Saturday 17 June 2023

Tax reduction: law and ethics


This post is about different ways to try to reduce the tax one pays, and about relationships between those ways, the law, and ethical considerations.

This post is not advice on tax law. Anyone with questions or concerns about the position of an actual taxpayer should seek appropriate professional advice. We will not provide advice or recommend an adviser.

The focus is on the UK. We shall therefore refer to the tax authority as HMRC, which is short for HM Revenue and Customs. Other countries handle some of the issues differently, but the same general style of enquiry may be useful in relation to those other countries.

We have written two earlier blog posts on issues related to legal provisions we shall discuss:

Categories of conduct

The traditional categories

There is a traditional distinction between three things one can do in order to reduce the tax one pays: tax planning, tax avoidance, and tax evasion.

Broadly, planning involves things like putting money into tax-privileged investments such as pension funds, or ensuring that a home bought to rent out becomes the owner's main private residence for certain periods so as to minimise the proportion of the gain on sale that is taxable, or structuring a group of companies so that if one company makes a loss, it can be netted off against the profits made by another company to reduce the amount that is taxable. Avoidance is planning that looks too much like the exploitation of loopholes. It often involves complex structures and transactions that have no purpose other than to save tax. It is common to speak of avoidance schemes, where a scheme is a complete structure and set of transactions. Evasion is the provision of false information to HMRC, or the withholding of information, in order to pay less tax.

There is also a well-established distinction between different consequences of actions that in some way harm others. This is the distinction between restitution, making good the loss suffered, and penalties. In the context of tax underpaid, restitution arises in the form of payment to HMRC of the tax that would otherwise have gone unpaid.

Traditionally, tax avoidance which did not succeed because HMRC argued successfully for an interpretation of the law that left no loophole only led to restitution. The tax which the taxpayer had hoped to avoid had to be paid, perhaps with interest, but that was all. There was nothing illegal in setting up complex structures and carrying out complex transactions. They might simply fail to achieve their aim. Evasion, on the other hand, traditionally led to penalties.

The categories we shall explore

We shall explore categories that are not the traditional ones, although they are related to the traditional ones. We shall do so because our alternatives seem to be more useful in understanding certain issues, particularly some relationships between the legal position and the ethical position. 

Our first category, which we shall call failed avoidance, covers tax planning or avoidance (we can run them together) that does not achieve its aim, for legal reasons rather than because some mistake was made in implementing the planning or avoidance.

Our second category, which we shall call unethical avoidance, covers tax planning or avoidance that on ethical grounds should not be undertaken.

Our third category, which we shall call penalised conduct, covers conduct that is liable to lead to penalties as distinct from mere restitution. We shall however not be concerned with the deliberate falsification or concealment of information.

Our fourth category, which we shall call culpable conduct, covers conduct that on ethical grounds should lead to penalties.

One of our questions will be that of the sharpness of the boundaries of these categories. Another will be that of the match or mismatch between the boundaries of the first and second categories, and between the boundaries of the third and fourth categories. We shall also be concerned with the extent to which, contrary to tradition, failed avoidance can amount to penalised conduct.

We shall start with failed avoidance, then move on to unethical avoidance and relationships between failed and unethical avoidance. After that, we shall we shall move on to penalised and culpable conduct. We shall then consider the ethics of legislating in certain ways. We shall conclude with a discussion of categories and general ethical principles.

Failed avoidance

Tax planning can be very straightforward, for example putting money into a pension fund to get a tax deduction now and tax-free investment returns, subject to taxation (perhaps at a lower rate) when the pension is paid out. At the other extreme it can involve very complex structures and transactions, often using multiple companies, trusts and the like and mixtures of share capital and loans, all spread across several jurisdictions, in an attempt to ensure that the overall tax rate on a group's worldwide profits is far less than one would naturally expect it to be.

HMRC will seek to prevent tax avoidance from succeeding when the tax at stake is substantial in an individual case, when it would be substantial if a scheme were widely used, or when the avoidance is considered to be brazenly contrary to the policy of the tax system. Complexity is not essential for any of these conditions to be met, but it is quite common for schemes to be complex and to rely on loopholes in the law that may not have been apparent when it was drafted.

