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Labour vows to penalise tax abuse

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14th Nov 2014
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A Labour government would bring in tough penalties for people caught by the general anti-abuse rule, Ed Balls has announced.

Writing on his blog, the shadow chancellor noted that Labour had supported the introduction of the GAAR in Finance Act 2013.

“Those who set up abusive schemes should run the risk of being caught by such a rule,” Balls said.

“But it is currently a GAAR without teeth. Those who are caught have to repay the tax they tried to avoid, but they do not face a penalty. There is still no disincentive to try and game the system. That is why Labour will bring in a tough penalty regime for the GAAR, with fines of up to 100% of the value of the tax which was avoided. For the first time this will provide a tough and genuine deterrent to those who try to abuse the system and avoid paying their fair share of tax.”

He added: “The public want us to be tough on the small minority of people who cheat the benefits system. They want us to be just as tough on companies and individuals who evade or aggressively avoid the taxes they should rightly pay.”

‘Temptation’

It is too early to measure the impact of the GAAR. Some tax commentators believe that it is too narrowly drawn, and the Scottish Parliament has enacted a broader general anti-avoidance rule for devolved taxes.

The rule was based largely on the recommendations of a study group led by tax barrister Graham Aaronson. His report noted that in some jurisdictions special penalties, or special rates of interest, applied to tax recovered under a GAAR.

“Including similar measures in a UK GAAR would certainly increase its deterrent effect, and may be regarded by a significant proportion of taxpayers as no more than just retribution for schemes designed to avoid paying a fair share of tax,” he said.

But Aaronson believed that including such provisions in a UK GAAR would be “seen as presenting an irresistible temptation to HMRC to wield the GAAR as a weapon rather than to use it, as intended, as a shield”.

Self-assessment

HMRC caused some consternation among tax professionals when it proposed that the GAAR should operate within the self-assessment regime. Some argued that the requirement to self-assess would place an unnecessary burden on taxpayers who would need to consider the GAAR only to find that they were not caught. The Chartered Institute of Taxation suggested in September 2012 that it would be “possible” to fit the GAAR into self-assessment once the GAAR was established and there was a “body of experience”  available to taxpayers and advisers.

The CIOT said there were “some practical problems revolving around how the taxpayer reaches his decision and, more importantly, how he defends himself against any subsequent contention by HMRC that he was wrong not to consider the GAAR”.

HMRC guidance says: “The GAAR forms part of the tax laws of each of the taxes to which it applies. Where those taxes operate on a basis of self-assessment, then taxpayers are required to take the provisions of the GAAR into account when completing their self-assessment returns.”

It adds that the GAAR legislation does not include specific penalty provisions. “However … a taxpayer has a duty to submit a correct tax return.

“Accordingly, if it would be reasonable for a taxpayer to believe that he or she has entered into an abusive arrangement that would be counteracted by the GAAR, then the self-assessment return must make an appropriate adjustment to reflect the fact that the GAAR would be applicable. Failure to do so could leave the taxpayer open to penalties for failing to take reasonable care in completing the tax return.”

‘Effective policy’

Tax barrister and Labour party supporter Jolyon Maugham said he had been calling for months for the Labour Party to “raise its game” on tax. Balls’s announcement was “a real sign that they’re starting to form into workable, concrete and effective policy what might otherwise be mere rhetoric”, he wrote on his blog.

Richard Murphy, director of Tax Research UK, also welcomed the announcement. “But adding a penalty regime to the GAAR is only step in the right direction for the GAAR,” he said. “The ‘double reasonableness test’ and GAAR advisory panel both have to go before it has anything approaching credibility.”

‘Who decides?’

But Michael Wistow, head of tax at the law firm Berwin Leighton Paisner, said his firm had long maintained that the GAAR was “seriously flawed and unconstitutional”.

Wistow added: “The double reasonableness test is vague and unpredictable. So to try and make the GAAR workable Parliament handed over control of what tax planning is acceptable to an unelected and unaccountable advisory panel.

“Graham Aaronson suggested that the fence should be electrified and it seems Labour agrees with him. The problem is who decides where the fence is. And can taxpayers even see it?”

BBC News quoted a Conservative spokesman as saying that Labour leader Ed Miliband had been “at the heart of former prime minister Gordon Brown's Treasury as ‘year after year’ they broke promises to deal with tax avoidance”.

The spokesman added: "If Ed thinks empty promises like this will get him into Downing Street, it's no wonder his own party are lining up to criticise his weak and ineffective leadership.”

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Replies (4)

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By mikefleming3028
14th Nov 2014 09:50

Does Mr Balls

know how many referrals there have been to the "GAAR Committee" since its inception, my researches show that there have been none so far, one wonders why given the back log HMRC have of "avoidance" cases? At the same time has Mr Balls given any thought to the  COP 9 procedure which is only offered in cases of suspected serious tax fraud and of course included in the offer of COP 9 is an undertaking not to prosecute if a full admission and  disclosure is made of all irregularities.   Politicians (on all sides) thinking on this whole issue is disjointed and ill-informed and if they want to introduce a morality and fairness test into the system then I would suggest that this would be a good place to start.

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Sarah Douglas - HouseTree Business Ltd
By sarah douglas
16th Nov 2014 22:26

That will be own party then

Hi 

They can penalise their own party then. Is abuse of tax payers money not tax abuse ?  They have the nerve to try and promote Jim Murphy as the Scottish Leader. Scotland is doomed if this is their answer for the Scottish Branch. He claimed £2000 one year for his accountants to do his tax returns on expenses. 

Perhaps they should look at the own party and clean up their own act first. 

 

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By richardterhorst
18th Nov 2014 13:36

Politicians determining morality in tax?

I have a problem with politicians and a tax authority determining what is moral and fair. On the former, politicians are the last to make a determination.

On the latter having HMRC trying/succeeding to dodge the Courts with follower notices and with automatic penalties applied in some cases very unfairly, we are in for a torrid time.

Its politicians worldwide who have failed to allow for global corporations and in the UK with a complex tax system much diluted by vested interests and vote catching exceptions.

Now if the tax pounds were spend wisely .... but that is subjective and we can only but dream.

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By Ian McTernan CTA
20th Nov 2014 13:33

More sound bites..

...designed to appeal to the un-informed masses.  The actual amount of penalty raised so far would be exactly £0.

Until they simplify the tax system and sort out the taxation of international transactions and corporations, penalising people twice for getting it wrong is the wrong way to go about it.

There are already a raft of penalties available where people get it wrong, as well as interest on underpaid tax, etc.

We already have the 'pay the tax we think you might owe' system for tax schemes whereby you are guilty and must pay before they even establish whether the scheme worked or not, now Balls wants to grab a handline by appearing to be 'tough' on the 'rich' who 'abuse' the system. Shame we can't prosecute those who put the country in such a state in the first place...

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