The motto of the family of The Duke of Westminster, arguably one of the richest men in the world, is virtus non stemma – virtue, not ancestry. The title dates back to 1622 when it was bestowed by King Charles the First. The King himself was later beheaded by Oliver Cromwell’s Army in 1649. How times have changed!
The present Duke’s illustrious ancestry did not prevent one of his predecessors making tax avoidance history in 1936 in the landmark case Inland Revenue Commissioners v The Duke of Westminster.
The Duke employed a very large number of people that worked in his houses and gardens. None of the wages were tax deductible, so the Duke entered into seven year irrevocable Deeds of Covenant to pay his domestic staff; the covenants would continue whether or not the employees remained in his service. The advantage of this specious legal arrangement was that the covenanted payments, which corresponded to the employees’ former wages, were deductible for surtax purposes.
The arrangements elicited the famous dictum from Lord Tomlin in the Court of Appeal:
“Every man is entitled if he can to arrange his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure that result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.”
Nowadays the status and efficacy of the Westminster principle is in considerable doubt. The courts would probably conclude that the arrangements were a sham, as there was little likelihood that, if a domestic servant left the Duke’s employment, he could still enforce payment of the covenanted sums. In any event, the law was subsequently changed to prevent such payments being deductible for surtax purposes.
But what, I hear you ask, has this got to do with South Africa and the heading to this month’s column? A unique example of modern day virtue and fiscal fidelity was set by former President Nelson Mandela. Not long after taking office in 1993 he ensured that Section 10(1)(c) of the Income Tax Act was amended. This section exempted State Presidents and their widows, from paying income tax on their salaries and pensions. It still applies to former State Presidents and their widows but Mr Mandela ensured that he and his successors would pay income tax like everybody else. What a marvellous example of fiscal fidelity!
It should not be forgotten that, until the invention of Pay-As-You-Earn tax during the Second World War, Customs & Excise Duties were the principal source of Inland Revenue’s income, both here and in the United Kingdom. Both were easily policed. As B E V Sabine observes in his Short History of Taxation (published by The Institute of Taxation in London), there was an “engagingly cavalier attitude towards income tax returns”, that is, until the introduction of PAYE tax. The incidence of tax evasion was high and, in consequence, little attention was paid to tax avoidance. Increasing surveillance by the authorities in South Africa and the United Kingdom soon changed that.
It is often said that honesty is the best policy and, in the context of dealings with SARS, that is unquestionably true. It should not be forgotten, however, that Archbishop Richard Whately, who coined the expression in the 19th century, added a rider: “but he who is governed by that maxim is not an honest man”. He was intending to say that someone who has to think about the maxim before acting cannot be entirely honest.
The Law Reports are full of colourful comments by judges presiding over tax evasion and tax avoidance cases. Lord Justice Diplock famously said in a Customs & Excise case in 1969 (Commissioner of C & E v Top Ten Promotions 3 All ER 39 at 69) that:
“There are few greater stimuli to human ingenuity than the prospect of avoiding fiscal liability. Experience shows that under this stimulus human ingenuity outreaches Parliamentary prescience”.
On balance, Courts in the United States seem to take a more robust view about legitimate tax avoidance and in many cases they have rebuked the US Internal Revenue Service for its aggressive attitude towards certain taxpayers. Thus, in International Harvester Company v Wisconsin Department of Taxes (1944) 322 U.S. 435 to 450, the judge observed that:
“Might does not make right even in taxation”.
And in Stewart Dry Goods Company v Lewis (1935) 294 U.S. 550 at 560:
“Gross inequalities may not be ignored for the sake of ease of collection”.
Perhaps the most stringent criticism came from the renowned Judge Frankfurter in Capitol Greyhound Lines v Brice (1950) 339 U.S.542 at 552:
“Systems of taxation need not achieve the ideal. But the fact that the Constitution does not demand pure reason and is satisfied by practical reason does not justify unreason.”
Taxation systems are not designed, and nor is it possible to design them, with a perfect distribution of benefit and burden. Their authors must at times be satisfied with a rough and ready form of justice.
As long ago as 1776, Adam Smith recognised this in his magnum opus An Inquiry into the Nature and Causes of the Wealth of Nations. Smith made it clear that the subjects of every state ought to contribute towards the support of the government as nearly as possible in proportion to their respective abilities to pay. He went on to say, however, that every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible, over and above what it brings into the treasury of the state.
Smith’s strictures have led to numerous innovative methods of gathering income tax, none more so than in the idyllic islands of Bermuda where in the 18th century the Governor-General introduced a special tax on bachelors to encourage matrimony. The population at that time was only 8 000 and this seemed to be a rough and ready attempt at social engineering. The present population of the islands is about 80 000, so perhaps this is a good example of a tax that achieved its aims? Of course, not so many years ago in South Africa, unmarried men paid more income tax than married men.
The matter of fiscal fidelity demonstrated by President Mandela is aptly illustrated by the motto of Lord Ormathwaite – veritas et virtus vincunt – Truth and Virtue must prevail. And, unlike the Duke of Westminster, Lord Ormathwaite does not feature in any tax avoidance case.
Penelope Webb, who for some years worked in industry, is a former tax partner of a large international accounting firm.
A tribute to Penelope Webb
It is with much sadness that I record the imminent retirement of our regular tax columnist, Penelope Webb.
This (May) edition of ASA will feature the last edition of Death and Taxes.
Nobody likes paying tax, and reading about tax is probably second only to paying tax in the onerous stakes.
However, with Penelope Webb’s column all that did not matter. Her column was always entertaining, factual and educational and, of course, varied from funny to hilarious. Quite simply, Death and Taxes has been among the best taxation columns I have ever had the privilege of reading and certainly the most entertaining.
This column has also consistently received the highest ratings from members in various survey’s.
Death and Taxes started in the October 2000 edition of ASA, since which time Penelope never missed an edition or a deadline.
How does one ever fully recognise and thank so erudite a contributor to ASA? Be that as it may, SAICA, as well as the profession, is extraordinarily grateful for the many hours of thought provoking tax education, entertainment and intellectual capital inherent in Penelope’s eight-year contribution.
This tribute would not be complete without recording SAICA’s recognition of Penelope Webb’s impressive skills as a tax consultant and writer.
Penelope, may your retirement bring you at the very least as much satisfaction as your column has brought to our readership.
In the July edition of ASA we shall publish readers’ appreciation of Penelope’s contributions. If you wish to participate, please send your tribute to email@example.com.
And most grateful thanks from an immensely appreciative team at Accountancy SA.
Senior Executive: Marketing
Publisher: Accountancy SA