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A new way to tackle unfair tax avoidance

December 5, 2011

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

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.

 

32 Comments leave one →
  1. December 5, 2011 1:48 pm

    I work in recruitment and I know how difficult it is to get a job at PWC, my respect.

    Talking of respect any bill that has David Laws attached to it has to be taken seriously.

    Anyway nice words aside, my feeling is that if taxation was low enough people would not use tax avoidance or evasion methods. The government and the Inland Revenue have made the process and rules so complicated, maybe from a job creation point of view that it invites people to search for the loopholes.

    Just in case other readers are not aware the top 3% of the highest earners contribute 27% of all income tax revenues, the top 10% over 50% of revenues. It is my belief that the wealthy accept they have to pay more and do it willingly, however when the pips squeak I can understand meetings pointing to Inland Revenue fine print and the furious tapping of keys on calculators.

    My personal view is that employers NI should be phased out, income tax and employees NI should be combined and a flat tax system, perhaps at 21%. Also personal allowances should be raised so those on the minimum pay no taxes of any description. I believe this is one of the Lib Dem’s policy aims. This means that there are no “taxes on jobs” a vastly simplified tax system. and I think in the long term will mean more revenue for the UK.

    • rosemary permalink
      December 5, 2011 3:51 pm

      Agree with pretty well all of this David. The healthiest way to stamp out avoidance and evasion is to discontinue the punitive approach to work and wealth creation. A generous personal allowance is essential, and a recognition of family responsibility which the Brown years all but obliterated – though Lawson was the forerunner of that with his supposedly feminist reforms. But at least Lawson was aiming in the long term, as his predecessor was before him, for overall simplicity. Oh, that Brown could have continued with that laudable aim, instead of being a disastrous interruption who made a bankrupting cat’s cradle of the tax and benefits system.

  2. December 5, 2011 5:13 pm

    “implemented a 50% tax rate on incomes above £150,000”

    That was Labour, not the Coalition.

    “imposed 2% national insurance contributions on salaries and bonuses above £42,500”

    Again, that was Labour. Admittedly the Coalition hasn’t reversed the increases, but the Tories in particular made a big deal over the ‘tax on jobs’.

    • December 5, 2011 5:37 pm

      that’s why I used the word “implemented”… Darling proposed the 50p tax rate and there are lots of Tory MPs who would like to scrap it but the Coalition kept it in the budget and Finance Act after the election. I mention that and the NIC rise as I still hear people (incl bizarrely Labour MPs) say that taxes on the rich have not gone up since the election. I could add that capital gains tax has been increased too…and that was a specific Coalition initiative. So bankers’ bonuses which were taxed at 40% from 1988 to 2010 are now taxed at 50% plus 2% NIC. The “tax on jobs” refers to employers’ NIC, not the rate paid by employees.

      • December 5, 2011 5:42 pm

        Speaking as a Lib Dem, I’d like to say that the Capital Gains Tax increase was a specific Lib Dem initiative – the Tories wanted to cut it, we wanted to raise it in line with income tax. It’s gone up, but not by as much as we’d like🙂

      • rosemary permalink
        December 6, 2011 7:57 pm

        Have the Irish raised Corporation Tax? No they haven’t, despite their rise in VAT, and this is harming us.

  3. John Rippon permalink
    December 6, 2011 1:54 am

    Anyone notice that Graham Aaronson begins G.AAR or was that too obvious an irony?

    Joking aside I think that this is an excellent Motion and I wish you every success with it.

  4. Nigel Drew permalink
    December 6, 2011 1:29 pm

    Interesting that you do not mention support from Vince Cable

    Is it true Cable has been captured by the Treasury and supports everything George Osbourne and his Fat Cat buddies want?

    Does Clegg support your Bill?

    • December 6, 2011 1:34 pm

      If it’s an Early Day Motion then Clegg and Cable probably won’t sign it as they’re members of the Government.

