It seems that, despite claiming that it wants to simplify the tax system, the government is determined to add ever more layers of complexity.That at least is the conclusion to be drawn from the government's proposals to clamp down on tax avoidance (a perfectly legal activity) by introducing a general anti avoidance rule (GAAR). GAAR was considered by the previous Labour administration. However, it was decided that it would be too expensive and complex to administer.
Critics note that the effects of GAAR will be most keenly felt by small and medium sized business.
Accountancy Age quote Andrew Jupp, head of tax at Haysmacintyre:
"It is unnecessary and unwelcome, and will introduce yet more uncertainty into the tax system. Unless it is coupled with a vast range of pre-transaction approvals it will stifle businesses ability to operate and make sensible commercial decisions.
Whilst the largest British companies might be able to cope with a GAAR, I cannot see how the smaller businesses, which are the lifeblood of the UK economy, will manage. These businesses constantly tell us that they want less red tape, not more."
James Bullock of McGrigors said:
"The problem is that there will inevitably be a situation - probably many situations - where commercial pressures mean that transactions have to be completed before specific HMRC clearance can be obtained confirming that they do not fall foul of a GAAR.
You will then have precisely the situation that applies at the moment - HMRC challenging the tax treatment of transactions after the event, on the basis that the GAAR applies. Taxpayers will oppose these challenges and the whole thing will end up being interpreted by the Courts - just as happens at the moment".
GAAR will simply push companies to move out of the country and reduce the tax take, thus being counterproductive to the economic well being of the country and the coffers of the government so hungry for cash.
Tax does have to be taxing.
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"tax avoidance (a perfectly legal activity)"
ReplyDeleteLots of activities are perfectly legal - for example:
* Visiting Strip Clubs
* Drinking
* Protesting
* Being a celebrity
* Being a member/representative of the C*ns*rv*t*ve Party
* Providing selectively ignorant and biased reports about the average civil servants pay/conditions/pensions in a daily newspaper.
It doesn't mean that if you do them to excess - that lots of people won't think you're a ****!
0854,
ReplyDeleteThe difficulty with arguing with Ken et al on this is they use a definition of the word "avoidance" to include any legal actions that reduce tax liability, including, for example, the use of ISAs and personal allowances. I've repeatedly argued against such a wide definition on the grounds that it is semantically unhelpful (i.e. confusing) and it leads to straw man arguments as it's not the definition that HMRC and others are using when they talk about tackling avoidance. It is also, incidentally, categorically not the definition that is meant in "General Anti Avoidance Rule"!
However, I'm coming to realise that I'm never going to get Ken etc to take a sensible view of the semantics of this issue, so from now on I'm going to avoid using the 'A' word wherever possible, because it's getting in the way of the real debate, which is about whether and how the government should address legal schemes that seek to produce a tax effect contrary to the intentions of Parliament. It's less catchy than "avoidance", but unless we can agree on a definition that encompasses (only) this type of behaviour we won't be able to get past it and talk about the interesting stuff!
(I also have problems with the use of the word "perfectly", as you get avoidance schemes that are held by the courts not to work. These are therefore not legal, but they're not evasion as, even though huge amounts are at stake, nobody ever gets prosecuted over them, so what are they? Interestingly, I've raised this point several times on here and nobody has ever ventured an answer. Oh well, to be fair it's probably another detail that gets in the way of the real issue.)
Like you, 0854, I fully agree that the opinion, implicitly expressed repeated by Ken etc, that if tax mitigation steps are legal then they are necessarily acceptable, is entirely disingenuous. Apartheid was legal in South Africa - did that make it right?
Some may wish to point out that the Apartheid regime was a corrupt one and therefore it was the law that was immoral. That is of course correct, but while apartheid behaviours were intended to be legal by that legislature, legal schemes that seek to produce a tax effect contrary to the intentions of parliament, are by definition not. The point is that legality alone is not a sufficient determinant of acceptability, as some seem to imply. The Apartheid example shows that you must take other factors into account (in SA the morality of the political system; in tax it's about the actions being contrary to Parliament's intent).
...and now to deconstruct the original post a little.
ReplyDelete"the effects of GAAR will be most keenly felt by small and medium business."