Legal provisions

Avoidance in which the necessary steps were executed correctly can only be prevented from succeeding if the legal tools are available. Some avoidance is blocked by specific legal provisions, often ones which were inserted as soon as the form of avoidance in question came to light. But the enactment of such provisions can easily lead to the creation of new schemes that stay just outside the ambit of the new provisions. More significant for our purposes are general provisions that are intended to lead to the failure of classes of schemes defined by some aspect of their overall nature or by their results, rather than by their details. We shall look at two such provisions, the General Anti-Abuse Rule (the GAAR) and the Diverted Profits Tax (the DPT).


In 2013, the UK introduced the General Anti-Abuse Rule (the GAAR). Links to the legislation and the guidance can be found here:

The basic idea is that a tax avoidance scheme does not succeed in delivering the expected tax saving if it fails the double reasonableness test. In the words of Finance Act 2013, section 207(2):

(2) Tax arrangements are "abusive" if they are arrangements the entering into or carrying out of which cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions, having regard to all the circumstances including -

(a) whether the substantive results of the arrangements are consistent with any principles on which those provisions are based (whether express or implied) and the policy objectives of those provisions,

(b) whether the means of achieving those results involves one or more contrived or abnormal steps, and

(c) whether the arrangements are intended to exploit any shortcomings in those provisions.

One argument for the double reasonableness test is that it makes it quite difficult for tax avoidance to be caught by the GAAR. This is legislation with a much less well-defined scope than most of the legislation that targets specific tax avoidance schemes. It has to have a fuzzy boundary of application because if it had a precise boundary, avoidance schemes that stayed just the right side of the boundary would soon be devised. So to be fair to taxpayers, the grey area created by the fuzziness of the boundary should be such that it is easy to keep a safe distance away from it. Routine tax planning is definitely safe because it would be perfectly reasonable to regard it as reasonable. This is so even though there are also reasonable positions from which it would be regarded as unreasonable, for example a position that people should act without regard to tax considerations and then just accept whatever tax consequences happened to follow.

We should note the connections between the general notion of reasonableness and the circumstances to consider that are listed in section 207(2)(a), (b) and (c).

The effect of the circumstances mentioned in (a) and (c) is to link the notion of reasonableness to the intention of Parliament as it may be inferred from the relevant legislation and to the policy intention (an intention of the Government rather than of Parliament). Unreasonableness is indicated, although not demonstrated, by action which would frustrate those intentions. And (b) draws attention to contrived or abnormal steps as an independent indicator of unreasonableness.

Thus the notion of reasonableness at stake is closely tied to what Parliament and the Government at the time wanted the law to achieve. This is not surprising. The whole point of the GAAR was to give a new way to stop taxpayers dodging the intended effect of the law. But it will raise the question of whether what one might regard as unreasonable on general ethical grounds would align with what would be caught by the double reasonableness test of the GAAR. Has the GAAR defined a boundary of ethical significance, or merely one of governmental convenience?


The Diverted Profits Tax (DPT) was introduced in 2015. The legislation is in Finance Act 2015, part 3, and may be viewed here:

This is a tax in addition to corporation tax, not an element within corporation tax. It is imposed on profits which would have been subject to UK corporation tax if avoidance steps had not been taken.

For the tax to apply, the taxpayer must have taken steps which lacked sufficient economic substance (sections 80(1)(f) and 86(2)(e)). This condition is defined in section 110(4), (5), (6) and (7). There are two parts. It must be reasonable to assume that the steps were designed to secure a tax reduction. And it must not be reasonable to assume that the non-tax benefits would exceed the tax benefits (section 110(7)(b) introduces a variation on this relative benefits rule which we shall not discuss).

We here have a different kind of reasonableness test from that used in the GAAR. The important difference is not between single and double reasonableness, with reasonable-design replacing reasonable-reasonable. Rather, it is between the DPT's "it is reasonable to assume" design to secure a tax reduction and the GAAR's "cannot reasonably be regarded as a reasonable course of action". The use of "cannot" in the GAAR leaves scope to survey all reasonable views in search of one favourable to the taxpayer. The use of "is" in the DPT pushes us to suppose some authoritative standard of reasonableness on the basis of which various possible sets of steps taken by a taxpayer could be divided into those it was reasonable to assume were designed to secure a tax reduction and those about which it would not be reasonable to make that assumption. The GAAR avoids the need to suppose an authoritative standard by allowing the full range of reasonable positions to be surveyed.