    • December 6, 2011 1:51 pm

      Nigel – EDMs are a way for backbench MPs to influence the Government or draw attention to an issue. Ministers and whips do not sign them, neither under this government nor all previous ones. Sorry to spoil your conspiracy.

  5. December 6, 2011 5:50 pm

    Stephen, I take it you’ve already sent this to Caroline Lucas? I would imagine she’d sign. I definitely would.

    • rosemary permalink
      December 6, 2011 7:47 pm

      Would Caroline Lucas realize that all tax-free products offered by National Savings, Premium Bonds, Post Office Accounts, ISAs, Child ISAs, VCTs, and EISs, to say nothing of more exotic schemes like tax relief on Woodlands and Windmills, are all tax avoidance schemes, deliberately promoted by Parliament and Government to meet important public needs, as they see them, by offering people escape routes from the high tax economy and the chance to acquire a little capital? Betting of course is tax free, and it can reasonably be argued that all betting, whether in the City or on the racecourse, is therefore a form of tax avoidance.

      Dear Stephen, do not fall into a Tory Trap by threatening the public belief in the safety of Premium Bonds or the Lottery.

      You will, as an historian, be aware of how unscrupulous Tories used a national savings scare in 1931, to deadly effect – on the Liberals. One could not swear to it that there are no tribal and utterly ruthless Tories alive today.

    • December 6, 2011 10:40 pm

      she hasn’t signed yet but I would guess that she will add her name soon.

  6. rosemary permalink
    December 6, 2011 9:23 pm

    PS I realize, Stephen, that you and your colleagues are concerned about avoidance that is more ingenious and independent than the rest, but this is a bit like BCC and others saying street art is good and tagging is bad. It could get quite subjective in the fine detail, and it sends out the wrong message to the layman.

  7. December 7, 2011 12:18 am

    For the record I am not a tax accountant and have never been one. But — from my un-tutored eye this would seem to be another layer of complexity to explain the desired operation of the multitude of tax rules we already cannot understand. It seems to me that accountancy — particularly tax accountancy — is a growing sector. Hooray. To operate a serious but quasi-legal avoidance scheme one needs a serious tax accountant, and they do not work for people with small incomes. I think your aim is laudable, but your chosen route will cause the seriously rich to spend a slightly larger share of their excess income on even more expensive accountants, who will be empowered to argue even more expensively with HMRC.

    Why not just simplify the system, and preserve the most fundamental aspect of the general tax code — banding to cause redistribution? I suggest four bands, because there seems to be four general groups of incomes:

    >> no tax for people below a “living wage” (+/- £15,000?);
    >> a general tax (say 20%) with no reliefs or avoidance schemes for people earning up to say £50,000, which people are comfortable;
    >> a higher rate of 50% for everything earned above £50,000, because that is really getting rather above the level of comfort that most people can aspire to; and
    >> a super-tax of 60% of everything earned over £150,000, because those people have a life-style that is 10 times (or more!) as comfortable as the large number of people at the bottom. The super-tax rate would deal with “rich” people, as perceived by the public, whether they had bonuses or second homes or equities or anything else. The vast majority of the public would approve of a super-tax rate, if for no other reason than the qualifying level of income would be unobtainable by normal people.

    I would suggest that nearly all avoidance schemes be ditched, except those that can be described in one or two sentences in very plain English, such as “charitable donations to charities the governance of which have no association whatsoever with the taxpayer” or “fully supporting a person under the age of 18”.

    If a tax relief scheme cannot be described in a very few very simple words, then it invites trouble and earns contempt from the public, while encouraging rich people to wriggle around.

    Most tax relief schemes only operate for the advantage of rich people, because lower income people could never afford the tax advice to take advantage of the schemes. So if most of the relief schemes were scrapped, the public would at the very least feel that the government was making a serious attempt to curb the widening gap between rich and poor.

  8. Paul Bemmy Down permalink
    December 7, 2011 9:46 am

    So, is somebody who moves abroad, shall we say to Guernsey, so as not to pay tax in this country, an avoider or evader?

