Tax avoidance – a mixed bag of thoughts
As mentioned in the Autumn Statement, the Chancellor continues to introduce measures, on top of plenty that are in force already, to tackle the growing issue of tax avoidance. These appear to be particularly aimed at high earners, where the problem is most prevalent.
First of all
Let’s understand the problem as the government perceives it. Tax avoidance is no good for our society, our economy, our public services and our most responsible businesses. The government believes that it has a particularly negative impact on small businesses as it increases the tax they pay due and in any instance, they can’t afford the hefty legal fees required to set up a complex tax scheme, even if they wanted to.
The message from the government is clear: enter into these tax schemes at your own risk – HMRC don’t want you to do them, and are doing more and more to make your life difficult if you do.
We therefore believe that it is far better to stick to durable and long-term tax saving strategies such as:
- Pension contributions
- Incorporation. If you aren’t already incorporated, get some advice from a specialist. If you are already incorporated, is your company structure as efficient as it can be?
- Alternatives that are not considered “schemes”
How the government propose to attack tax avoidance
As announced in the Autumn Statement, a few things on the horizon:
A new information disclosure and penalty regime will be introduced for certain types of promoters of avoidance schemes. Clients of these promoters will also have certain obligations, including identifying themselves to HMRC.
Penalties in failed avoidance schemes
Where HMRC has officially defeated a tax avoidance scheme, other users of the scheme will be required to concede their position to reflect the decision. HMRC will then issue a notice to all users of the scheme requiring them to amend their return, or advise HMRC why they believe they should not. A tax-geared penalty will be charged if the users fail to amend their return when they should.
Accelerated tax payment in avoidance cases
There will also be a requirement introduced by the 2014 Finance Bill to pay the tax in dispute in a tax avoidance enquiry when HMRC issues an ‘avoidance follower penalty notice’. At present taxpayers in most cases can hold on to the disputed tax during an investigation. This can take a number of years, and some taxpayers may enter into avoidance schemes primarily for the cash flow benefit.
Will this really stop the problem?
It is apparent that there is much scepticism on whether any new measures will impact the problem significantly.
Even the government’s own calculations suggest that the General Anti Avoidance Rule will only reduce tax avoidance by 1% at best, of the estimated £25billion lost each year through tax avoidance measures.
For starters, the Anti Avoidance Rule’s definition of tax abuse is far too narrow – even the big scandals in the press (Google, Amazon, Starbucks) lately wouldn’t have fallen foul.
Secondly, the test that has been defined as to when the Rule can be used is so tight and complex that few tax avoidance schemes will be covered. It pays mention to that when a “reasonable course of action can or cannot be taken” and typically the people conducting these tests, who have been selected from the tax avoidance industry, will have a range of views on what “reasonable” could be.
No Prevention Method
Another key point is that there is no “clearance system” attached to this Rule. As in there is no channel with HMRC for the taxpayer to propose a transactions/s and be advised if they are within or outside the scope. This means no prevention method is in place.
Down to HMRC
Finally, the Rule requires HMRC to show that a scheme is abusive rather than the taxpayer to show why it is not, putting the responsibly into the hands of a government with their hands already full.
It seems like the introduction of the big scary “Anti Avoidance Rule” is aimed to deter perhaps more than tackle, although it is clear that it is a hot and ongoing topic.
There is no question though, unless you are specifically “pro-risk” then legitimate, robust and long-term tax saving strategies will ensure you are tax compliant, paying the right amount of tax (but no more) in the right place and at the right time.