UK: International Tax - April 2011

Last Updated: 2 July 2011
Article by James Quarmby

Mind the gap

The 'tax gap' is one of those phrases (like 'fairness' and – even worse 'hard working families') that politicians like to throw around when discussing the nation's finances. The tax gap is based on the fanciful idea that there is a sum of money that each taxpayer (be that an individual or company) should pay in his/her or its circumstances. The reality, however, is that with such a complex taxation regime as ours - let's not forget we now have the longest tax code in the world – it is virtually impossible to say how much tax each taxpayer should pay.

Therefore, any calculation of the tax gap will be based on wild assumptions and founded on a political ideology which despises personal wealth whilst, at the same time, relying on it to prop up our bloated public finances.

If the government really wanted to reduce the tax gap then it would make our tax laws simpler for ordinary human beings to understand. It would also reduce the punitive rates of tax now suffered by high earners and which provide a real motivation for taxpayers to avoid tax. Remember, we now have an effective rate of tax of 60% for people earning over £100,000, due to the effect of the removal of the personal allowance. This then settles down to 'just' 50% for those over £150,000 (or 52% if you are employed). The experience in many countries, including our own, has shown that when you lower tax rates for the higher paid you actually increase the overall tax take as this benefits the economy and generates wealth. However, that would involve long term thinking and courage – something our politicians sadly lack.

HMRC's new anti avoidance strategy

In the HM Treasury's document entitled "Tackling Tax Avoidance", released on Budget Day, it says that the government has "inherited a tax system with a tax gap of around £40billion". This document promises new – and exciting – anti avoidance measures to try and reduce that gap. So, what do we have to look forward to?

  • There will be a system to 'list' specific avoidance schemes. If taxpayers then enter into those schemes they will be taxed as if they hadn't entered into the scheme at all and will therefore be expected to pay the tax that the scheme purports to avoid. It's like a rather exciting game of 'pretend'. What is worrying about this development is that it enables HMRC to decide what works or not, without the inconvenience of going to the courts. It therefore substantially weakens the rule of law which is designed to protect our citizens from the arbitrary exercise of executive power.
  • They haven't given up on the idea of a general anti avoidance rule (GAAR) and a study group led by Graham Aaronson QC is supposed to be report by 31 October 2011.
  • There is a commitment to keep introducing targeted anti avoidance legislation for specific measures. Whilst on that subject, it mentions that we can expect more legislation on the use of double taxation treaties to avoid UK taxation. I suspect this will be another attempt to unilaterally override treaty benefits.
  • It seems that HMRC will continue with its pronouncements on what it thinks are the high risk areas of tax avoidance, particularly through the use of their ominously named "Spotlights". For some reason, these always make me think of WWII era prisoner of war guard towers. Am I the only one?
  • The rules on disclosure of tax avoidance schemes (DOTAS) will apparently be 'improved'. Readers will be aware that these rules have already been significantly 'improved' with the inclusion of an obligation for promoters to provide lists of clients who have taken up avoidance schemes. We can now expect new "hallmarks" for schemes which must be disclosed.

So what do we do now?

It's certainly going to be more difficult to use structured tax avoidance techniques going forward. However, there is a glimmer of light. A couple of weeks ago the EU Commission issued a formal request to the UK government to review the anti-avoidance legislation in Section 720 Income Tax Act 2007 and Section 13 Taxation of Chargeable Gains Act 1992. The Commission thinks that these provisions are incompatible with the fundamental freedoms under the EU Treaty.

Of course, the Commission is right. For a number of years now I have been advising clients to use companies in low tax EU jurisdictions, such as Malta and Cyprus, as an alternative to the usual BVI or Cayman option. EU law is one area where our Parliament is not supreme and this means that if taxpayers rely on EU law for their tax planning, they will have a far more robust position to those just relying on loopholes in our domestic law.

Taxation Awards

I am delighted to report that Thomas Eggar has been shortlisted for the 2011 Taxation Awards – 'Best Tax Team in a Law Firm' category. Wish us luck!

Household tip

Relevant for anyone going away on holiday. One way of reducing irritation from mosquito bites is to wet a bandage in cold water, rub with soap and apply to the bite. I've no idea whether this actually works, but it sounds plausible.

Tax Engine gets a re-fit

The tax engine has been chugging away without a break for a couple of years now and, to be honest, the bodywork could do with a lick of paint. I've also noticed a squeaky wheel or two and a mysterious oil leak. So, we have decided to shunt the Engine into the Tax Sheds for a complete re-fit. As the "Fat" Controller, it is my job to supervise these works and , as such, I will also be away for the next three months. But, fear not, there are plenty of Thin Controllers to help you in my absence. Do give them a call if you need any help.

The contents of this brochure are intended as guidelines for clients and other readers. It is not a substitute for considered advice on specific issues. Consequently, we cannot accept any responsibility for this information or for any errors or omissions.

Thomas Eggar LLP is a limited liability partnership registered in England and Wales under registered number OC326278 whose registered office is at The Corn Exchange, Baffin's Lane, Chichester, West Sussex, PO19 1GE (VAT number 991259583). The word 'partner' refers to a member of the LLP, or an employee or consultant with equivalent standing and qualifications. A list of the members of the LLP is displayed at the above address, together with a list of those non-members who are designated as partners. Regulated by the Solicitors Regulation Authority. Lexcel and Investors in People accredited.

Thomas Eggar LLP is not authorised by the Financial Services Authority. However, we are included on the register maintained by the Financial Services Authority so that we can carry on insurance mediation activity which is broadly the advising on, selling and administering of insurance contracts. This part of our business, including arrangements for complaints and redress if something goes wrong, is regulated by the Solicitors Regulation Authority. The register can be accessed via the Financial Services Authority website. We can also provide certain further limited investment services to clients if those services are incidental to the professional services we have been engaged to provide as solicitors.

Thesis Asset Management plc, our associated financial services company, provides a comprehensive range of investment services and advice. Thesis is owned by members of Thomas Eggar LLP but is independent of and separate to it. No lawyer connected with Thomas Eggar LLP provides services through Thesis as a practicing lawyer regulated by the Solicitors Regulation Authority. Thesis is authorised and regulated by the Financial Services Authority. Thesis has its own framework of investor protection and professional indemnity cover but Thesis clients do not enjoy the statutory protection of solicitors' clients.

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