Minimizing tax liability

A landmark judgment often cited regarding tax minimization was delivered in the 1930s, establishing that taxpayers are not obliged to pay the maximum amount of tax. This was the Inland Revenue Commissioners v. Duke of Westminster [1936]. This case, famously known as the Duke of Westminster case, is the key ruling, often associated with a similar sentiment in Ayrshire Pullman Motor Services v. Inland Revenue Commissioners [1929].

There were key details of the ruling. In a quote that became famous, Lord Tomlin stated in the 1936 judgment that “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."

The Principle that the judgment established was that if a person legally structures their affairs to minimize tax, they cannot be compelled to pay more just because the Inland Revenue finds it unappealing.

The case arose because the Duke of Westminster reduced his tax liability by paying his employees via a deed of covenant rather than a wage, reducing his surtax liability. 

While the Duke of Westminster case was decided in 1935, the principle was built upon earlier cases. The 1929 case, the Ayrshire Pullman Motor Services v. Inland Revenue Commissioners is often cited as setting the precedent that the law could be used to minimize tax, although the 1935 case is the most famous formulation. 

While this principle, known as the ‘Westminster Doctrine.’ allowed for extensive tax avoidance in the early 20th century, it has been significantly weakened by later cases, starting with W.T. Ramsay Ltd v. Inland Revenue Commissioners [1981] which allowed courts to look at the ‘substance’ of a transaction rather than just its form.

There is a large and important difference between tax avoidance and tax evasion. It is that tax avoidance is legal, whereas tax evasion is illegal. When people act within the law to reduce their tax liability, as they do with ISAs and pensions, they are using the law to do so. When people ask to be paid in cash so the income is undeclared, they are breaking the law.

Some of those who favour high taxes for collective spending try to blur the distinction or even to imply that there is no difference, but there is. Tax avoiders act within the law, whereas tax evaders do not.

Companies that choose to locate in low-tax jurisdictions are not evading tax; they are avoiding it, and what they do is legal. This may discomfort HMRC, who seem to think their duty is to collect the maximum amount of tax possible. It may discomfort those who dislike profits and high earners, and want to punish them. But it is the law.

Madsen Pirie