    • rosemary permalink
      December 7, 2011 10:39 am

      Or someone who runs their business in Eire rather than here? Or Hong Kong, the Cayman Islands, or all the other business friendly environments? Singapore is probably the best all round bet, because of the superb human resources there – cleverer and better educated than here, and more law abiding. There is more to evade or avoid than punitive taxation. It is the majority left behind here who get clobbered by it all; and envy, spite, and resentment of the rich escapers doesn’t help to make things better for them.

      • December 7, 2011 4:02 pm

        more facts needed Paul (and I think I know who you may have in mind….) but on the face of it, an avoider. Evasion would be doing something hidden from HMRC. Ironically, both the Isle of Man and Jersey have a GAAR.

      • rosemary permalink
        December 7, 2011 6:28 pm

        Stephen, do the Isle of Man and Jersey have these GAARs voluntarily, or were they bullied into it – by the UK, or by the UK acting for Brussels, or by Brussels directly? I rather think they only submitted at gunpoint, but you will know the detail.

        I understood the Isle of Man gave generous tax breaks for film companies (in their efforts to become the new Hollywood). Does this still apply?

        Though the use by mainland Europeans of these two islands for tax avoidance has now been clamped down on, they are still generous to their resident islanders – Mr Clarkson, for instance. I wonder how long Brussels would allow that to go on if the Isle of Man were indeed to become the new Hollywood, or prosper unduly in some other way.

        I am sure you will have noticed that oil explorers are at work in various parts of the Irish Sea, with possible results no-one can predict!

        In one respect these offshore tax havens – and never forget they are dependencies under a sovereign state, not themselves part of the UK or of the EU, which can exercise their fiscal autonomy as they think best – are scrupulous observers (for philosophical reasons) of the golden rule that is perhaps dearest to Brussels’ heart, that there should be no anti-competitive direct state subsidy. In this respect they are very models, unlike other European states which are a great deal bigger than they are, and should know better, when one considers the way they throw their weight around.

      • rosemary permalink
        December 7, 2011 6:35 pm

        PS A true statesman will wish to look beyond these technical details. The long and short of it is that we are an island of some 70 millions, and we have to compete as a high tax economy with highly successful low tax economies. We are also a high cost economy competing against low cost economies. Finally, we are far behind our competitors in education and skills. It is a no brainer to predict the most probable result: we may not be able to put food on the table one day.

  9. December 7, 2011 3:33 pm

    paul

    if someone legitimately moves to guernsey, i.e. its their place of residnetce for tax ourposes, then its avosiion they are not tliable for any UK taxes.
    If they lie about it, and place assets there, but continue to live in the UK and not declare to HMRC their assets in guernsey thats evasion.
    similar rules apply to othger countries

    ” nigel drew,

    this is an edm which cabinet members dont sign,

  10. December 8, 2011 1:28 am

    In 1963 I opened an account with the Midland Bank PLC: the “Caring Sharing Listening” bank in Bolton Lancashire. Over the years I built up a relationship with the Bank Manager and always received excellent service whilst I moved around a great deal over the years and my account still is still with the bank in Bolton to this day. I felt a LOYALTY to this Bank and particularly to this Branch: I could ring up the Manager and arrange a short Bridging Loan when I changed properties with no problem at all, because loyalty works both ways.

    When the Hong Kong and Shanghai Banking Corporation realised that China would take back legally the “New territories” they registered their Company in the UK as “HSBC”. they also bought out the Midland Bank which then became HSBC without any consultation with its customers.

    HSBC is still run and operated by the Company back in Honkong and the service to customers gets worse. In New York there is an HSBC bank on almost every corner: the one I use on West 51st, Street has a lady Chinese manager and Americans all consider it to be a BRITISH bank.

    My point is that HSBC could, in the twinkling of an eye, withdraw their registration as a British bank and transfer registration to anywhere it suited them: maybe even back to Hong Kong.