While inability to survey a full range of reasonable positions would make it harder for a company to be confident that it was safe from the DPT than it would be to be confident that it would be safe from the GAAR, because the inevitable grey area would be closer to regular commercial practice, there is another difference that might, but need not, pull in the other direction. The GAAR looks directly at what the taxpayer did. The DPT legislation looks at whether what the taxpayer did appeared to be designed to reduce tax. That is, application of the DPT requires consideration of design.

Having said that, it is only design as may be inferred from action that matters, not actual design as might be disclosed by internal company documents. To avoid its being reasonable to assume that transactions were designed to achieve a tax reduction, one would at a minimum have to argue that the transactions could easily have been chosen without tax reduction in mind. This much would be needed because section 110(9)(b) allows there to be design to secure a tax reduction despite there also being design "to secure any commercial or other objective". 

There is however one final safeguard for the taxpayer. This is the rule that the DPT does not apply if it is reasonable to assume that the non-tax benefits would exceed the tax benefits.

There is a penalty for failure to notify that the DPT might apply. It can be up to 100% of the tax at stake. Notification does not however imply an admission that the tax applies.

Unethical avoidance

What is unethical?

Tax avoidance may be seen as unethical. It at least tends to be against the spirit of the law, which is to collect tax at prescribed rates on income, gains, sales and so on as evaluated in a common-sense way. If for example someone receives income of £90,000, and there is no express provision to treat income of that kind as being less than is received, they should pay income tax on that amount minus the personal allowance at the applicable rates of 20% and 40%. It would be contrary to the spirit of the law to find a loophole which meant that tax was only levied on £20,000.

The ethical case against avoidance could be strengthened by pointing out that the avoider relied on goods and services provided out of taxation, such as education, healthcare and roads. Such goods and services are not only used directly in daily life. They also make it possible to run businesses so that people can have jobs or make investment returns. That is, they help to generate the income on which tax is supposed to be paid. If a democratically elected Parliament has decided how the cost of the tax-funded goods and services is to be shared out, it would seem to be unethical to dodge paying one's allocated share.

A contrary view would be that tax was an artificial imposition, with ethical obligations being defined entirely by the words of the law so that the only unethical conduct would be to act contrary to those words. If an avoidance scheme navigated round the words of the law without actually breaking any of the rules, nobody would have any ground to condemn the avoider as unethical. It would even be possible to take a positive view of avoidance, on the ground that the state had no business violating individual property rights without individual consent (as opposed to collective consent).

There is very unlikely to be universal agreement on the boundary between acceptable and unethical tax planning or avoidance. Some people think that if the law allows a piece of tax avoidance to succeed it is ethically acceptable, however contrived it may be. Others think that anything in the least bit contrived is ethically unacceptable. And there are plenty of options in between, allowing that certain degrees of avoidance are acceptable but condemning more extreme avoidance.

It is not surprising that there should be a wide range of views. There are many factors to consider in political questions, and several angles from which those questions may be viewed. We do not find the single dominant factors or angles which may allow there to be general agreement on conclusions such as the one that physical violence is wrong. 

Not only is there no general agreement on where to place an ethical boundary. Almost any boundary would be hazy. The only positions that would be guaranteed to yield sharp boundaries would be extreme ones: that all tax planning was wrong, so that people should make their commercial decisions as if tax did not exist and then accept whatever tax consequences arose, or that all tax avoidance, however contrived, was ethically acceptable.

Even an ethic that was intrinsically disposed to precise conclusions as to what to do in given cases would be unlikely to help. A Kantian ethic might tell taxpayers to act from a good will, and to consider the feasibility of universalising the maxims on which they acted, but any one of a range of principles on which to approach tax planning, or indeed any one of a range of possible decisions on particular occasions, could easily comply with such requirements. And a Benthamite approach of maximising happiness could not be used to work out either principles on which to act or which choices to make on particular occasions, simply because of the impossibility of working out what would in fact do the most to promote human happiness. On the one hand it could be argued that the democratically controlled state was the best guardian of resources to be applied for the common good, so that tax planning should be minimal. On the other hand it could be argued that the flourishing of the economy would be vital, that this would demand not letting too much wealth leach into the public sector, and that the state was incompetent at allocating resources, so that tax payments should be minimised.

