A new way to tackle unfair tax avoidance
We all know that times are tough for Government finances. In order to bring Britain’s enormous budget deficit under control there has to be a mixture of increasing tax revenue and restricting the growth of spending. Tax revenues are most easily increased by rises in the rates of various taxes. So the Coalition Government has raised the rate of VAT to 20%, implemented a 50% tax rate on incomes above £150,000 and also imposed 2% national insurance contributions on salaries and bonuses above £42,500.
But tax revenues can also be increased by making sure HM Revenue & Customs collect in all the tax that is due. Here we enter the murky world of tax evasion and avoidance. Let’s start with some definitions. Tax evasion is illegal, tax avoidance is legal. I know that usually surprises people, including people who avoid tax! Tax evasion is basically lying about your income and expenditure and defrauding HMRC of taxes on income or expenditure taxes like VAT. It is an offence and people can and do go to prison if convicted.
Tax avoidance is legal as it results from tax reliefs and incentives passed by Parliament. So if you have an ISA, you are avoiding income tax on the interest on your savings. If you arrange your affairs within your family to take advantage of the tax thresholds available to each person, then you are avoiding tax. If you make contributions to a pension then you get income tax relief. So that makes most of us tax avoiders but it’s OK as it’s within the law. It’s best to think of the vast majority of tax avoidance as sensible and prudent tax planning.
The problem comes with individuals and companies who stretch beyond credibility the rules Parliament has passed. Unscrupulous wealthy people or corporations exploit loopholes and grey areas. Rather than engaging in sensible and legal tax avoidance they construct contrived and wholly artificial trust or business structures so as to dodge taxes that would have been paid in normal circumstances. The result is a loss of tax revenue, the so called tax gap, estimated to run into tens of billions.
So why do people get away with it? Successive governments have passed legions of clauses in tax legislation trying to close off any room for exploitation of new tax reliefs. HMRC enter into protracted negotiations with companies and either settle or take the issue to court. Settlements give HMRC a certain amount of money and are entered into to save time and neutralise the risk of losing the case in court. But they are controversial as readers of Private Eye will know.
We now have an incredibly complex tax code. There are lots of tax reliefs to incentivise people and businesses to structure their personal finances (savings, pensions, etc) or business planning (capital investment, research, etc) in a way that is for the greater good of society. But to stop abuse each relief is accompanied by anti-avoidance rules that try to second guess all potential loopholes. It hasn’t worked and we need to try a new approach.
The Liberal Democrats promised in our 2010 manifesto that we would tackle tax avoidance problems. The Coalition Agreement provided for a study into what’s called a General Anti-Avoidance Rule, a rather ugly acronym of GAAR. The Treasury duly commissioned top tax barrister Graham Aaronson QC to set up an expert group to make a recommendation on whether the UK should have a GAAR. The basic point of a GAAR is that it would be explicitly stated that personal and business arrangements that are set up purely to avoid tax and for no legitimate commercial purpose, would not be considered legal tax avoidance. Essentially they would be irresponsible tax planning bumping right into illegal tax evasion.
Aaronson has now published his report and I met him to discuss it last week. He recommends legislation for a GAAR to cover initially income taxes (incl NIC), capital gains tax, corporation tax and petroleum revenue tax. It would be a shield against future tax avoidance schemes.
Most other developed economies have a variant of a GAAR. The USA has its Codification of Economic Substance Rule. It’s now time that the UK had a tough general rule blocking unfair tax avoidance of the sort that perverts the will of Parliament. That’s why as co-chair of the Liberal Democrat backbench committee on Treasury and Business I have tabled a Parliamentary motion calling for the Treasury to implement the Aaronson report. I have secured the support of other senior Lib Dems including Deputy Leader Simon Hughes and former Chief Secretary to the Treasury David Laws. The full text of the motion is set out below.
Finally, a personal note. To avoid some smart alec coming along and trying to embarrass me about my professional career before I became an MP, let me confirm what has long been in the public domain that I am a member of the Chartered Institute of Taxation, the country’s premier tax planning body. I worked for PWC and Grant Thornton as well as in the tax functions of large companies. The vast majority of the UK’s tax profession, in law, accounting and industry, operate entirely within the law, advising clients on how to structure their affairs in a tax efficient way. The contrived and artificial schemes pursued by some wealthy people or companies are not approved of by responsible advisers. Abuse of the tax code gives advisers a bad name and also facilitates the vilification of large companies and wealthy people in general. Such abuse must be stopped and a GAAR may be the way to do it.
GENERAL ANTI-AVOIDANCE RULE FOR TAXATION
- Session: 2010-12
- Date tabled: 01.12.2011
- Primary sponsor: Williams, Stephen
That this House notes the widespread public concern about the extent of tax avoidance and evasion by individuals and corporations; further notes that while evasion is illegal, taxes can be avoided by schemes that are contrived in their nature or by arrangements that are artificial and thus far removed from the responsible tax planning measures provided for by Parliament; believes that the ever-growing expansion of anti-avoidance measures has not eliminated the scope for exploitation of loopholes; further notes the publication of the report by Graham Aaronson QC outlining the case for the introduction of a general anti-avoidance rule in the UK; and urges HM Treasury to bring forward legislation within the next Finance Bill for the introduction of such a rule.