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Complexity 'benefits big businesses and tax advisers'

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8th Jun 2005
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Houses of ParliamentComplex tax law leads to a redistribution of wealth in favour of larger businesses and specialist lawyers and accountants, who have enjoyed a "bonanza" since Labour came to power, the Conservatives claimed yesterday.

As MPs began to examine the Finance Bill, John Bercow MP called on the Paymaster General to accept that there is a link between the tax law rewrite project and the composition of Finance Bills.

Unless and until the size of Finance Bills is reduced "we will be effectively ensuring that wealth is redistributed in favour of large businesses that can pay for specialist tax advice, and against small businesses that cannot," he argued.

Philip Hammond, shadow chief secretary to the Treasury, said he suspects that "the actual outcome is that wealth is redistributed in favour of specialist lawyers and accountants, who benefit in proportion to the tax code's size and complexity".

Avoidance 'not appropriate'
Introducing the Bill, paymaster general Dawn Primarolo said the Government's underlying philosophy is to produce fair taxation, reducing avoidance that is "not appropriate in a modern and fair economy", and to simplify the business environment to produce "clear, dependable and fair interaction with the state".

She reiterated the message that for a tax system to be effective "everyone must pay their fair share of taxes ' and we are fully committed to combating all forms of tax avoidance including VAT".

The Government remains determined to continue to close tax avoidance schemes "as we become aware of them". Any government, she said, would pursue a policy of acting fairly on behalf of the vast majority of taxpayers to prevent a small number of taxpayers "receiving tax payments that they were not entitled to".

Primarolo added: "Tax avoidance schemes create economic distortion, provide commercial advantage over compliant taxpayers and redistribute tax revenues in an unfair and arbitrary manner."

'Racier forms of tax planning'
Philip Hammond, shadow chief secretary to the Treasury, replied for the Conservatives and observed that the Bill is largely composed of anti-avoidance clauses excluded from the truncated pre-election Bill on the grounds of complexity and the need for more detailed scrutiny.

He welcomed some minor changes the Government has made, but warned that major concerns remain in "the key areas".

He recognised the need for the Government "continually to address tax avoidance and the racier forms of tax planning in order to protect the Exchequer", but said many of the avoidance opportunities themselves arise from the increasing complexity of tax legislation.

International competitiveness
Hammond added: "Since 1997, the volume of tax statute in force has almost doubled, creating a bonanza for lawyers and tax accountants. This is a practical issue.

"Tax planning is a fact of life for international business, as is tax competition between governments. And governments everywhere face the same challenge, to reduce the loss of revenue from tax avoidance and tax planning, while at the same time ensuring that they do not weaken their international competitiveness. It is about maintaining the right balance between those competing objectives."

Gordon Brown faces a fiscal black hole, Hammond argued, with independent commentators predicting that tax receipts will need to rise sharply if the golden rule is to be met. The Chancellor is, in any case, "already projecting a hefty additional contribution from UK corporations" whilst competitors are increasingly lowering their corporation tax rates.

'High handed'
The Conservatives have "two overarching concerns," Hammond said.

First, they fear that the Treasury's collective judgment "may have faltered under the pressure to find additional sources of revenue and the temptation to address all the avoidance schemes disclosed under the Finance Act 2004". The Treasury's response to some concerns raised has been "rather high handed", he claimed.

"Assurances that wide powers will be used only narrowly in practice are no substitute for tightly drafted legislation. There remains a real possibility of inflicting damage on some of the UK's most dynamic business sectors in the medium term, and thus of damaging the UK economy's international competitiveness in the long term.

"A successful anti-avoidance measure must increase the tax take while neither adversely affecting transactions not primarily designed for tax-avoidance purposes nor imposing on business a burden of compliance disproportionate to the additional revenue generated.

"Not all the measures in the Bill will pass those tests, and in Committee we will offer suggestions for achieving its anti-avoidance objectives without the collateral damage that the current drafting risks."

Legislation 'by press release'
The second concern was "the direction in which the Government are taking the tax code". Certainty and transparency are the hallmarks of a fair, effective and competitive tax system, Hammond said.

"A taxpayer is entitled to know with certainty - be it an individual or a multinational corporation - what he may or may not do in planning his tax affairs. He is entitled to expect that his treatment be laid down in statute, not determined by administrative fiat; he is entitled to expect that another taxpayer in similar circumstances will receive treatment similar to his; and he is entitled to be protected from retrospective or retroactive legislation."

The Bill gives to officials powers that "ought to be exercised by Parliament", he claimed, so that "Revenue guidance will determine how much of the complex corporate anti-avoidance legislation works in practice, and by the use of retroaction not just back to the date of a press release - it is bad enough, but perhaps fitting, that a Government who govern by spin have determined to legislate by press release - but back even further, fundamentally altering the future commercial outcome of arrangements entered into perfectly legally, and sometimes, as in the case of the venture capital industry, with the active endorsement of the Treasury".

"In so doing, the Bill introduces an arbitrariness that undermines the fairness and predictability that are essential elements of an effective tax system," he said.

Andrew Goodall
Editor, TaxZone

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