Failed avoidance and unethical avoidance

We shall now consider the relationship between the boundary that divides effective from failed avoidance and possible boundaries that would divide acceptable from unethical avoidance.

Perfect correspondence in fact, so that tax planning was ethically acceptable if and only if it was legally effective in the sense that it would lead the planner to keep their envisaged tax saving, seems unlikely. One would expect it if there were a general ethical principle that whatever planning the law did not defeat was acceptable, and whatever it defeated was unacceptable. One might argue for the first leg of this general principle on the basis that there was no natural morality about the levying of taxes, although on that basis ethical acceptability would amount not to endorsement but only to the absence of ethical objection. And one might separately argue for the second leg of the general principle on the basis that there was an ethical requirement to show respect for the law which went beyond abstention from illegal actions and extended to abstention from actions, the hoped-for consequences of which would be frustrated by operation of law. (Remember that tax planning, even aggressive avoidance, is in general not disobedience. There is in general nothing illegal about setting up complex commercial structures, even if the purpose is tax avoidance. The law may merely render the use of such structures ineffective for tax purposes.) But it would be very hard indeed to argue for both legs at the same time, unless one were to assert that the law was in the areas of life that it covered the definitive guide to the ethical. That would be to allow legal positivism to steamroll its way across ethical discourse.

Ethical thought and the GAAR

The GAAR relies on the double reasonableness test: could the tax arrangements reasonably be regarded as a reasonable course of action? 

The resultant haziness as to which tax avoidance would be defeated by the GAAR is inevitable, given that precise rules directed against specific avoidance schemes routinely leave scope to devise new schemes.

There is a special contribution that ethical thought might make to deciding specific cases. Ethical thought might contribute to deciding what would be reasonable, or at least (taking account of the double reasonableness test) to deciding what could reasonably be regarded as reasonable. What follows here on this point is however speculative. The potential scope to contribute is not recognized in current legislation, and attempts to make use of ethical thought might get nowhere in court. We include the topic here in order to suggest that ethical thought might have a role to play in the writing of future tax law or in the development of approaches to deciding cases.

A Kantian approach would best be suited to saying what could reasonably be regarded as reasonable. An understanding of the notion of a good will and of the categorical imperative would not suffice to say what would be reasonable in tax planning. The factors to consider would be too complex for that. But a claim that some particular piece of tax planning could reasonably be regarded as reasonable could be tested by asking whether it was plausible that the action might be inspired by a good will, or whether it was plausible that the maxims behind the tax planning could be universalised. (We here mean maxims specific to planning of the relevant sort, and do not envisage a single maxim or set of maxims that would cover tax planning of all sorts.)

A utilitarian approach would likewise best be suited to saying what could reasonably be regarded as reasonable. The only actions that would in fact be reasonable, according to such an ethic, would be actions that maximised total happiness. But it would be far too hard to work out consequences of particular pieces of tax planning or of general approaches to tax planning. On the other hand, it might be feasible to say that it was reasonable to regard some particular piece of tax planning, or some particular general approach, as having a plausible prospect of maximising total happiness.

Virtue ethics may have a better prospect of leading to judgements as to which specific pieces of tax planning, or general approaches, were in fact reasonable. A piece of tax planning or a general approach could be judged on the basis of whether it accorded with specific virtues. Honesty would be an obvious virtue, but so long as we were not considering evasion dishonesty might not be in question in any case. Community spirit might be a relevant virtue (although there are philosophies, such as that of Ayn Rand, which would not see it as a virtue of any significance). Paying for resources on which one relied even though they were technically provided free of charge at the point of use, such as the education of employees, might be a virtue. And so on.

Penalised and culpable conduct

Restitution and penalties

We have noted the distinction between two two types of demand for payment that HMRC may make.

Restitution is making good a loss, for example when tax avoidance fails and the tax which it had been intended to save is payable after all. The restitution is of the loss to the state. It is not exactly like damages payable for loss in a civil action between private individuals or companies, but the basic idea is the same. Adversely affected parties are to be restored to the financial positions in which they would have been had something unfortunate not happened. Most importantly, for any payment to amount to restitution, its amount must be determined by reference to the loss that arose.

