So, I got a little bit angry at reading the TUC’s research on the GAAR.
The first thing that irked me was the TUCs claims about HMRC’s estimates of how much the GAAR will raise. Now, I would guess that the purpose of the GAAR is to ensure that other pieces of legislation collect the amounts of tax intended, rather than directly raise revenue itself.
As such, the amount directly raised by it should be minimal. If the GAAR works perfectly, it won’t raise any money directly whatsoever.
Also, do you honestly expect the people who prepared the impact assessment to put down a large figure which they would have to show they have delivered on?
And how are they ever going to calculate the amount of tax on behaviours that haven’t happened because they have been deterred by, and only by, the GAAR?
But onto the specific points they raise:
- “The Rule’s definition of tax abuse is far too narrow” – that’s a subjective call, but it is too narrow for what? The cases highlighted don’t appear to be avoidance at all. I am comfortable that Starbucks isn’t avoidance, though they’ve made their own bed by offering to pay tax voluntarily. I haven’t looked in depth at the other two, but I wouldn’t categorise it as avoidance. I’d say a change in permanent establishment and transfer pricing rules is needed to rectify whatever people are upset about there. Any legislation that tackled those situations would, by definition, not be anti-avoidance legislation. Of course, the mention of these “stories” might just be for the benefit of somebody who might have a sensationalistic book to sell regarding these companies at present.
- “There is a complex test to determine when the Rule can be used by the government” – the fact that double reasonableness test can be put in this bullet point shows that it is not complex. It is a simple test. It just happens to be slightly abstract. And besides, it is literally asking the question “could the man on the Clapham Omnibus possibly think that the action taken is reasonable?” Which is pretty much what many people have asked for, isn’t it?
- “The Rule is adminstered [sic] by a panel of experts – who are all drawn from the tax avoidance industry and can be expected to have a broad view of what ‘reasonable’ action might be” – Dealing with the substance of the point, you need to have people who sufficiently understand the tax system and have a degree of commercial awareness. I cannot see how somebody who doesn’t work in tax could fulfil the role. Besides, as the panel’s view is not binding, it’s power only exists if both taxpayers and HMRC respect its view. Otherwise it will render itself redundant. Partly for this reason I was OK with the idea of having HMRC representation on the panel.
- “The Rule requires HMRC to show that a scheme is abusive, rather than requiring the corporate taxpayer to show why it is not” – good. I do not think that HMRC should be given arbitrary judgement over what is abusive or not. This is a natural safeguard to protect the taxpayer and I think it is necessary. I would rather accept that some abusive practices slip through because the action may reasonably be considered not to be abusive, rather than punishing many non-abusive practices which might seem to be abusive. No system is going to be infallible and I prefer the option which sees innocent people not subject to injustice. I consider it to be more morally acceptable.
- “There is no penalty regime attached to the Rule” – not a new one, no. But the GAAR is within self-assessment and subject to interest and penalties as with other disclosures on the tax return. Therefore people could receive penalties of up to 100% of the tax due in certain circumstances. Maybe even 200% if it involves an offshore element . Yes, I am sure people will then complain that the individual is not banged up for evasion, but the penalties are there.
- “There is no ‘clearance system’ attached to the Rule” – the whole point of this is that it is a deterrent: the uncertainty is intentional. Otherwise, it would be easy to do things that are certainly not caught instead of things that certainly are. And, much more importantly, I genuinely do not think HMRC could cope with the administration in a clearance system. And as for the argument that “this also means that the rule fails to prevent tax abuse before it happens”, I disagree. That’s the point of the uncertainty – it deters tax abuse and behaviours that are approaching tax abuse. And we cannot prevent all tax abuse before it happens. Come on, what do you want, something similar to Minority Report and have Precog Inspectors of Taxes?
Anyway, when I read it (initially via Tim Worstall’s blog), I felt compelled to write something about it. I was particularly upset about the use of the term “tax avoidance industry” in the third point.
I do not recognise the term “tax avoidance industry” in association with the individuals on the panel. I don’t know them personally, but I find the term particularly insulting and appears intentionally inflammatory.
I don’t know if it is just me, but I take real offence at the use of terms like that about my fellow professionals. Or if the term “tax avoidance industry” was meant to refer to the tax profession in general, I find it completely ignorant.
I am not a tax avoidance adviser. I am a tax adviser.
The TUC talk about the negative nature of uncertainty in tax in a context where uncertainty is intended. But there is plenty of uncertainty where it is not intended or desirable.
The self assessment system would not work without tax professionals providing advice to taxpayers on how to actually comply with the law. The tax system works thanks to both tax professionals in the private sector and within HMRC administering the system.