In his recent interview with The Times, John McDonnell outlined that Labour planned to stamp out the promotion of tax avoidance by advisers, noting that those ‘enabling tax avoidance’ should ‘pay for it’ with ‘bigger fines’.
One of the potential difficulties with this type of policy is determining what constitutes tax avoidance and what is legitimate tax planning. Tax avoidance is not defined in legislation and differing opinions on its meaning have been offered by Parliament, HMRC officers and in the courts over the years.
In an attempt to clarify the position, a Commons Library Briefing Paper published in May 2019 defines tax avoidance as ‘bending the rules of the tax system to gain an advantage that Parliament never intended. It often involves contrived, artificial transactions that serve little or no purpose other than to produce this advantage. It involves operating within the letter, but not the spirit, of the law’.
It will often be quite clear whether advice represents avoidance or not based on the definition above. The complexity of tax legislation can however throw up challenges for advisers in certain situations. As David Gauke, then Treasury minister, noted in 2010, ‘there is a distinction [between tax avoidance and tax planning], although there will be occasions when the line is a little blurred’.
In particular, as noted in that briefing paper, the suggested definition of avoidance has its challenges as establishing Parliament’s intention is not always straightforward.
When the courts attempt it, the focus is often on interpreting the wording of the legislation itself. An adviser might reasonably assume that surrounding commentary or guidance around the time the legislation was written is a useful indicator of Parliament’s intention but that is not always taken into account in the courts. As a result, an adviser and their client can be left on uncertain ground as to whether they are acting in ‘the spirit’ of the law despite best intentions to stand as far away from the ‘blurred’ line as possible.
In practice, substantial tax anti-avoidance rules have already been introduced over the last ten years or so. In particular, measures have been introduced such as the general anti-abuse rule (GAAR) and the widening scope of the disclosure of tax avoidance scheme (DOTAS) rules, which effectively act as a disincentive to taxpayers and advisers alike in engaging in clear tax avoidance activities.
HMRC figures indicate that tax avoidance relating to income tax, national insurance, capital gains tax and corporation tax still amounted to £1.6bn in the 2017/18 tax year. That remains a substantial figure but in the context of the wider tax gap of £35bn (the difference between what HMRC expect to receive in tax and the reality), tax avoidance is diminishing.
There is therefore some potential for Mr McDonnell’s proposals to narrow the tax gap further. If the suggested ‘bigger fines’ cited are restricted to apply to clear avoidance cases such as those within the GAAR, then that might act as an effective deterrent to those continuing to engage in such activity and still be reasonably clear for advisers. The difficulty for advisers and their clients is that such proposals may widen the definition of ‘tax avoidance’ to the extent that what it means in practice becomes unclear.
Home >Articles > Will tax avoiders be hit with a bigger stick?
Will tax avoiders be hit with a bigger stick?
In his recent interview with The Times, John McDonnell outlined that Labour planned to stamp out the promotion of tax avoidance by advisers, noting that those ‘enabling tax avoidance’ should ‘pay for it’ with ‘bigger fines’.
One of the potential difficulties with this type of policy is determining what constitutes tax avoidance and what is legitimate tax planning. Tax avoidance is not defined in legislation and differing opinions on its meaning have been offered by Parliament, HMRC officers and in the courts over the years.
In an attempt to clarify the position, a Commons Library Briefing Paper published in May 2019 defines tax avoidance as ‘bending the rules of the tax system to gain an advantage that Parliament never intended. It often involves contrived, artificial transactions that serve little or no purpose other than to produce this advantage. It involves operating within the letter, but not the spirit, of the law’.
It will often be quite clear whether advice represents avoidance or not based on the definition above. The complexity of tax legislation can however throw up challenges for advisers in certain situations. As David Gauke, then Treasury minister, noted in 2010, ‘there is a distinction [between tax avoidance and tax planning], although there will be occasions when the line is a little blurred’.
In particular, as noted in that briefing paper, the suggested definition of avoidance has its challenges as establishing Parliament’s intention is not always straightforward.
When the courts attempt it, the focus is often on interpreting the wording of the legislation itself. An adviser might reasonably assume that surrounding commentary or guidance around the time the legislation was written is a useful indicator of Parliament’s intention but that is not always taken into account in the courts. As a result, an adviser and their client can be left on uncertain ground as to whether they are acting in ‘the spirit’ of the law despite best intentions to stand as far away from the ‘blurred’ line as possible.
In practice, substantial tax anti-avoidance rules have already been introduced over the last ten years or so. In particular, measures have been introduced such as the general anti-abuse rule (GAAR) and the widening scope of the disclosure of tax avoidance scheme (DOTAS) rules, which effectively act as a disincentive to taxpayers and advisers alike in engaging in clear tax avoidance activities.
HMRC figures indicate that tax avoidance relating to income tax, national insurance, capital gains tax and corporation tax still amounted to £1.6bn in the 2017/18 tax year. That remains a substantial figure but in the context of the wider tax gap of £35bn (the difference between what HMRC expect to receive in tax and the reality), tax avoidance is diminishing.
There is therefore some potential for Mr McDonnell’s proposals to narrow the tax gap further. If the suggested ‘bigger fines’ cited are restricted to apply to clear avoidance cases such as those within the GAAR, then that might act as an effective deterrent to those continuing to engage in such activity and still be reasonably clear for advisers. The difficulty for advisers and their clients is that such proposals may widen the definition of ‘tax avoidance’ to the extent that what it means in practice becomes unclear.
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