A penalty is a punishment that is inflicted for reasons other than restitution, for example in order to deter. The severity of a penalty may happen to be determined by the size of the loss in question, as when a penalty for making an inaccurate tax return is a percentage of the tax that would have been lost. But there is no need for there to be a link between the size of the loss and the size of the penalty.

The extent of penalties

Penalties do of course apply when a taxpayer deliberately falsifies tax returns, or conceals information that is required. Such actions fall under the traditional heading of evasion. We shall not be concerned with such conduct here.

One would naturally expect that failed avoidance would lead only to restitution. Indeed, that has been the traditional position. There is in principle nothing illegal about setting up complex structures and carrying out complex transactions, even if the aim is to reduce tax liabilities.

Things have however changed. Failed avoidance can incur penalties, and can do so even when all the structures and transactions are in themselves perfectly legal and full disclosure has been made to HMRC. We shall consider two examples here. The first one relates to mistaken claims to successful avoidance. The second one relates to the GAAR.

Mistaken claims to successful avoidance

If a taxpayer completes a tax return on the basis that an avoidance scheme succeeds, when in fact it fails, the return will be inaccurate and there may be penalties for that reason, a reason which is distinct from the creation of a complicated commercial structure and its use to engage in complicated transactions.

This can happen even if the structure and the transactions involved are disclosed in full, and any applicable requirement to notify the use of an avoidance scheme or of transactions that may suggest avoidance is also met. (The use of some specific schemes must be notified. And transactions with certain characteristics that are typically associated with avoidance must also be notified, even if no avoidance is in fact involved.) 

The return can be inaccurate because under the self-assessment regime that has prevailed in the UK since the 1990s, the taxpayer is responsible for working out what tax they owe. So if a taxpayer has engaged in tax avoidance that on close inspection would be found not to save tax, they should state their tax position without taking account of the purported saving. The normal penalty would be the one for carelessness in making an inaccurate tax return, although other penalties would also be possible (Finance Act 2007, schedule 24, paragraph 3A). The penalty for carelessness typically ranges from nil to 30% of the tax at stake (more if transactions involving entities in certain countries are involved), but if HMRC find out about the error before the taxpayer discloses it unprompted the minimum penalty is 15%.


In relation to the GAAR, the UK has adopted an approach which allows penalties to be imposed merely because avoidance fails. A taxpayer may be put on notice that HMRC believe the GAAR to frustrate a piece of tax avoidance. If the taxpayer does not promptly agree and re-assess their tax as if the avoidance did not succeed, a legal challenge may follow. If the taxpayer loses, they must pay not only the tax not saved but also a penalty of 60% of that tax. The only way to guarantee not to suffer this penalty is to concede that the scheme is defeated by the GAAR as soon as HMRC claim that it is so defeated. If the taxpayer fights the case and loses, the penalty will be due.

Culpable conduct

The absence of general agreement on an ethical boundary, together with the fact that the steps taken in tax avoidance are when considered individually often steps that could just as well be taken for other reasons, steps such as setting up trusts in order to safeguard assets from the spendthrift or making loans in order to finance business ventures, make it arguable that when tax avoidance is frustrated by law the consequences should be limited to restitution and should not include a penalty. The law has to draw its boundary between effective and failed avoidance in one place, and there is not much prospect of general agreement that it is ethically the right place. So there is not likely to be general agreement that a given taxpayer has acted in a way that would make penalties appropriate in addition to restitution.

This puts the spotlight on cases in which the approach is to impose penalties despite the fact that all this is involved is failed avoidance. Can it be right to do so, given the legality of the underlying structures and transactions?

One argument in favour of such penalties would be that the law could draw a secondary boundary within failed avoidance, between respectable and outrageous avoidance. Another argument would be that penalties would deter speculative avoidance which was unlikely to succeed unless HMRC failed to look at it. A third argument would be that while the structures and transactions might be perfectly legal, the motive would very often be one of tax reduction. Then the taxpayer should be regarded as unethical and the state should not be expected to pull its punches.

