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Tax avoidance under scrutiny

Philip Fisher notes that each of the major political parties is threatening to attack tax avoidance schemes and ponders some possible strategies.

5th Dec 2019
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Only a couple of weeks ago, this column highlighted what appeared to be an error by Shadow Chancellor John McDonnell, who seemed unable to differentiate between tax avoidance and tax evasion.

The bad news is that every political party manifesto ahead of next week’s general election contains promises to attack not only tax evasion but also tax avoidance. As noted last time, tax avoidance remains legal and permissible, with very limited exceptions.

To confuse matters, the Conservative manifesto quotes the relatively common figure for the tax gap of £35bn. Love him or hate him, Richard Murphy believes that the actual figure should be closer to £100bn and, in reality, is probably somewhere in between.

The most significant issue here is that, as far as this writer knows, the tax gap does not include any calculations for sums that might be generated from what is currently regarded as “acceptable” tax avoidance ie almost anything that does not come into the tax evasion category.

It therefore appears that, if the politicians can be relied upon to deliver, then HMRC will be asked to increase its activities in the field of tax evasion. That will come as no surprise and should be welcomed by every reader.

However, there seems every chance that whichever party gets into power will also take things several steps further. Whether we like it or not, those in positions of influence appear to have decided that certain types of tax avoidance are unacceptable and should be outlawed.

From their perspective, this means not only eating into the £35bn but also potentially having the opportunity to drag in billions of pounds more from hitherto commonly used tax avoidance arrangements that were unexceptionable.

There are two obvious ways that future chancellors may seek to achieve such an outcome. First, they could decide to create a whole new raft of anti-avoidance legislation attacking specific areas that are perceived to be abusive. As long the legislation is drafted clearly, at least we will know where we stand. However, that would be unprecedented.

The second alternative represents a missed opportunity by George Osborne. In the years leading up to the introduction of the General Anti-Abuse Rule in 2013, many commentators had anticipated that the UK would follow a number of other countries by introducing a General Anti-Avoidance Rule.

This would have been far more potent, using a scattergun approach to attack any tax avoidance behaviour that was deemed to be unacceptable by HMRC and its legal advisers.

It seems reasonable to assume that whoever wins the impending election will be burdened with their efforts to untangle the unholy European exit mess for the foreseeable future.

After that, given that Chancellors of the Exchequer are always eager to find ways to raise funds that do not give them adverse media attention, very few serious gamblers would be likely to bet against the introduction of vast swathes of additional legislation.

This is the last thing that any of us needs, bringing some activities that had previously been regarded as safely vanilla within the tax net.

What are the top tips? An implementation and expansion of the digital tax concept could be an obvious starting point, along with attacks on non-dorms and perhaps schemes that prevent the Exchequer from collecting what are often large sums of PAYE and NIC.

A canny Chancellor might go the whole hog and take the opportunity to introduce a full-scale anti-avoidance rule. This would potentially give massive powers to HMRC and maximise the tax take.

While this sounds feasible in principle, what is missing from every manifesto is any kind of promise to spend serious money to scope up HMRC both in terms of numbers and skills, following years of impoverishment.

It is all very well to introduce flashy new legislation that complicates an already impossibly difficult area but if there is nobody to oversee it, then we may be back where we started with both newly outlawed avoidance and old-style evasion slipping through the net.

Replies (6)

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By SteveHa
05th Dec 2019 15:57

Or they could abolish all of the niche reliefs (R&D, ER etc.), abolish CGT, IHT etc. and simply tax all profits after vanilla expenses at flat (possibly banded) rates, thereby achieving simplification at the same time.

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Replying to SteveHa:
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By peterdell
07th Dec 2019 11:19

There we go. Perfect answer.

I would also look at quarterly payments just for CT, to stop non-uk nationals using a company for a couple of years and disappearing leaving unpaid tax, but I don't want to detract from your answer.

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By Trethi Teg
06th Dec 2019 09:37

Wow, Mr Fisher seems positively excited about HMRC maximising the tax take.

HMRC powers already too great and lord preserve us all if they are given more. It will not only be the tax evaders and tax avoiders who will pay but those who dare go against whatever HMRC decide they want to do.

More time should be devoted to exposing and controlling HMRC rather than encouraging them.

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By Trethi Teg
06th Dec 2019 09:37

Wow, Mr Fisher seems positively excited about HMRC maximising the tax take.

HMRC powers already too great and lord preserve us all if they are given more. It will not only be the tax evaders and tax avoiders who will pay but those who dare go against whatever HMRC decide they want to do.

More time should be devoted to exposing and controlling HMRC rather than encouraging them.

Thanks (0)
avatar
By Trethi Teg
06th Dec 2019 09:37

Wow, Mr Fisher seems positively excited about HMRC maximising the tax take.

HMRC powers already too great and lord preserve us all if they are given more. It will not only be the tax evaders and tax avoiders who will pay but those who dare go against whatever HMRC decide they want to do.

More time should be devoted to exposing and controlling HMRC rather than encouraging them.

Thanks (0)
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By AndyC555
10th Dec 2019 15:18

"Love him or hate him, Richard Murphy believes that the actual figure should be closer to £100bn"

Yes, well, The House of Commons Briefing paper 7948 did describe Mr Murphy's figures as "deeply and systematically flawed", "an element of double counting is involved", "dangerous if not countered" and using a methodology that had been "comprehensively and extensively criticised in unusually strong terms by other academics".

Perhaps most damning is that included within Mr Murphy's figures was £28bn tax debt which is commented on as follows in the HoC report:

The Tax Research estimate of tax debt is £28 billion. That is a
snapshot figure of all tax owed to HMRC on 31 March 2009,
which does not represent the actual losses to the Exchequer from
non-payment. Almost all tax owed to HMRC is eventually paid,
sometimes within days of becoming due." The actual amount lost "was not £28 billion but £3 billion".

So every penny of £28bn owed to HMRC as at a certain date was included as part of Mr Murphy's tax gap despite £25bn of it being eventually collected.

That's like assuming every single penny of debtors at a company's year end is an unrecoverable debt. How can any figures produced using such methods be given any credence?

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