My recent presentation at the inaugural Personal Finance Society conference in Birmingham was entitled, Does tax make a difference? Well, does it? My conclusion was that it does to three key parties – the Treasury/HM Revenue & Customs, taxpayers and financial advisers.That tax matters to the authorities is hardly a difficult conclusion to reach. A Government’s spending plans are determined largely by the amount of tax revenue it can generate. Going by recent reports of the significantly reduced economic growth assumptions that the Chancellor is going to have to make and a resulting likely reduction in tax yield, it is incontrovertible that tax makes a difference to the Treasury. Of the direct taxes, income tax, corporation tax and National Insurance are the Treasury’s key sources of funds. Inheritance tax and capital gains tax come some way behind. A key part of a financial planner’s services is the ability to minimise the tax payable by a client. This will often be achieved in collab- oration with the client’s other professional advisers. Over the years, it has become evident that the Treasury has been pouring more and more resources into preventing what it believes to be unacceptable tax avoidance. Commentators are predicting that anti-avoidance will once more be an area of significant Government activity. At the PFS conference, I reminded attendees of the three key weapons in HMRC’s official armoury – legislation, litigation and fear. Many years ago, the flow of anti-avoidance legislation was nowhere near current levels. But then, the extent to which tax avoidance was employed was significantly less. In the old days, the basic position with regard to the acceptability or otherwise of tax avoidance could be summed up by the following two extracts from judgments in the Duke of Westminster and Ayrshire Pullman cases. In the Duke of Westminster case, the following was a key extract from the judgement: “Every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate act is less than it otherwise would be.” And from the Ayrshire Pullman case: “No man in this country is under the smallest obligation, moral or otherwise, so as to arrange his legal relations in connection with his business or his property so as to enable the Inland Revenue to put the largest possible shovel in his stores.” So there we were, proceeding in a gentlemanly fashion without mass-marketed tax avoidance. What went wrong? Predominantly, the move from bespoke to off-the-peg, aggressive and marketed avoidance. The major change occurred in the 1980s with momentous cases such as WT Ramsay, Furniss v Dawson, Eilbeck v Rawling and Craven v White. Following the ground-breaking Ramsay decision, it was concluded by many that, regardless of whether a particular tax-saving effect was achieved on the face of a series of transactions, the courts had the power to reach a different conclusion, preventing the desired tax effect being achieved. The cases of Eilbeck v Rawling, Furniss v Dawson and Craven v White gave us a little more clarity over the extent to which a true substance over form approach could be adopted by the courts. What emerged from these cases, it seems, was that the courts could not just ignore legislation but could adopt what has become known as a purposive basis of interpretation. These cases led us to the conclusion that if there were a series of circuitous, self-cancelling steps that made up a particular composite transaction and some of those steps were inserted purely to avoid tax and with no commercial purpose, then those steps could be ignored and the transactions interpreted as if the steps had not been taken. Similarly, where there was a linear set of transactions with steps inserted that were only inserted for tax-avoidance purposes and with no commercial purpose attaching to them, those steps could be ignored and the transactions interpreted as if those steps had never been taken. The courts were effectively endorsing a substance over form approach. In other words, regardless of what the face of a document (or series of documents) set out, it would be possible, in determining the outcome of the transaction(s) under the legislation, to ignore any steps inserted with no commercial purpose and to look at the perceived reality of the overall transaction. Over the years, from the time these cases were decided to the present day, there have been many cases where the substance over form or purposive doctrine of interpretation has been used. It has to be said that, as a result, confusion still appears to abound – confusion over just how far one can go in tax avoidance using pre-constructed schemes. To ignore the potential use of the substance over form or purposive method of interpretation would be folly. Lord Hoffman, in the recent MacNiven tax-avoidance case, stated: “If a court is asked to apply a statutory provision on which a taxpayer relies for the sake of establishing some tax advantage and transactions are preordained, circular or self-cancelling or the transaction (though genuine and not a sham) had no commercial purpose other than obtaining a tax advantage, then the proper construction should be that the condition laid down in the statute for the obtaining of the tax advantage has not been satisfied.” This appears to endorse the capability of the courts, in the circumstances set out, to interpret legislation in a strongly purposive way. Despite the relative clarity of this statement, some have questioned whether this purposive approach can only be applied where the legislation is founded on commercial issues and is not a purely legalistic piece of legislation. The fact that there is still some confusion over what has to be said is a relatively complex law of interpretation probably serves HMRC quite well. People generally like certainty, especially when entering into significant financial transactions. That there may be less uncertainty around the potential outcome of a particular transaction must mean that people will be less inclined to enter into that transaction and, if HMRC takes a general view that tax-avoiding/planning transactions are something they would rather people would not enter into, this must be a good thing from its standpoint. In other words, uncertainty breeds inaction. Inaction means less tax-reducing potential. And that is good as far as HMRC is concerned.