There are counter-arguments to all three of these. To take the first argument, while a legally defined boundary between respectable and outrageous avoidance might be said to exist already in the double reasonableness test of the GAAR, there would be little prospect of general agreement on the location of a corresponding ethical boundary. The deterrent effect in the second argument might go too far. It would extend to avoidance that had a reasonably good prospect of succeeding, and the state should not deter claims to what might well turn out to be the taxpayer's legal entitlement were the matter to go to court. (It is a feature of such cases that it often cannot be known in advance of a court hearing exactly what the law would require.) Finally, the argument that unethical conduct on the part of the taxpayer should allow the state a freer hand than it would normally have would introduce notions of fair dealing into the tax system in a very strong form. Not being bullied by the state would become dependent on being kind to the state.

The GAAR brings such issues sharply into focus. It may easily be unclear whether some tax avoidance would be defeated by the GAAR. There is guidance on the GAAR, but it is not going to answer every question, and in any case guidance is not the law under which the question of whether tax avoidance succeeds is determined. And yet Parliament has legislated to impose a penalty of 60% of the tax at stake on avoidance that fails by virtue of the GAAR, the only sure protection against which is to concede as soon as HMRC challenge the avoidance.

For the penalty actually to apply, the avoidance must be established to fail. Then it would be a penalty like the general penalty for making a return that was inaccurate by virtue of allowing for avoidance that was found to fail. But the scale of the penalty would be doubled, from a usual maximum of 30% to a fixed 60%, if the taxpayer, at the earlier stage of not knowing whether the avoidance would succeed, had the temerity to challenge HMRC's view that the avoidance would fail. Such an encouragement to taxpayers not to stand up for themselves but instead meekly to accept HMRC's view of the law is at the very least ethically dubious.

To raise ethical objections to this kind of penalty is not to endorse tax avoidance. The kind of avoidance involved will nearly always be highly contrived, and would not have been instigated unless the taxpayer was determined to pay significantly less tax than the general principles of the tax system would lead one to expect. But such considerations do not suffice to give the state a free pass.

We should add in favour of the state that a decision to challenge avoidance under the GAAR would not be made lightly or on the say-so of a single tax inspector. There is an Advisory Panel, and HMRC must seek the Panel's opinion on each case before invoking the GAAR. The Panel can decide that the GAAR should not be used, for example in the case discussed here:

One may however have reservations about the strictness of the control imposed by the existence of the Panel. While its members are not HMRC staff, they are appointed by HMRC and are supported by an HMRC-staffed secretariat. While HMRC must seek the Panel's opinion on each case before invoking the GAAR, they are not bound by that opinion but are only required to consider it (Finance Act 2013, schedule 43, paragraph 12). And the Panel does not apply the double reasonableness test, but only the test less favourable to the taxpayer of asking whether the taxpayer's actions were in fact a reasonable course of action (Finance Act 2013, schedule 43, paragraph 11(3)(b)).

Thus one can still be concerned about the existence of a penalty for avoidance, the only sure way of avoiding which is to concede to HMRC without taking the matter to a judicial hearing, even if one disapproves of tax avoidance and despite the existence of the Advisory Panel.

We do not here discuss penalties under the Serial Tax Avoidance Regime. We do however note that there would be things to say in connection with that regime about the imposition of penalties, rather than merely requiring restitution, on the basis of the fact that the taxpayer had previously attempted avoidance.

The ethics of legislating


It is a general principle of law that individuals and companies should know in advance what the consequences of various possible actions would be. This argues in favour of clear boundaries, and against hazy ones. Legislation that does not provide such boundaries where it would be possible to provide them is arguably unethical, even if hazy boundaries would make it easier for the state to achieve its objectives.

In the present context this means that it should ideally be clear in advance which kinds of tax avoidance would fail, and which conduct would be penalised (as opposed to merely requiring payment of tax saved by way of restitution).

With avoidance that is defeated by the GAAR, the boundary between successful and failed avoidance is deliberately hazy. A precise boundary would lead to too narrow a range of avoidance being defeated by the GAAR, either because the boundary had been made precise by specifying commercial features of schemes (such as loan transactions that went through intermediate group entities which merely received money and passed it on, or the use of branches which were commercially significant but fell outside the definition of permanent establishments), or because the boundary had been made precise by reference to figures like effective tax rates. In either case, it would not be long before significant avoidance schemes which fell just outside the boundary were devised.

