Query from a freelance journalist
“I’m writing a feature for Economia magazine looking at corporation tax and the fine line between avoidance and evasion.How has the situation arisen where different companies pay different rates, and is there a need for a workable solution between companies and HMRC here? What pressures are accountancy firms under, both from the legal perspective and also from customers? What needs to happen to develop a credible and long-lasting system?”
The UK tax system has always lacked a set of underlying principles; it has developed in a piecemeal fashion with too much political influence from the government of the day and insufficient concern for the development of a cohesive, understandable tax code. As a result there are inconsistencies in the system, which the government would refer to as loopholes, whereby it is sometimes possible with careful planning to exploit such inconsistencies to give a tax result which is much more favourable than the commercial realities of the transactions undertaken would justify.
The initial government response was to introduce targeted anti-avoidance legislation aimed at particular schemes, but they were always behind the times in this respect, as the ingenuity of the tax planners outstripped HMRC’s speed of manouvre in drafting legislation. HMRC was helped to some extent by the development of the “Ramsay principle” by the judiciary in the 1970s and 1980s, which held that artificial steps inserted into series of transactions solely for tax purposes could be ignored in assessing the tax consequences of the overall transaction, but this principle has fairly clearly defined limits.
The next government response was to required advance Disclosure of Tax Avoidance Schemes, under the so-called DOTAS regime. This has helped to some extent, but the volume of schemes is such that HMRC is hard-pressed to respond with legislation on a timely basis, and bespoke schemes designed by or for individual companies are not covered.
Denis Healey defined the difference between tax evasion and tax avoidance as “the thickness of a prison wall”, and the distinction has always been that evasion requires dishonest taxpayer behaviour, whereas avoidance operates on a full disclosure basis. This has not changed, but what has changed is the attitude of the majority of taxation practitioners in the UK operating outside the major accountancy firms and multi-national companies. The financial crisis has focused minds on the unacceptable nature of large scale tax avoidance using artificial, non-commercial arrangements, to the extent that the bulk of the tax profession would now accept such planning is beyond the pale (I know this because I chair a discussion group each 6 months at the Chartered Institute of Taxation Residential Conference, and the change of view has been clear).
Thus the proposed introduction of a General Anti-Abuse Rule (GAAR) focused on large-scale abusive tax planning using artificiial arrangements has been widely welcomed by the tax profession, and should prove to be the workable solution required and the beginning of the advent of a credible and long-lasting tax system, provided it is implemented as envisaged by the Working Party that devised it (chaired by Graham Aaronson QC). The reason for variations in effective tax rates has been that some companies (e.g Vodafone and, at least prior to the banking crisis, the major banks) have devoted resources to devising, often highly artificial, schemes to radically reduce tax bills, a process which is made somewhat easier by the global structures of such organisations and the increasing spread of e-commerce, which has made it relatively easy for them to base operations in low tax jurisdictions. The danger of this is that it is to some extent becoming the case that the bigger a company you are and the more profit you make the lower your effective tax rate, which is morally unacceptable particularly in the current economic climate.
The vast majority of our clients reject the idea of artificial and abusive tax avoidance schemes (there is a mass market for these at a lower level, typically marketed through accountancy practices by specialist tax avoidance boutiques) on the basis of the HMRC scrutiny involved, the high cost of implementation, the risk of long-running court cases and the uncertainty of a successful outcome. The pressure comes from those few clients who are interested in such schemes, who we are obliged to keep informed of possible tax planning measures for fear of offering negligent advice. My solution to this is to maintain contact with what I consider to be the most ethically sound of the tax boutiques, so that I can refer clients to them in (relatively few) appropriate cases. I may not be happy about this, but it is at least not negligent. I would be delighted to be able to tell clients from the proposed date of introduction of the GAAR (April 2013) that there is no point considering such schemes as they would almost certainly be caught by the GAAR.