I'm skeptical about this in the first place (the reason for my skepticism will be apparent when I get round to Jupp and Bullock's comments) but what this ignores is that legal schemes that seek to produce a tax effect contrary to the intentions of Parliament help to undermine level playing fields in markets, making it harder for SMEs to compete. This is because such schemes are heavily reliant on expensive legal and professional advice and they almost always also need a fair bit of spare cash sitting around to implement. SMEs are much less likely to have access to these resources and are therefore unable to reduce their tax bills through these means, which hurts their competitiveness. (A fine example of this is the Channel Island-based distributors who undercut small retailers by being able to make VAT-exempt supplies.)
Both Andrew Jupp and James Bullock talk about additional burdens being imposed on business as a result of this uncertainty. When HMRC finds out about a scheme that appears to seek to produce a tax effect contrary to the intentions of Parliament, they will look into it, whether or not a pre-transaction clearance has been sought. This will not change if a GAAR is introduced. This work is either done pre or post transaction and businesses frequently say that the pre-transaction clearance process is beneficial to them in getting earlier certainty. The situation Bullock refers to, where it's not possible to get pre-transaction clearance and the matter has to be dealt with after the event, does frequently arise and will presumably continue to do so. It is therefore very difficult to see how the GAAR will actually make any significant operational difference, and hence it's hard to see how it will increase red tape.
Oh, hold on! That's exactly what Bullock says in the last paragraph of his quote.
Hmm...could this just be another example of the industry lobbying furiously against any change that might make abuse of the system harder?
Having said all that, I'm still not convinced that a GAAR is the way forward. The industry that conceives and promotes legal schemes seeking to produce a tax effect contrary to the intentions of Parliament operates on the principal that rules are made to be broken. We can expect to see HMRC, the Big 4 and the Magic Circle spending the 2020s in court arguing about whether the GAAR has been triggered (as we have where certain specific pieces of legislation have been enacted which work in a similar way). In the meantime HMRC is likely to have less resources allocated to producing more straightforward fixes to loopholes, as the government will feel such resources aren't required because the GAAR will take care of everything. Finally, if the intention of the GAAR is to simplify the compliance burden on taxpayers it is unlikely to work, for the same reason that it won't increase red tape: it will make little operational difference!
I think it quite arrogant to dismiss “Ken etc”, which includes me, as not being sensible.
ReplyDeleteYou invent a debate to address your supposed problem of addressing legal schemes that are supposedly contrary to the intentions of Parliament, but miss the fact that the problem if Parliament and their advisers who collectively, if not separately, are proven unfit for purpose through proposing a GAAR to cover-up their incompetence.
11 December 2010 10:43 etc, looks like you have been snowed in to long.
ReplyDelete"You invent a debate to address your supposed problem of addressing legal schemes ..."
ReplyDeleteNot really. He has been having that debate on here for months, if not years. Its just that no one manages to argue against his points so instead they resort to insults/blaming incompetence.
The fact is there are highly paid professionals who are employed by big business (not small and medium) for the sole purpose of finding or inventing apparent loopholes in the legislation. They then pursue the case to the nth degree knowing that HMRC will always back down due to cost. That is why Vodafone got away with billions along with many other large UK companies.
As for the perfectly legal "avoidance" how many large UK based companies have pretended to relocate elsewhere without actually relocating? Something your average SME can't do.
A person who claims we should respect parliament's law in country A, but not in country B is a hypocrite. You can't read behind any laws to make up your own factors in order to justify misinterpreting the law for the purposes of taxing people more than the legislation states. Obeying the law and avoiding non-legislated taxes is good.
ReplyDelete11/12, 22:44
ReplyDeleteI'm sorry if I came across as arrogant. However, I think you may be taking my comments a little personally. I wasn't implying that you guys aren't sensible, rather that the definition of "avoidance" used by Ken and others (including, I'm afraid to say, John Whiting, who does at least say that certain "aggressive" avoidance is unacceptable) is not sensible for the reasons I've described in this thread and elsewhere. Perhaps claiming that your position is not "sensible" came across as too strong (though that wasn't the intent and it wasn't really all that strong language, was it?), but I certainly do not think it is arrogant to disagree with another party to a debate, especially when you set out your reasons for doing so, which I always try to do.