The same case for a hazy boundary could be made in relation to the DPT, although the potential scope of that tax is made a bit more precise by the need for a specific effect, the diversion of profits, which narrows the range of structures and transactions that could give rise to the charge.

In defence of haziness in both these cases, it could be said that those who engage in normal commercial transactions with little focus on saving tax will find themselves to be at a safe distance from the hazy boundary, although this is less true of the DPT than of the GAAR because of the absence with the DPT of an option to survey a full range of reasonable positions.

The argument for clear boundaries is particularly strong when penalties, rather than merely restitution, are involved. We naturally associate penalties with criminal conduct, where conduct must clearly fall within the scope of an offence defined in legislation. But penalties are involved both when the GAAR applies and when the failure of avoidance leads to a penalty for making an inaccurate return, another area of hazy boundaries because it can easily be unclear in advance whether avoidance will succeed even when the avoidance is clearly not within the scope of the GAAR. (The penalty for failure to notify that the DPT might apply is however rather different. It is not in itself enough to make haziness of the boundary objectionable, because notification does not imply liability.)

Motives and penalties

It might be thought that penalties, and even the GAAR penalty for having the temerity to challenge HMRC's view and then losing, would be acceptable so long as a taxpayer had unacceptable motives.

It might also be thought that dubious motives were indeed present, both when the GAAR applied and when the penalty for making an inaccurate return applied. After all, the pursuit of loopholes and the minimisation of one's contribution to the cost of providing infrastructure, a health service, and so on do not look like good objectives.

We should however recognise counter-arguments.

One is that the duty of taxpayers to the state is laid down in statute, and statute is nearly all drafted in terms of precise rules. The rules must be obeyed, but the limits of the rules are the limits of the taxpayer's obligations. There is nothing in statute about the spirit of the rules, and the relationship of taxpayer to state is not like the relationship of two cricket teams to each other in which the spirit of the game should be observed. (As it happens there is a law of cricket, law 41, which requires observation of the spirit.) The closest one gets in tax law to reference to the spirit of the rules is in references to the principles and policy objectives of legislation and to the exploitation of shortcomings in legislation which we find in the GAAR legislation quoted above (Finance Act 2013, section 207(2)(a) and (c)).

A second counter-argument is that the state gets enough money, and wastes a lot of it because politicians and officials who spend it are not personally at risk of financial loss, so it is good to keep the state on a tight rein by not paying more tax than one must.

A response to concerns about penalties might be that it would be impractical to handle all the tax avoidance there would be if attempting it were a game without risk, in that the taxpayer would in cases of failure merely have to pay the tax they would have had to pay without the attempt. Penalties change the balance of risk, and deter the taxpayer population as a whole. But that would be to say that the need to keep the population cooperative outweighed considerations of justice to individual taxpayers. One could make a case that this was so, but the case could in turn be challenged.

Categories and our general ethical principles

We have proposed four categories to analyse conflicts between on the one hand actions short of the outright criminal to reduce tax payable, and on the other hand the law and ethics: failed and unethical tax avoidance, and penalised and culpable conduct. These categories strike us as more useful than the traditional categories of planning (being sensible), avoidance (being too clever by half), and evasion (lying), when we want to think about relationships between legal rules and ethical principles.

Having said that, the categories we use are not particularly novel. They are clearly related to and inspired by the traditional categories. And the traditional categories still have important roles. They serve to explain how the law has developed. They also help to relate general ethical principles from outside the tax world both to the general scheme of the law and to ethical assessments of what taxpayers do: being sensible is generally accepted both in law and in ethics, being too clever by half may easily be seen as something to be blocked by the law and is also ethically debatable, and lying is both reasonable to punish and ethically unacceptable.

It is not that the traditional categories are essential to underpin judgements as to what is legally appropriate or ethically unacceptable. But whenever we tackle questions of what the rules should be or what is unacceptable conduct in a specific area, we do need some way to relate the question to more general principles. And it so happens that in the area of taxation the traditional categories can perform that role. Since they also need to be kept in play in order to understand the history of the current law and the context of much ethical comment on what taxpayers may do, and they do not interfere with other ways of thinking about the issues, we see no reason to discard them. It is merely that they are not the only useful categories.