Growing tax legislation

Tuesday, 01 December 2009

Tolley’s yellow tax handbooks for 2009-10 were published with the announcement that the size of tax legislation has doubled since 1997 and that we now have the most voluminous tax legislation in the whole world, finally surpassing India. I doubt that any of us thought that this was a cause for rejoicing, and in particular, not a cause for pride.

I am not altogether sure whether the actual legislation itself has doubled or whether this takes account of the fact that the yellow tax handbooks very helpfully include press releases, interpretations, extra statutory concessions (so far as they exist anymore after Wilkinson) but this is all at a time when legislation is meant to be written in more understandable English. The increase in the size of the tax legislation is not a creature of only the last twelve years. I wonder if the turning point was the 1965 Finance Act, which introduced capital gains tax and fundamentally reframed corporation tax.

What has changed recently is the reaction to the tension between what I can over simplify by referring to as the letter of the law, as against the spirit of the law. There is general acknowledgement that the subject should be entitled to know (and not just in tax law), whether an action that he takes is to be the subject of legislative intrusion. Cases consistently upheld the principle that you ignore what is said in Parliament or in Ministerial Statements and you start and finish at what the law actually says. If Parliament gets it wrong, then it has the privilege, denied to the Subject, of putting it right subsequently. For those of us who believe, deeply, that the changes in Finance Act 2006 about trusts were deeply misguided, and offensive, we have no chance of putting that right, even if those responsible regret what happened.

From the other side of the fence, one senses that HMRC resent those who use the words to deny what they see as being the spirit of the law. That actually works both ways. When Arctic Systems v Jones was decided, the Revenue felt that this was abusing what was intended in introducing separate taxation of husband and wife. But Treasury Ministers during the Finance Bill on the introduction of that change said that they understood that husbands and wives would marshal their assets and income to achieve the optimum tax result. If that was not what the law said, any change should be debated and approved by Parliament. It is much better if legislation is correct first time. Surprise initiatives by Ministers followed by unconsidered law have usually been unsatisfactory. How often do we reflect on the unintended consequences which float to the surface from an idea that looks politically attractive?

There is one other point about the ‘spirit of the law’ and I would draw your attention to an article in The Times for 16 September 2009 by Daniel Finklestein, where he comments on a book called ‘Going to Extremes.’ He quotes the author, Professor Cass Sunstein, as promoting the theory of group polarisation. The nutshell of the theory is that ‘groups go to extremes.’ More precisely, ‘members of a deliberating group usually end up at a more extreme position in the same general direction as their inclinations before deliberation began’.

I have sat in three recent meetings where we have bemoaned the myopia, self righteousness, intransigence and obstinacy of HMRC over their approach to tax law. You see, I am polarising there! Individually, I would have been much more moderate! However, it made me wonder, what happens in the Revenue committee rooms when the professional bodies are not there. Do they polarise attitudes which see the professional bodies as being self serving, obstinate, unrealistic and short-sighted?!

Given that backdrop, could it ever be justifiable to allow either of those groups to determine what is the spirit of any piece of legislation, which is a subjective test almost as illusory as that of ‘fairness’? Tax laws are never ‘fair’, but they should be certain. Let us take time to find a way to legislate better and not follow paths that will inevitably be much more unsatisfactory.

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Martyn Gowar

Martyn Gowar TEP is a Partner at McDermott Will & Emery UK LLP and an Editor of the STEP Journal.

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