UK: Tax Update - Monday 28 November 2011

Last Updated: 30 November 2011
Article by Richard Mannion

1. General news

1.1. GAAR Study

The report by Graham Aaronson QC has been published with a clear recommendation that Government should introduce a narrowly focused general anti-abuse rule, rather than one with broad application.

The report sets out the conclusions of the GAAR Study group and puts forward suggested legislation and guidance notes, as summarised below.

Summary of conclusions

  • In broad terms the purpose of the study was to consider whether the introduction of some type of general anti-avoidance rule would be beneficial for the UK tax system.
  • One of the most critical factors was whether introducing such a GAAR might erode the attractiveness of the UK's tax regime to business.
  • The report concludes that introducing a broad spectrum general anti-avoidance rule would not be beneficial for the UK tax system, as it would carry a real risk of undermining the ability of business and individuals to carry out sensible and responsible tax planning. Such tax planning was considered an entirely appropriate response to the complexities of a tax system such as the UK's.
  • A broad spectrum rule would require a comprehensive system for obtaining advance clearance for tax planning transactions which would have significant resource burdens for all concerned. The group was also concerned that a clearance mechanism would give HMRC wide discretionary powers.
  • The report concluded that bringing in a specifically targeted anti-abuse rule which does not apply to responsible tax planning would be beneficial for the UK tax system. Such a rule could bring a number of significant benefits.
  • The rule should initially apply to the main direct taxes – income tax, capital gains tax, corporation tax, and petroleum revenue tax. It should also cover national insurance contributions (which would require separate legislation). At a later stage, when the GAAR is seen to be operating fairly and effectively, consideration should be given to including other taxes such as stamp duty land tax.
  • The rule would not apply to VAT, because VAT has its own anti-abuse rules derived from EU law.
  • A GAAR would highlight the need to improve the specific legislation, as the GAAR will operate most effectively where the principles underlying the specific tax rules are clear. Thus one of the advantages of a GAAR would be to encourage legislators to consider more carefully the principles behind proposed legislation.

Perceived benefits of the moderate general anti-abuse rule proposed include:

  • It would deter (and, where deterrence fails, counteract) contrived and artificial schemes.
  • It would reduce the need for the Courts to stretch the interpretation of legislation in order to defeat abusive planning and thereby reduce the uncertainty that such interpretations introduce for the wider community.
  • Enacting an anti-abuse rule should make it possible to draft future tax rules more simply and clearly.
  • In due course it should be possible to initiate a programme to reduce and simplify the existing body of detailed anti-avoidance rules.
  • A targeted anti-abuse rule will not apply to the centre ground of responsible tax planning. Consequently there will be no need for a comprehensive system of clearances, with the resource burdens which such a system would require.
  • There should be an independent advisory panel that would help taxpayers and HMRC define the line between abusive and non-abusive planning, without running the risk of giving greater discretionary powers to HMRC.

Draft legislation

Appendix 1 to the report contains an illustrative draft of a general anti-abuse rule. It would counteract 'abnormal arrangements' which, but for the GAAR, would achieve an 'abusive tax result' from the application to the arrangements of the provisions of the Acts, and which are contrived to achieve such a result.

It can only apply if an abnormal feature can be considered to have the sole or one of the main purposes of the achievement of the abusive tax result by:

  • Avoiding or exploiting particular provisions of the Acts, or
  • Exploiting inconsistencies in the provisions of the Acts, or
  • Exploiting perceived shortcomings of the Acts.

