Mike Fleming CTA. TEP. Tax Director at Straughans Chartered Accountants
Tax avoidance has been a hot topic in the media in recent months. David Cameron, David Gauke and Nick Clegg are just a few of the public figures who have taken a very deliberate stance on the subject designed in my view to trigger a wave of public opinion against wealthy individuals who structure their business and financial affairs in order to pay less tax.
In part I find myself in some sympathy with these views but more importantly, I maintain that taxpayers, wealthy or otherwise, should not be prohibited from legally organising their financial affairs to produce the best possible result for themselves. The problem here is of course that the British Tax Code is a labyrinth of complicated and sometimes contradictory legislation. By its very nature it offers opportunities for those who have a substantial exposure to tax to find ways of reducing their liability, for a cost which is substantially less than the tax they would have paid. Historically there have always been schemes on offer which were designed to substantially reduce liabilities but in the main these schemes have only been of interest to the very well off because of the costs involved in their implementation.
To put things in perspective, in their annual report each year HMRC publish their estimate of what they consider to be the ‘tax gap’. This is a sum declared to be the amount of additional tax which they should have collected over and above that reported in their Annual Accounts. In the last few years this sum has weighed in at a hefty annual £35 billion. This has to be taken in context with the overall duty collected by HMRC which is in the region of £460 billion per annum.
HMRC’s own official statistics quantify the amount of tax lost through avoidance on Direct Tax and Corporation Tax at £1.5 billion and £1 billion respectively. So by their own estimates the total tax at stake on avoidance is in the region of £2.5 billion per annum. In the same Report the amount of VAT lost and included in the £35 billion amounts to £11.4 billion, with a further £10.9 billion resulting from inaccurate Self-Assessment Returns from both individuals and business taxpayers.
The scale of potential loss to the Exchequer would seem to me to be weighted heavily in favour of VAT and incorrect SA Returns which between them account for £22.3 billion. Considering the huge difference between this figure and the £2.5 billion estimated to be lost as a result of avoidance, it is difficult to understand why HMRC are making such a song and dance about their efforts to tackle tax avoidance, when almost 10 times the tax lost to tax avoidance is haemorrhaging out of the Treasury as a result of HMRC’s lacklustre administration of both VAT and direct tax.
It’s important that we recognise HMRC has targets to reach. In his Remit Letter to the Chief Executive of HMRC, David Gauke set out those targets earlier this year. You will not be surprised to learn that the emphasis was on increasing revenues by improving the detection of avoidance and evasion.
In an unusual step, HMRC recently published details of its ‘20 most wanted tax fugitives’. HMRC asked the public to assist in identifying their whereabouts, presumably so that arrests could be made. The vast majority of these individuals are wanted in connection with VAT fraud.
What interests me is that between the mere 20 individuals concerned, the amount of tax unpaid or at risk totalled £¾ of a billion. Compare this to the Revenue deficit created by tax avoiders across the whole of the UK, currently standing at £2.5 billion.
Surely it would have made sense for HMRC to channel extra resources into ensuring that these VAT fraudsters were subject to the full rigour of the UK Justice system? Not least for the simple reason that it would have significantly improved HMRC’s chances of meeting their annual revenue targets. This would also have acted as a warning to other potential fraudsters that their actions were unacceptable and that heavy sentences could be expected if caught.
You would expect that anyone suspected of being involved in a £¾ billion tax fraud would be subject to some restrictions on his/her movement prior to facing trial. Bearing in mind that the majority of the individuals concerned are non UK nationals it would seem reasonable that passports could have been confiscated. Suffice to say, all of the 20 individuals named are on the run and the majority are thought to be in foreign jurisdictions. Having just returned from holiday myself and gone through both passport and immigration control on four occasions, I am at a loss to understand how HMRC and the Border Agency could have allowed these individuals to exit the country without the necessary paperwork. To paraphrase Oscar Wilde: ‘To lose one fugitive may be regarded as a misfortune; to lose twenty looks like carelessness.’
Putting things into perspective, it is clear that the issue of tax avoidance is now political, not practical. Anyone who disagrees with this obviously isn’t listening to the news or reading the press. It is also equally clear that the amount of tax at risk from tax avoidance is dwarfed by the scale of the problem we have with VAT and other direct taxes which make up over 60% of the £35 billion estimated tax gap. So why are the Government making such a big issue about what they are doing to combat tax avoidance when clearly there are other areas of the tax assessment and collection system which are desperately in need of attention? One answer is that they believe this approach chimes well with the majority of voters in the UK. As the majority of us are not wealthy this panders to our baser instincts to soak the rich.
The introduction of new rigorous and watertight anti-avoidance legislation is a real need and HMRC have been playing catch up on this issue for more years than I care to remember. However, I do take issue with the way the proposed General Anti Abuse Rule (GAAR) has been presented as a solve-all solution to future tax ills. The proposed legislation has been published: a rather thin document at approximately 2½ pages which essentially centres on HMRC’s interpretation of whether or not they consider arrangements entered into by taxpayers as being ‘reasonable’.
Ordinary individuals and SMEs engaged in tax planning behaviour previously considered acceptable will in future have no certainty as to the results of their actions. They are likely, in the current climate, to find themselves under investigation and potentially liable to hefty tax charges, penalties and interest for indulging in what have historically been tried and tested methods of arranging your finances.
HMRC have given little in the way of guidance as to what current arrangements they consider will fall outside of the scope of GAAR. They have also confirmed that there will be no advanced clearance procedure available, meaning that honest taxpayers will not be able to seek guidance from HMRC before actions are taken. The simple act of transferring share ownership between spouses or the introduction of family members into a family business could well fall foul of the GAAR.
As stated earlier in this piece HMRC are under tremendous pressure as a result of David Gauke’s recent ‘Remit Letter’ and no doubt certain HMRC Directors will be considering their future if targets are not met. The introduction of a GAAR in its current proposed format could signal the first day of a hunting season for HMRC, complete with a licence to shoot down anything that walks, flies or crawls in the fiscal forest.
The reasons behind the need for a GAAR are compelling; however in its proposed form it would patently upset the equilibrium between the expectations of the citizens of this country and the people elected to run it. As a taxpayer I expect, as a right, to be able to anticipate with a degree of certainty what my financial liabilities are to the state in which I reside and to which I owe my allegiance. This proposed GAAR offers no assistance in achieving this certainty and in my view it will further stir up the already muddy waters of legislative interpretation, creating even more work for the overburdened Appeals Tribunals.
The motivation behind the basic principle of a GAAR has, I think, the support of the majority of the individuals in this country. However, its current incarnation is not the answer. I sincerely hope that common sense prevails and that Parliament will either reject it or propose some sensible amendments. Above all, we deserve clarity and transparency from HMRC: on what the GAAR will mean for the average taxpayer, on what is being done to close the yawning gap in revenue created by VAT fraud and how exactly the much-publicised plans to tackle tax avoidance will impact on the tax gap. It all boils down to the importance of being earnest.