News Alert: Tax Avoidance at the Top of Government’s Agenda?

In the New Year, the government seems to be giving top priority to tackle tax avoidance and evasion issues with global companies not paying UK corporation tax, celebrities having personal tax arrangements and actual owners of high-end properties that are held through overseas companies brought to light by the media.

Most people agree that it is important to pay taxes for the good of the society, though they may content that the rates could be little lower or disagree on how the collected funds should be put to use by the government. However, a couple of questions always plague our minds: What is the fair amount of tax that we should pay? Whether we should maximize our tax liability by seeking advice from a professional? Should we not make use of eligible reliefs, allowances and loopholes to bring down our tax liability? The general feeling is that legitimate tax planning is acceptable, but is should not be carried too far so that it becomes tax evasion or avoidance.

Tax avoidance by taking advantage of inadequacies of and loopholes in tax legislation, interaction between UK legislations and foreign laws may not be explicitly termed as illegal, but media expose and public outcry reveal that it is a fine line between morality and legality.

Many consider that concealing real circumstances so as to avoid paying tax amounts to crossing the moral line, especially by a person who has more resources compared to others. Moreover, the middle path of tax avoidance, the one between tax planning and abuse, may be within the law but is generally considered unacceptable and unfair. The question, therefore, is how legislators can tackle such tax arrangements.

The study group that was set up after the June 2010 Budget to consider the benefits of establishing a general tax anti-avoidance rule (GAAR) submitted a report in November 2011 favoring its introduction. The objective of the GAAR would be to encourage responsible tax planning and tackle artificial and contrived schemes that are considered to be intolerable. The government accepted a major part of the recommendations of the group led by Graham Aaronson and HM Revenue and Customs (HMRC) published a paper in June 2012 on GAAR’s proposals. Subsequently in December, the revised draft legislation was published with a view to making it effective from April 2013.

The GAAR empowers HMRC to tackle tax arrangements that are considered as abusive by making just and reasonable adjustments. A variety of taxes such as income tax, stamp duty land tax and capital gains tax, among many others, are covered by GAAR. Additionally, inheritance tax planning will also be included in GAAR’s scope in spite of one-third of the respondents raising objections in summer 2012 consultations.

The new rules are likely to be discussed at length prior to the acceptance of the Finance Bill 2013, but it will be interesting to watch as to how the double-reasonableness test proposed in the draft legislation will operate in practice. Opinions of the tax practitioners published thus far indicate that many are doubtful as to whether the test will provide sufficient certainty about reasonableness, especially because of the confirmation by the government that there will be no clearance process under GAAR.

The squeezed budgets, GAAR, HMRC’s December 2012 report on closing in on tax evasion and the promised £77 million to HMRC for expanding its evasion and avoidance activities are all likely to put the government under moral and financial pressure in the New Year.