to the law remain but are unenforced. This is a far cry from the normative world in which all tax liability is collected.
It is perhaps in the everyday collection of tax where managerial discretion is most engaged. HMRC must make decisions as to the allocation of scarce resources. To this end, the use of risk assessment is legitimated. Through this process, HMRC analyses various sources of information in order to obtain a view as to the risk of non-compliance. Less time and fewer resources are dedicated to low-risk taxpayers whilst more time and a greater amount of resources are expended on high-risk taxpayers. This categorisation diverges from the law in that it does not indicate whether any taxpayer has actually conflicted with the law but rather focuses on the statistical likelihood of non-compliance.
HMRC is also justified in putting systems in place to ensure future compliance with the law, which might result in less tax than due being collected. A notable example of this is the Fleet Street Casuals case, wherein the Revenue legally refrained from collecting all tax that was historically due (which was estimated to be in the range of £1mil per annum over a number of years) in return for the assurance of future compliance. What prevented the Revenue from opening investigations into the historical evasion was the combination of the unknown return to be obtained from expending resources and the threat of industrial action. The latter in particular would have compromised the possibility of future compliance. This case serves to highlight that HMRC are entitled to compromise on what the law might require so long as mechanisms are put in place to ensure future compliance. Bespoke sector specific agreements, such as Flat Rate Expense Allowances relating to Airline pilots, are justified on this basis.
Ultimately, HMRC is entitled to make decisions, which are pragmatic in their opinion, as to how to go about the everyday collection of taxes. The fact that many resources would be expended in seeking to ascertain and collect the full amount of tax due under the law in fact justifies compromising on the law:
“There will often have been… some “horse-trading” that has led, for good and practical reasons, to some departure from the strict requirements of the taxing statutes” (R (Bamber) v HMRC  EWHC 3221, para. 48 (Lindsay J))
Whilst morality will continue to cause debate as to its proper relevance in relation to tax, the relative nature of tax itself provides an interesting problem which is often overlooked. We often ignore the factors that in practice are more likely to influence how HMRC operate. Settlements, everyday collection strategies and the (non) pursuit of test cases are but some of the pertinent ramifications of this relativeness. With the continuing reduction in resources and the increasing layering of complexity in tax law, this issue is set only to become more important. Should we not then be as, if not more, concerned with reality than morality?