The government has been urged to regulate the activities of accounting firms in a House of Commons motion accusing firms of devising ‘aggressive’ tax avoidance schemes that cost the Treasury billions of pounds in revenues. A number of MPs have signed this motion. Additionally, some MPs have signed a motion accusing banks of using havens to avoid tax.

In reality, these motions have no chance of being debated. They do, however, reflect growing concern among MPs about tax avoidance.

The MPs claim that tax avoidance schemes deprive the Treasury of billions of pounds of tax revenues, which in turn forces the government to curtail social investment and shift the tax burden on to ordinary taxpayers.

It is a difficult area. A significant number of large companies have moved their Head Office outside the UK to reduce the impact of taxation. Should the UK encourage lower taxes or seek to “squeeze”?

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Historically, the government’s response to an avoidance “scheme” has been to block it (and then block scheme mark 2, et seq). Look at national insurance (NIC). I am (sadly) old enough to remember when employees were paid bonuses in gold coins to save NIC. Gold coins were of course blocked, so the market moved on to platinum sponge, fine wine and, as I recall, carpets. It took a long time to introduce legislation to stop all similar schemes.

From the Treasury’s perspective principles-based avoidance legislation makes perfect sense.

There has been a lot of sophisticated planning around interest income and HMRC and the Treasury are seeking to change the rules of the tax planning “game” with the introduction of a principle. The consultative document states: ‘A return designed to be economically equivalent to interest is to be taxed in the same way as interest.’ (Regrettably the ensuing draft legislation is nowhere near as succinct).

If this principle based approach is successful in this area, we have to ask – what will be the next step?

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There has been a lot of press speculation recently that, following the calls for a shake up in the tax breaks enjoyed by the private equity industry, the Chancellor may change capital gains tax for everyone. According to the FT, the Chancellor is considering an increase in the effective rate of capital gains tax from 10% to 20% for businesses assets e.g. shares in unquoted trading companies and partnership goodwill. Additionally, he is apparently proposing an increase in the taper relief period from two years to five years.

The reforms were allegedly discussed in meetings between Treasury officials and private equity representatives. This may be a relief to the private equity industry but, unless some distinctions are made, it is very bad news for other business owners.

Watch this space!

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The House of Lords issued their judgement in the case of Jones v Garnett (also known as the “Arctic Systems Ltd” case) on 25 July 2007. To much rejoicing the case was decided in favour of Mr and Mrs Jones. However, the Revenue is a bad loser.

On 26 July a written Ministerial statement was issued by the Exchequer Secretary to the Treasury, announcing the intention to change the law.

Using the standard “the Government is committed to maintaining fairness in the tax system” statement the Government now believes it needs to do something to “ensure that there is greater clarity in the law regarding its position on the tax treatment of income splitting”. Actually, in my opinion, the law is now clear – it may not say what the Revenue wants it to, but that is unfortunate (for them) rather than unclear.

In the Government’s view minimising a tax liability “results in an unfair outcome” that puts other businesses “at a competitive disadvantage”. Surely competition is a vital part of a free market. Anyway, what happened on Lord Tomlin’s statement in IRC v Duke of Westminster in 1936 (yes even in 1936 people were planning to reduce tax):

“Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to result this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.”

Presumably nowadays that should finish “until the Government change the law so he has to!”.

The Government are therefore planning to bring forward proposals for changes to the law to ensure that individuals such as Mr Jones should pay tax on what is, in substance, their own income. In the meantime, (I assume, grudgingly!) “HMRC will apply the law as elucidated by the House of Lords and will be providing guidance in due course.”

A final throwaway statement – “The Government would not want commercial arrangements to be caught by any change in legislation. Consultation should help to ensure this.”

Watch this space!

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