    There must be many more companies like HSBC with registration in the UK who could do the same think and then where would we be?

    • rosemary permalink
      December 8, 2011 11:32 am

      Did you notice, John, that HSBC were fined a huge amount this week by the FSA for taking advantage of old people? I don’t bank with them myself and am horrified by the ambience when I very occasionally go into one of their branches. Dirty, run down, and don’t care. The equivalent of the NHS in banking. Presumably this is what happens when things get too big. On the other hand we haven’t had to bail them out – just because they are so big. What a world it has come to. I still think the socialist approach to wealth creation since the war has bred these monstrous international survivors of regulation and taxation. They are like the super viruses which grow in resistance to the overuse of antibiotics.

      • December 8, 2011 11:38 am

        The reason we didn’t have to bail out HSBC is because they raised some additional capital beforehand, just like Barclays, plus HSBC wasn’t in quite as big a mess as RBS and Lloyds.

  11. rosemary permalink
    December 8, 2011 11:47 am

    Yes, Barclays are a well run bank, and so were Lloyds – till GB made them take over RBS.

  12. December 8, 2011 11:59 pm

    Rosemary: both HSBC and Barclays are guilty of the same old-age con.

    Despite the fines imposed (Laughable) and the compensatory payments back to the the oldies, you can bet your bottom dollar that they will still emerge from this with a fat profit!

    My only experience of Barclays was that I had a Barclays DCO account during my five years in Benghazi, Libya because it was the only “British” bank there.

  13. December 21, 2011 8:42 pm

    I am rather surprised that no-one, especially you, Stephen, found anything noteworthy in my comment on this thread last week. You started this thread by explaining how complex our tax codes are, and how expensive to operate and enforce; and further how ineffectual all the earlier attempts to curb abuse have been. So your new proposal, though well-meaning, is to add another layer of complexity to the existing tax code.

    Let’s take a hypothetical tax-avoider –not your average person claiming utilising legitimate tax planning; let’s consider the unscrupulous tax avoider, who goes to his (expensive) accountant and says “how can we reduce my tax bill — must be some way to slightly circumvent this new GAAR thing.

    • December 21, 2011 8:49 pm

      “… must be some way to slightly circumvent this new GAAR thing.” what does the well-paid, well-informed tax accountant do with this well-heeled client? Does he say, “Oh, no. There is absolutely no way we can do anything at all with your tax bill, other than the normal things that the majority of the population are already doing.. But there is absolutely no scope for researching any loopholes in the new GAAR — there aren’t any.”

      Does that sound like the kind of advice your previous colleagues in the tax-accounting world will give their most wealthy clients?

      • December 22, 2011 9:53 pm

        Richard – I’m sorry, I missed your original comment. You make some interesting points. I very much agree that the tax system could be reformed and simplified. I will be writing more about this in a pamphlet scheduled for publication in January, as long as I do my Christmas recess homework!
        On your specific points – the Coalition Govt is implementing the number one Lib Dem manifesto commitment at the last election, to introduce a £10,000 income tax free band. I have spoken in favour of us going further in the future to lift more people out of tax and NIC.
        Yes, clever accountants and lawyers will always look for ways to shelter their clients’ income. A smart government should try to stay ahead of them and a GAAR will help. But most of the professional support advisers give to clients is on making the best arrangement of their affairs within what the law actually intended. A GAAR will not remove the need for financial planning advice.

      • December 23, 2011 1:47 am

        Ah, you are a consumate politician, and no doubt a good accountant. A small person writes on your blog, “the Emperor has no clothes” and you miss reading it. He shouts again, “The Emperor has NO CLOTHES” and you respond with an apology, a justification that neatly misses the main point, and you politely point to the good work you and your party (and the various committees of accountants) have been doing. You have neatly missed the main point.

