Look out, tax avoidance will soon be illegal

22 November 2011

ballchainI know what you’re thinking, it’s tax evasion that’s the illegal one (ask Lester Piggott) but in recent times tax avoidance, acting within the letter of the tax law, has also become a shady occupation. Just ask Secretary to the Treasury, Danny Alexander who said “Tax avoidance and evasion are unacceptable in the best of times but in today's circumstances it is morally indefensible” at the Autumn 2010 LibDem conference. Yes, the same Danny Alexander who was accused by the Telegraph of using the vagaries of capital gains tax law to avoid tax on the sale of his second (constituency) home.

Where the line is drawn between legitimately avoiding tax and doing so amorally is a difficult question, with tax-saving schemes such as ISAs or childcare vouchers at one end of the spectrum; offshore protected cell companies for footballers at the other end. However, a new report published by the Treaury has concluded that we do need a blanket anti-avoidance rule.

The idea of such a general anti-avoidance rule (GAAR) has been around for some time, but many tax experts and commentators fear that such a heavy-handed approach would punish the many to catch the few. Now, a team of tax experts, including academics, barristers and judges, has advised the Treasury that in their opinion, a GAAR is the way forward for the UK and would help prevent schemes “widely regarded as an intolerable attack on the integrity of the UK's tax regime."

However, what is especially interesting* about this report is the acknowledgement that a rule that banned any tax avoidance completely would damage UK business by preventing reasonable tax planning. "Such tax planning is an entirely appropriate response to the complexities of a tax system such as the UK's."

So, it looks like we have the beginnings of a sub-division within tax avoidance. Bad stuff will become contrary to tax law (i.e. illegal) and “responsible” stuff will be OK.  A targetted anti-abuse rule would “ level the playing field for businesses, depriving tax avoiding businesses of the competitive advantage they gain from tax abuse.” A blanket rule could also reduce the cumbersome weight of the current UK tax law.

The report says "The starting point should be to see whether the arrangement is abnormal, in the sense of having abnormal features specifically designed to achieve a tax advantageous result. If an arrangement has such an abnormal feature or features then it becomes in effect "short listed" for consideration as a potential target for the general anti-avoidance rule (GAAR)."

Cynics could argue that the wealth of case law on the subject, such as the Ramsay principle which causes circular transactions to fail are already serving this function, but the report highlighted the SHIPS 2 scheme as one successful arrangement which allowed a complex series of transactions in life insurance contracts, resulting in a tax loss for the scheme user but no economic loss.

The report also recommends a number of ‘safeguards’ to prevent application of a GAAR where this would be heavy-handed or unfair. Alongside safeguards disapplying the rules for “reasonable tax planning” or where there is no “intent to reduce tax”, it is recommended that the burden of proving an arrangement is not ‘reasonable’ falls on HMRC, rather than the taxpayer. Any arrangement that is considered unreasonable should then be considered by an Advisory panel made up of a majority of non-HMRC members.

The Chancellor has confirmed the Office of Budget Responsibility will make its Economic and fiscal outlook on Tuesday 29 November along with the Chancellor's Autumn Statement, but the Treasury has said it will announce if it intends to proceed with the report’s recommendations in next year's Budget.

*it really is interesting. Trust me.

TOPICS:   Tax

10 comments

  • Mark M.
    So, I can avail myself of "reasonable tax planning" to make sure I don't pay any tax? Great news, now how do I opt out of PAYE?
  • DragonCHris
    Just force tax on footballers... debt sorted.
  • Alexis
    Seems like another half-arsed law from this lot that will inevitably end up at a judicial review and be ripped to shreds by the legal eagles.
  • Phillip G.
    You wish.
  • Tim
    The only moral obligation is to pay only the tax you are legally obliged to pay. Anything else is over payment of tax. This isn't a charity that you're morally supposed to pay as much as possible to.
  • corbyboy
    There is no morality when it comes to taxes. Something is either legal or illegal. Using phrases such as "intent to reduce tax" is stupid. I put money in an ISA specifically to reduce tax. How ar HMRC ever going to prove you did something to reduce your tax bill?
  • Loads m.
    Yes this is another prize cock-up in the making. It is Christmas early for lawyers and accountants alike, as they will be the ultimate beneficiaries of such a scheme. Most likely we'll all end up paying more, either to fund the HRMC legal bills, or to contribute to legal aid for those caught in the cavernous grey area that such rules would create. The REAL cause of the problem is the layers of accumulated tax laws over the years that have created complexity & confusion. If you strip away all this crap, and stick something really simple in its place (like everyone pays 20% on anything they get - earnings or non-earned income, then a small number of extra benefits and payments that is in the detail I had once worked, which would make it fairer, including some revisions to make the benefits system easier to use). Trouble is common sense can not prevail. To many vested interests. Come the revolution... and the middle England spring ...
  • Mike H.
    Solution: Don't work. However, you you will be joining a group of people who only have 3 holidays a year, only 2 of the 3 consoles, only the premium Sky subscription (No, you don't get the paid for channels) and only a 60" TV. Life's hard.
  • jmecks
    Targetted? Ttargeted? How about Targeted?
  • Shooter M.
    The day that "morally indefensible" activities in tax affairs can get you the jail is the day I'll listen. Until that time, Danny Alexander can take a flying fuck.

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