Tax avoidance laws could backfire

 
Chas Roy-Chowdhury

The new General Anti Abuse Rule is creating damaging uncertainty

ACCA COMMENT

WE KNOW education revolves around the three Rs – reading, writing and arithmetic. Today’s back to basics Budget, however, should be about the three Ss of tax – “simplicity, stability and certainty”. But whatever else the spread betters punting on today’s Budget will back – how many times George Osborne refers to “green shoots”, “right track” or “the debts of the last Labour government” – they won’t be betting too much on him simplifying the UK’s tax system.

Given there is an imperative for Osborne to deliver good news, and with an admission from a government insider last week that the coalition doesn’t have enough money to breed rabbits to pull from hats, much of the focus on bridging the deficit will centre on the General Anti-Abuse Rule (GAAR).

PAYING YOUR FAIR SHARE

The spin will be that the GAAR will act as a catch-all for anyone deemed not to be “paying their fair share”. The message will be loud and clear: we know you’re having a tough time making ends meet, but we want you to know that the government is serious about catching those bad people who, for one reason or another – including the clever use of legislation and allowances – are not paying the appropriate amount in tax.

Announcing the GAAR is one thing – actually making it effective is something else altogether. While it may take Osborne less than a minute to make the announcement, the GAAR is itself likely to run to around 150 pages of extra material when finally enacted. That might pale into insignificance against the over 15,000 pages of current tax legislation that it will be joining. But what the new GAAR will do – as a universal law – is create more uncertainty and complexity within an already massively complicated system, particularly if you bear in mind that only ten pages of the draft GAAR material is legislation – the other 140 are the guidance needed to try to make it work.

GENERAL RULES

The offending word here is “General”. ACCA believes that the more general the rules, the greater the uncertainty that accompany them.

Larger businesses will be able to ensure they comply with GAAR with relative ease. But it will create uncertainty for the many small businesses and individuals who will wonder whether the perfectly legitimate financial planning they have used until now is considered abusive under the new GAAR. The aim of that planning – all legitimate, remember – has been to create reinvestment, jobs and export opportunities for their enterprise. This will be particularly true for those who have to complete self- assessment forms – including a large proportion of those working in the City who will have share holdings and bonus payments, in addition to those earning over £100,000 per year.

One of the inherent principles of self-assessment is that individuals and small businesses should be able to establish fairly easily from first principles whether any particular transaction or series of transactions will be considered “abusive” within the framework of the law.

But with the introduction of a GAAR, most will only be able to establish the same by referring to an expert. This is good for tax accountants – but it will effectively mean that self-assessment becomes more of a best estimate for many taxpayers. They will no longer be able to complete a correct tax return without advice, and could run the risk of penalties and unwarranted interest from the taxman as a result.

PHASE IMPLEMENTATION

We believe that to minimise uncertainty there should be a phased implementation of GAAR. Any new rules should first be applied to business taxes, and only then expanded to cover personal income tax when taxpayers and their advisers have more evidence on which to base their understanding of the concept of “abusive”.

Given there is a desire to attract investment into the UK in an increasingly competitive global marketplace, the way in which GAAR is shaped, along with its accompanying guidance, must be driven by measured long-term considerations that take into account the international as well as domestic perspective.

It must not be distorted by short-term considerations or unrealistic expectations of what can be achieved by tax legislation. Having identified those issues that can be properly regulated through a legislative anti-abuse mechanism, it is important that the legislation itself is then properly and carefully formulated.

LACK OF RESOURCES

This legislation also needs to be clear to enable the coalition to achieve another of its stated aims from the Budget – to encourage the private sector to create new jobs and opportunities, partly to fill the gap left by the contraction of the public sector.

Local government still has to find more than £3.5bn in savings – much has been met by the use of reserves and a cutback in services. But if further spending cuts are imposed on local government, there is little doubt that there will be a severe financial impact on front-line services, which in turn will create greater demand for services provided by the private sector.

Of course, significant savings have to be found within the public sector, including across most government departments, which adds another element to the equation.

The organisation expected to implement and unravel the complexities of any announcements made today is itself vulnerable to spending cuts. Only this week we heard that HMRC last year left 20m calls unanswered, which suggests it is not ideally placed to take on the heavier workload that GAAR will undoubtedly bring.

And while GAAR-level inspectors are a totally different breed to call centre staff, the long-term under-resourcing of HMRC has starved it of the technically trained, experienced staff that they need for that sort of work. Introducing a tax college and other measures will all eventually staunch the flow a bit. But it is akin to setting up a sandbag factory, having let the Thames Barrier fall into disrepair.

In the meantime, the pressure on an under-resourced HMRC to deliver good news on catching tax avoiders will mean it either goes for soft targets – small businesses or sole traders – or for headline-catching operations in the hope of sending a clear message to all those who avoid tax. This will happen even if, thanks to GAAR, those same soft targets are not entirely sure whether they are avoiding tax at all.

Chas Roy-Chowdhury is head of taxation at ACCA.

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