The draft GAAR contains a series of important safeguards to ensure that the centre ground of responsible tax planning is effectively protected. These safeguards are –

i) an explicit protection for reasonable tax planning (Safeguard 1). Reasonable tax planning is regarded as a reasonable exercise of choices of conduct afforded by the provisions of the Acts (ultimately a decision for the courts, unless resolved by the safeguards below where there is a difference of opinion);

ii) an explicit protection for arrangements which are entered into without any intent to reduce tax (Safeguard 2);

iii) placing upon HMRC the burden of proving that an arrangement is not reasonable tax planning (Safeguard 3);

iv) having an Advisory Panel, with relevant expertise and a majority of non-HMRC members, to advise whether HMRC would be justified in seeking counteraction under the GAAR (Safeguard 4). This Advisory Panel should publish anonymised digests of its advice.

v) giving taxpayers and HMRC the right to refer to material or information which was publicly available when the tax planning arrangement was carried out. This could provide valuable help in determining whether an arrangement should be regarded as reasonable tax planning: This material should be available as evidence even if it would not otherwise be admissible as a matter of law.

vi) requiring that potential application of the GAAR has to be authorised by senior officials within HMRC in order to ensure consistency and responsibility in its application by HMRC.

Treasury issued a press release which says: "The Government will consider the report in detail and the extent to which the proposals could add to HMRC's existing legislative and administrative approaches and further reduce levels of tax avoidance. The Government will discuss the implications of the proposed rule with business and tax practitioners and respond fully at Budget 2012, setting out its plans for further, formal public consultation, if appropriate."

The aim of reducing abusive tax avoidance is to be commended, but if the idea of introducing a GAAR is to be taken further it would be helpful to see what areas of legislation could be simplified or (in the case of clearance applications mentioned in the report) be removed. To be workable there would need to be a clear understanding of the boundary between reasonable tax planning and exploiting inconsistencies in the legislation.

The report suggests future drafting could be improved by a more careful consideration of the principles behind any legislation. It would be helpful if a review panel that included HMT, HMRC, industry and the professions could review the existing legislation to ensure it is currently in line with the principles underpinning it and fit for purpose.

1.2. Working Together Issue 46

This issue includes an exchange of views about the delay that occurs before HMRC notifies employers that a PAYE penalty has arisen. HMRC say "Where taxpayers don't send in returns, HMRC has to act to get them in - all the more so in the case of employer returns where delays can be detrimental to employees. Even if a taxpayer rectifies their mistake quickly, the delay costs public money. The longer the delay, the greater the cost to HMRC, and the greater the overall compliance risk - regardless of whether the taxpayer has deliberately delayed, or has made 'a genuine mistake'."

Notwithstanding its commitment to providing a 'customer-centric' service, HMRC seems to have missed the customer service point here altogether. The basic fact is that PAYE penalties increase the longer that the end of year return is outstanding and in a number of cases heard by the First Tier Tribunal the employer quite clearly believed that the return had been lodged correctly and it only became aware of a problem once HMRC had issued the penalty notice, by which time several months' penalties had accrued.

HMRC says that the delay in issuing penalty notices is to allow employers to tell them they have no return to make, but that does not seem like a good reason to delay notifying employers who need to file a return and think they have done so but for some reason HMRC has not received it.

2. Private Clients

2.1. Self Assessment payment slip

HMRC recommend that tax payments are made electronically as it is safer and more secure but if choosing to post the tax payment the HMRC computer printed payslip should accompany the cheque.

Where a computer printed payslip is not to hand the details to link the payment to the Self Assessment account are required and HMRC had provided a downloadable form, which could be completed with the necessary information. This has been replaced with an arrangement where the details are entered online and a completed form produced.

2.2. Modernising the administration of the personal tax system

We have submitted the following response to the consultation paper: "We wish to make a limited response to the section headed 'Vision for the Future' in the consultation paper published in November 2011.

Pre –filled tax returns

Questions for consultation

9. If you complete an SA return, do you think you would benefit from your information being pre-filled in your SA return?

10. What do you consider the benefits and risks of pre-filling to be?

11. What do you think the most important areas are to pre-fill that would reduce the potential for mistakes and save time?

