Over the past few days, I have had the pleasure of marking around 50 tax essays. And I do mean it has been a pleasure, because in the process of marking you must confront the fundamentals underpinning the questions that have been asked of students. A common issue throughout the questions has been how tax law distinguishes between two things, whether that is the difference between debt and equity; income and capital; an individual and a couple; employed and self-employed or accounting rules and tax rules. In each instance, in the paradigm case, it is easy to see how the two are different. An apple is clearly different from a tree if your business is selling apples. But at the margins unsurprisingly, the two are difficult to separate. If I buy a factory, but sell it very shortly after – is it an asset that has been sold off, or is it stock?

Much energy can be expended in trying to clarify the distinction. The task of doing so is not fruitless and can have obvious benefits to those that are seeking to plan their lives in accordance with the rules.

But there is a more fundamental point to the idea of these distinctions. Why does the particular distinction even matter? It will matter because there will usually be some meaningful difference between falling on one side or other of the line. In tax, the difference will be money (whether that is direct in that less tax must be paid or indirect in the sense of a lower administrative burden) and the result will be that people, companies, entities will seek to place themselves on the favourable side of the line. That is the significance of the distinction – remove that, and the fact that the line might be blurry becomes largely irrelevant. When viewed in this way, the question is not about how to clarify the distinction but whether, as a policy choice, that distinction is justified. If the distinction is justified, then we must live with the unfortunate consequences at the margins and try to clarify the differences. If it is not justified, then the task should be to minimise the difference in treatment between falling on either side of the line.

Bringing this to real world distinctions today that are, or at least should be, testing policymakers, is there a sufficient justification behind distinguishing between different categories of persons engaged in work for the purposes of employment law? What about the distinction in treatment between employed and self-employed persons for tax purposes? Although the Paradise Papers brought together myriad different issues, one oft-cited benefit of offshoring is its use for investment funds. If there is good reason for this, then should there be a distinction in treatment between offshore and onshore investment funds?

It is these questions on the justification underpinning any distinction that our attention should be focused upon. It is only after answering them that our minds should turn to clarifying the distinctions. (For an example of interrogating the justification for a distinction and looking at ways to clarify the distinction, see Professor Freedman’s work on the employee/self-employed distinction most notably here).

*Postscript: Apparently this two stage approach is in fact the approach adopted internally by HMRC (h/t Heather Self @hselftax)