Damien Grant: Taxation an injustice when left to whim of IRD

Commissioner of Inland Revenue, Naomi Ferguson. Photo / Marty Melville

There is not much left of the Magna Carta. It has been steadily repealed over the past 800 years but clause 39 remains - no free man shall be seized or imprisoned, or stripped of his rights or possessions, or outlawed or exiled, nor will we proceed with force against him, except by the lawful judgment of his equals or by the law of the land.

This simple statement is powerful because it marks the end of the capricious rule of man with the more certain rule of law. It stripped the monarchy of their absolute power to rule by fiat and imposed the supremacy of written laws.

The legacy and certainty of this rule can be seen in a famous English tax case, the Inland Revenue Commissioners v the Duke of Westminster.

The Duke reduced his income tax by paying domestic staff by way of a deed, rather than as employees, taking advantage of the technical wording of the tax act at that time.

The UK tax commissioners took the Duke to court. Happily, in 1936 taxes were still considered to be abhorrent confiscations of a man's property and the courts found for the Duke. In what was to be known as the Duke of Westminster principle, the court declared that "Every man is entitled ... to order his affairs so that the tax attaching under the appropriate acts is less."

Today, paying taxes is viewed as a moral duty. Parliament has passed a sweeping edict that any transaction entered into for the primary purpose of reducing your taxes, even if the arrangement is within the law, can be set aside by the Commissioner of Inland Revenue, Naomi Ferguson. She can then re-set your affairs to tax the underlying activity that took place.

The commissioner is entitled to consider what Parliament intended, not what the law actually says, when making a determination. Further, she can consider what Parliament would have thought of a taxpayer's arrangements had that august body contemplated it.

The IRD has just released a 135-page document outlining what constitutes tax avoidance. In short, if the department thinks your arrangement is tax avoidance, then it is tax avoidance. The courts, on their recent track record, will side with the tax collectors.

This is not the rule of law. It is a return to the capricious regime rejected by King John's unruly barons in 1215, and it has been made possible by a series of judicial rulings that have discarded the Duke of Westminster principle.

This has little impact for most PAYE taxpayers, but for those who are self-employed or in business, this creates uncertainty. We must consider what the IRD might think about our commercial affairs and not merely what the statute says.

An injustice occurs when a citizen who has broken no written law can have his assets stripped from him at the whim of an unelected bureaucracy.