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Tackling avoidance: cautious welcome for ‘new strategy’

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Tax professionals have found a good deal to be positive about in a paper setting out the government’s strategy for tackling tax avoidance – an issue that seems set to assume an even higher profile than it has in recent months.

As the protest group UK Uncut continued its campaign of direct action against businesses – overshadowed last weekend by the violence of a small minority of the people attending a TUC anti-cuts march – a committee of MPs appeared set to investigate corporate tax avoidance.

The Guardian reported this week that George Mudie, chairman of the Commons Treasury sub-committee, said there was growing public interest in the issue. ‘I will be seeking to take the sub-committee into it unless the chairman [Conservative MP Andrew Tyrie] says we will do it in the full [Treasury Committee],’ he told the paper.

The government is committed to a more strategic approach than its predecessors, one that ‘gets to the root of the problem, rather than treating the symptoms’, David Gauke, the Exchequer Secretary, said in his foreword to Tackling tax avoidance, published alongside last week’s Budget.

The paper sets out an ‘ambitious’ package of measures including a new anti-avoidance strategy; the first announcements of reviews in high risk areas of the tax system; options to reduce the cash flow advantage from using avoidance schemes; and targeted responses to specific avoidance risks.

Vincent Oratore, President of the CIOT, said the government’s operational approach to tackling avoidance ‘seems quite understandable in the current environment’. But he added that ‘we would urge the government not to lose sight of evasion and other criminal activity which has a far greater impact on exchequer revenues’.

Cash flow
HM Treasury said it will consult on proposals to remove the cash flow advantage that ‘tax avoiders’ can obtain by using high risk avoidance schemes.

'At present, a minority exploit the cash flow advantage of retaining tax during a dispute over liability, in some cases, even where the courts have already ruled against similar transactions. The government is determined to address this systemic advantage to reduce the appeal of participating in high risk avoidance,’ it said.

Users of schemes will be encouraged to pay the disputed tax earlier than is currently required, or ‘will face an additional charge for late payment of the tax when it is found to be due’.

Adam Craggs, Tax Partner at Reynolds Porter Chamberlain, said: ‘Previously taxpayers using a tax avoidance scheme that was later found not to work would be charged interest but not usually a penalty. That meant investors in such a scheme could “take a punt” on whether the scheme would work.’

There will now be a significant disincentive for taxpayers to use aggressively marketed tax avoidance schemes, he added.

Helen Lethaby, Tax Partner at Freshfields Bruckhaus Deringer, said the proposal was ‘refreshingly innovative’. It was designed ‘to keep taxpayers honest by removing the cash flow advantages of entering into schemes which are known to be ‘try-ons’.

'Tackling Tax Avoidance was ‘full of good, sensible stuff’, she said, writing in Tax Journal.

‘It is just a shame that the message is not getting through to HMRC: Budget day also saw the publication of eight pages of closely articulated amendments to the sale of lessor rules designed to counter particular disclosed arrangements. The changes involve fiddling around with some definitions and withdrawing an election which had only recently been introduced to protect commercially motivated transactions. All HMRC needed to do was incorporate a motive test.’

HMRC’s ‘new anti-avoidance strategy’ will focus on preventing avoidance at the outset where possible; detecting it early where it persists; and countering it effectively through challenge by HMRC, the paper said.

It also confirmed that the study group examining the case for a general anti-avoidance rule (GAAR) will complete its work by 31 October 2011 and report its conclusions to David Gauke. The government has ‘committed to further, formal consultation if the proposal is taken forward’.

‘I will be astonished if such a rule is not in next year's Budget’, wrote Richard Baron, Head of Tax at the Institute of Directors, in Tax Journal.

But Lethaby observed that ‘HMRC’s continuing antipathy towards simpler motive-based legislation increases suspicion that a GAAR is likely to be kicked back into the long grass’.

While many UK tax practitioners may fear the potential uncertainty caused by a GAAR, Chris Groves, Partner at Withers, commented that ‘the reality is that with the increasingly  interventionist attitude of the courts, taxpayers face that uncertainty now. Better a GAAR should be codified in a coherent policy objective by government, than left to the whims of individual judges’.

‘More intelligent’
‘The overall impression gained from reading the government’s paper is that a slightly more intelligent ministerial team are now in charge,’ said Patrick Cannon, Barrister in Tax Chambers, 15 Old Square.

‘Lazy phrases such as “the right amount of tax” and the deliberate attempt to equate tax avoidance with tax evasion appear to have been left behind. However, disappointingly there is still plenty of management-guru speak,’ he wrote in Tax Journal.