"You ... miss the fact that the problem [is] Parliament and their advisers who collectively, if not separately, are proven unfit for purpose through proposing a GAAR to cover-up their incompetence."
Actually, I think I've addressed this point here. Although that post wasn't about GAAR, I think it gives a realistic and pretty balanced view of why loopholes arise under the present system. GAAR is an attempt to improve the current situation, so if you describe the current position as being the result of incompetence (though my 5/11 post was an attempt to show that "incompetence" is a gross over-simplification), then yes, GAAR is intended to address that.
I'm not naturally ideologically inclined towards the Tories (as you may have guessed!), but shouldn't the purpose of any law be to improve on the status quo? Does that mean that any problem that requires the enactment of new legislation to address must be the result of incompetence on the part of the administration (or previous ones)? Sometimes it no doubt will be, but again see my 5/11 comment. Also, if you describe tax loopholes as being the result of incompetence then, given that this is a new government, surely it's their predecessors' incompetence that they're seeking to address?
11/12,
ReplyDeleteDon't worry. I can type quite fast! :)
In the Vodafone case, wasn't it an ex-revenue inspector who saved Vodafone all that tax?
ReplyDeleteAlso, if HMRC back down on a case due to cost then that should surely cause them to reassess their approach!
10:29,
ReplyDelete"A person who claims we should respect parliament's law in country A, but not in country B is a hypocrite."
Sorry, I genuinely don't quite follow this. Can you please explain in what way you feel this has been claimed (presumably by me) in this thread? I'm not trying to be facetious, I genuinely can't see where that's been argued.
I don't think I've ever said in my comments on this blog or elsewhere that people shouldn't practice tax avoidance (though I'm willing to stand corrected if I have said this months or years* ago). Because of the level playing field thing described above it's foolish for a business not to at least consider it! What I try to do here is argue is that the government needs to address it and discuss how that is best achieved.
(* - hat tip to 11/12 22:42!)
On re-reading it, the 12/12 10:29 comment is (deliberately or otherwise) such a classic straw man argument that my last comment doesn't even come close to addressing it properly. Please accept my apologies for not engaging meaningfully with your arguments. How arrogant of me! Unfortunately I can relate all to well to the frustration you must feel!
ReplyDelete"You can't read behind any laws to make up your own factors in order to justify misinterpreting the law for the purposes of taxing people more than the legislation states."
Nobody here has suggested for a moment that HMRC or anyone else should do this, or should be able to do this. The courts would rightly throw out any attempt to do so (and, arguably, have!). I will try to set out the actual position around purposive construction using a statement along similar structural lines to yours:
If (and only if) there is ambiguity over the way in which the plain wording of legislation applies to a given situation, and case-law does not provide a clear answer, Parliament's intention in enacting that legislation may be looked to for guidance on how to correctly interpret it. Such an interpretation may prevent someone from paying less tax than they would if an alternative interpretation were adopted.
In other words:
- it's not about misinterpretation. In these cases there are two or more different interpretations of, by definition, an area of ambiguity, one of which will normally be upheld if it goes to court (although the courts sometimes hold that both litigants' interpretations are wrong!).
- It's not about "mak[ing] up your own factors". In law, "Parliament's intention" is defined along the lines of what a reasonable person would infer Parliament's intention to have been, taking into account the wording of the legislation, evidence from Hansard and other contemporary public statements, and the wider circumstances within which the legislation was enacted, such as the type of transaction involved and generally-prevailing commercial practice. In other words, HMRC or anyone else's "own factors" have nothing to do with it.
- It's nothing to do with "taxing people more than the law states". As explained, a purposive interpretation can only be adopted where there is ambiguity; it cannot be used to go against what is unambiguously stated in legislation (or, for that matter, case-law). As I explained in my comment on the 5/11 blog post, HMRC drops cases where there is a blatant, gaping loophole (i.e. there is no ambiguity; the loophole is "stated" in legislation. In such circumstances they normally drop the case and then advise the government to legislate to plug the gap to stop it happening again.
The law says that litigants (HMRC or anyone else, in either tax or any other area of the law) can look to Parliament's intentions. In fact, the courts are bound to construe legislation purposively where its plain wording does not conclusively decide the case. This principle is currently enshrined in case-law; the (in my view somewhat questionable) objective of a GAAR is to bring this existing principle into legislation instead.