Govt risks own goal in tax fight
REUTERS LONDON THE crackdown against tax avoidance could land the authorities with legal bills bigger than the income they recover as rich individuals, exploiting loopholes of the taxman’s own making, head to the courts to fight their corner, experts warn.
Recent scrutiny of banks and footballers has highlighted tax agencies’ over-reliance on taxpayers who confess to finding flaws in legislation and the aggressive retroactive moves against anyone who has dared to cash in on those mistakes.
Chancellor George Osborne is expected to propose a general anti-avoidance rule (GAAR) in next month’s Budget statement, after a report compiled for the Treasury in November recommended ‘a one-size fits all’ standard to deter “abusive” tax avoidance.
But experts fear the rule, which would require the taxman to prove the spirit, if not the letter, of the law had been breached, could spawn a wave of costly legal battles that would be difficult to win.
“For HMRC (the HM Revenue and Customs tax office) to prepare cases and go to court is a hugely costly affair and the onus is going to be on them under GAAR to prove you are attempting to achieve an abusive result,” said Ronnie Ludwig, a partner at accountants Saffery Champness.
The bungled case against football manager Harry Redknapp and Monday’s retroactive move to close loopholes disclosed by Barclays support claims the taxman spends too much time and money challenging people who use existing rules to their advantage instead of ensuring new legislation is as robust as it can be. “The goalposts are always moving,” complained Angela Beech, partner at accountant Blick Rothenberg.
Lawyers and accountants are particularly critical of ‘disguised remuneration’ rules which were introduced last year to restrict companies sidestepping tax on salaries paid to their highest earning workers and charge them retrospectively for exploiting loopholes.
Scottish football club Glasgow Rangers has been forced into administration pending the outcome of a probe into possible unpaid tax liabilities on benefits paid to players out of Employee Benefit Trusts (EBTs).
Investigations into investment schemes offering tax relief on money invested in subsidised industries such as film have also led to a number of high earning bankers being arrested.
The Treasury-commissioned GAAR report recommends introducing a narrow focused rule to “deter contrived and artificial schemes which are widely regarded as an intolerable attack on the integrity of the UK’s tax regime.” But some experts say the tax authorities are being inconsistent, operating a set of rules clearly defining fraud while simultaneously expecting people and companies to act according to moral judgements when setting up tax arrangements.
“There’s no point having a relief then telling everybody it’s immoral to take advantage of it. It’s completely counter-productive.
You can’t have those two tests, moral and legal, running alongside each other.” said Damian Bloom, Londonbased partner at law firm Berwin Leighton Paisner.
HMRC estimates as much as 5 billion pounds a year is lost to avoidance schemes which use loopholes to stay within the law. One analysis published by Britain’s trade union umbrella body, the TUC, puts the figure at 25 billion pounds per year.
Experts warn a system based on value judgements will be easy to defend against while also leading to inefficiency and uncertainty that deters business.
The taxman’s new vigilance, critics argue, is putting two of Britain’s strongest industries - high finance and club football - in jeopardy, with major banks and teams set to find attracting world class bankers and players much tougher going forward.
“Bearing in mind tax rates for individuals are now 50 percent for those earning more than 150,000 pounds (per year), a lot of footballers and entertainers are avoiding coming to the UK because of that,” said Sharon Brennan, partner at lawyer Lewis Silkin.
Others argue legitimate tax planners are being unfairly caught up in the HMRC’s heavy-handed and backwardlooking attacks on tax avoidance, which ultimately punish far more than the small number of investment schemes and advisers who act against the spirit of the rules.
But campaigners against tax avoidance argue a new general rule will simply put an end to abuse of loopholes and have little impact on Britain’s competitiveness.
By curbing the abuse of rules to dodge tax, the government will not just recover lost revenues but economic resources previously applied to finding loopholes can be better employed elsewhere, argues Richard Murphy, tax expert.