        The tax system is too complex, falling over itself with excessive efforts to regulate. Isn’t that where your blog started? You know, solicitors used to be paid by the number of words they wrote in a document. Were they being dishonest? No. Were they “evading” the law? No. They were just doing what lawyers do — selling their time and advice and making a profit. The main business was quantity, not quality, or to use modern-speak, output not outcomes. Hopefully that era is beginning to pass. It is the principle of rewarding output without measuring outcomes that is at fault, all the same as “financial services”, where practicioners are beginning to feel a little bit of heat.

        The “tax system” is too complex, and ordinary people cannot hope to understand the details; even well-educated, literate and numerate and thoughtful people cannot hope to come to grips with the system, be it tax or “financial services”. Some parts of the “law” are just beginning to pull out of the grip of hypercomplexity.

        The tax system is too complex. Isn’t that where you (and other “reformers”) started? How can you hope to make it less complex by adding yet another tier of complexity, under the guise of “fairness”, or “reining in the rich” or whatever?

        The job of the rich is to protect and enhance their wealth, by ANY sustainable means. If you make more complex rules they will hire more expert accountants and lawyers to accomplish their “job”. The rich can defend themselves. The job of government is to protect the non-rich from the rich.

        Look at road-building, by way of analogy: if you are rich, you can afford to pay for a very long private driveway. If you are Tesco, you can even afford to pay for roundabouts, and stretches of public highway (called “planning gain”). Why? Because the rich and the managers/shareholders of Tesco are feeling charitable? Come on, Stephen. Those private driveways and new roundabouts are the means to protect wealth, and to enhance it. Yes, the road-building creates jobs for thousands of non-rich people. But — surprise, surprise, the rich get richer, and the poor (those guys out there shovelling the tarmac) … . Look at the facts. Tesco is keen to “offer the public more choice”. But the statistics show that Tesco’s share grows, while the rest of the competition shrinks.

        I think you mean well, and you are hoping for a good social outcome with the GAAR proposal, but it will not lead to simplifying the tax system. Look at what you wrote: “…arrangements that are set up purely to avoid tax and for no legitimate commercial purpose, would not be considered legal tax avoidance”. Can you tell us, right now, what you (and the “experts”) mean by “purely” or “legitimate” or “commercial”? The proposals will make the system more complex and thereby more remote from ordinary people, and more understandable ONLY by very well-heeled accountants and specialist lawyers.

        Those words “purely”, “legitimate” and “commercial” are the giveaway. The proposal is NOT to re-distribute excessive income; it is to justify some ways of escaping taxation. Why isn’t the proposal to re-distribute excessive income? Why is everybody so afraid of defining “excessive income”? Why don’t we put some real numbers in here, that cannot be twisted by clever accountants? You know, ordinary people can understand tax bands of £10,000, £50,000, £150,000, etc. After £150,000 per year it gets a bit hard to understand for us mortals.

        But why, oh why, do the “experts” shy away from real numbers and concepts that everybody can understand? Ah, I know: an actual real-number definition of excessive income would be a damper on entrepreneurs, would send the really ambitious wealth-creating folks abroad, would reduce our competitive-ness, would result in less money in the pockets of ordinary folks.

        Hmm. Isn’t this the same whinge we’ve heard from the seniors in the banking community? Isn’t this the exact same whinge from Tony Blair, as soon as he got into office, about tobacco advertising in sports events (e.g. Formula 1)? Didn’t I hear Vince Cable, a few months before the election, answer the bankers with “let them go elsewhere”? Have we noticed how BAT and other tobacco companies are suffering these last 10 years? Let’s get real, Stephen, and stop wasting paper and ink and electricity. If you can’t see the clothes, and I can’t see the clothes, maybe, just maybe, the emperor isn’t wearing any.

        Will you take a bet with me? How about chancing £5 to see what the outcome is five years after the GAAR comes into practice? I bet the level of evasion goes up, and new ways of big-income avoiding come into practice. AND — the budget for the revenue inspectors will go up — they will have to research into how “purely” the rich are behaving.

        Go on. Put your money where your mouth is (sorry, an American phrase). You can afford a fiver, can’t you?

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