We welcome the possibility of pre-filling tax returns, both for represented and non-represented taxpayers. At first glance this move could be seen as reducing the cost of preparing tax returns and thereby reducing the income of agents. However in reality it would remove an element of routine work that is very time-consuming and difficult to charge for, and allow more time to be spent on higher value work and advice. In addition it should hopefully significantly reduce the number of HMRC enquiries about trivial errors and oversights.

In our view pre-filling should apply to all areas where present and future technology would enable information to be captured by HMRC with a high degree of confidence in its accuracy.

We would urge HMRC to make a start at the earliest opportunity with those areas where it already has that high degree of confidence, for example earnings (per P60), benefits in kind (per P11D), personal pensions, state pension, other taxable state benefits and underpayments for earlier years.

In the fullness of time it should be possible to extend the pre-filling system to other sources of income, like bank interest. However it needs to be recognised that considerable ground work would be required to ensure that the right amount of interest was attributed to the right taxpayer. Over recent years we have seen many enquiries regarding amounts of bank interest which banks have reported to HMRC where the name shown on the report on its own is not sufficient to identify the correct taxpayer. For example the case where a bank reports an amount of interest relating to 'John Smith, 33 High Street' and there are three John Smiths at that address - grandfather, son and grandson. Or Mr Smith is nominee for his child, or for the local football team.

We suggest that each bank would need to be more precise over the status of each investor and in the case of individuals they would need to record each customer's NI number and that will take time and involve costs for the banks. Special rules would be required for joint accounts where the percentages of ownership might vary over time.

Most investment managers provide end of year summaries of income and gains for their clients and so in theory it should also be possible to capture this information centrally. However it appears that investment managers' reports could only deal with UK source income, as the taxpayer would have to self-assess his or her reporting status for offshore income. So far as capital gains are concerned the investment manager may not have all the necessary cost details provided to them by their client and so it is doubtful whether their CGT calculations could be regarded as definitive.

Assuming that a robust system was developed for reporting these sources of income it would still be necessary for the taxpayer to be able to override the pre-filled data. This could perhaps be done by way of a 'reason' box like the existing claim to reduce payments on account.

Pre-filled Tax Statements Questions for consultation

12. Would you like to have an annual tax statement that sets out your income and tax liability for the year?

13. Would you want to view your annual tax statement if it included your overall personal tax contribution, your average tax rate and other general tax information?

14. What else could an annual tax statement show that would be of use and/or of interest to you?

Again we welcome the proposal for pre-filled tax statements. However we would point out that there is a misleading error in this part of the report where it says:

"The majority of UK taxpayers, for whom PAYE collects the right amount of tax, are not required to self assess...."

Whilst it is true that the only nine million or so taxpayers are required to submit self-assessment tax returns, all other taxpayers are in fact required to self assess their liability each year and if they are liable to pay further tax they are required to give notice of chargeability to HMRC in accordance with Section 7 Taxes Management Act 1970. In other words they are still within the self assessment system, but they do not have the benefit of assistance from HMRC in calculating their liability. However there is currently very little education of taxpayers about this requirement.

With this background we consider that pre-filled tax statements would significantly assist taxpayers to comply with their statutory obligation, particularly if the UK statement mirrors the Danish example and "sets out clearly where the information on which the tax calculated has originated and what the individual should do if they don't agree with the figures". We suggest this would need to include a warning of the penalties for failure to comply with the requirement to notify chargeability.

However for this to work properly, statements would need to be issued to all taxpayers and just making statements available to taxpayers who are logged in on-line would not be sufficient.

There is no mention of NIC liabilities being included in the pre-filled statement although the paper makes the repeated point about the need to improve transparency in terms of both income tax and NIC. We suggest that the pre-filled statement should include detailed information about the NIC paid during the year, but also go on to set out the taxpayer's contribution record so they can see where they stand in terms of meeting the various obligations for full state pension and other contributory benefits. That would be a real step forward in transparency and one that should be eminently possible bearing in mind that the National Insurance Contributions Office is part of HMRC."

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Richard Mannion
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