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BDO: HMRC must discriminate between tax planning and tax avoidance

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A leading firm of accountants has welcomed ‘in principle’ the government’s intention to consider the introduction of a general anti-avoidance rule (GAAR) but has called on the Chancellor to provide clarity about what the UK government perceives to be the tax avoidance that must be tackled.

BDO has warned of fears in the business community that the government will impose additional burdens by focusing on ‘acceptable tax planning’ resources earmarked for tackling illegal evasion and legal avoidance.

Nearly two thirds of UK businesses responding to a recent survey feel that the current tax framework is so complex that ‘they are not clear as to what constitutes legitimate tax planning or whether they will be accused of tax avoidance’, the firm said.

The Financial Times reported last weekend that six out of ten people taking part in a  Financial Times-Harris poll said ‘they thought it was wrong for UK businesses to “employ controversial but legal means of reducing their tax contribution at a time of economic uncertainty”.’ Only 15% of respondents ‘agreed it was acceptable to use legal tax avoidance techniques’.

BDO’s report published today, ‘Tax challenges – an imperative to discriminate’, warns of a ‘real danger’ that the UK will continue to be viewed as having ‘an increasingly unfriendly’ tax regime. This alone would lead to erosion of the tax base, it suggests.

‘There is, of course, a complementary perspective that to facilitate [tax cuts and deficit reduction], taxpayers and advisers need to accept HMRC must not only be intolerant of, and punish, tax evasion more severely but must also seek to combat the legal but artificial pre-packaged tax avoidance schemes which have often been marketed with overly optimistic opinions about what the Courts will decide when these schemes are identified and challenged,’ said BDO LLP’s senior tax partner Stephen Herring and head of tax Paul England.

The firm also acknowledged that tax authorities ‘may, properly, act together to target wholly artificial structures seeking to achieve cross-border arbitrage from a mismatch between the tax rules in two or more jurisdictions’.

But this did not justify a ‘concerted attack’ on all forms of tax planning by international groups.

‘This is exacerbated by HMRC appearing, on occasions, to take an aggressive stance towards some commercially driven business transactions, with many feeling as though they are being treated as guilty until proven innocent.’

Herring said a start had been made in reforming the UK tax code. ‘These reforms need to be matched by a more selective and discriminating approach by HMRC, particularly when it becomes clear that their initial questions concern bona fide, commercially driven events. If this is not addressed, we will see fewer businesses established in the UK, leading to the erosion of the tax base, thereby reducing the prospects for cuts in corporation tax and income tax rates in the medium term,’ he added.

The firm said a reliable and simple clearance mechanism must be a prerequisite to any GAAR.