Tax Avoidance - Where are we now?
This country has come a long way since the 1930s, when a leading judge could say that a man was entitled to arrange his tax affairs as he wished within the law in order to minimise his tax liabilities. Now anti-avoidance is a key feature of government tax policy, and the government’s definition of the line between acceptable and unacceptable tax avoidance is very much a moving target.
We now have a General Anti-Avoidance Rule to combat artificial tax-driven transactions, and the scope of anti-avoidance legislation grows ever wider. The latest two targets of the government’s wrath are areas that, until very recently, most tax advisers would have characterised as acceptable tax mitigation rather than extreme and artificial tax avoidance, namely the use of company partners in partnerships to defer income tax and the redistribution of profits around groups of companies. This does beg the questions of what will be next, and how do we make sense of what has happened and is happening in this area?
I would identify four key factors relating to modern government fiscal policy that help to explain the trend in tax legislation:
- Errors by governments past
There has been a regrettable tendency by recent governments of all hues to tinker with the tax system, without due regard to the likely upshot of their actions. For example, Gordon Brown introduced a zero rate of corporation tax, and was then surprised when small businesses flocked to form companies. Alastair Darling was also obliged to backtrack on certain income tax and capital gains tax changes once their full implications came to light. I have detected a greater care in this government’s amendments to tax legislation in this respect.
- The banking crisis and public reaction
Such was the depth of the crash caused by the banking crisis that people in general realised both that we had been living in a fools paradise created by excessive debt and that it would take the economy a long time to fully recover. This has fostered a sense that ‘we are all in this together’, and that we should all be paying our share of the cost. Hence the media frenzy over tax avoiders as diverse as Jimmy Carr, Starbucks and Google, and a growing sense that artificial tax avoidance has become utterly beyond the pale, not only for the public at large, but for a large proportion of tax professionals also.
- Greater targeting of tax reliefs
I now identify a coherent strategy to government tax policy which has sometimes been absent in the past. There is a drive to encourage employment (national insurance breaks for employers in general, and of young people in particular), to encourage capital investment by small business (very generous tax reliefs for such investment), to encourage saving (nil rate income tax band for savings income) and in particular to establish the UK as the world leader in research and development (extraordinarily generous tax reliefs for R & D expenditure and the patent box corporation tax regime). Paying for these generous reliefs involves the population in general picking up its share of the tax burden without seeking artificial means of avoiding or deferring liability.
- Politics
There is a strong trend in the modern UK economy away from full-time employment into short-term contracting and self-employment. This means that a greater number of voters are in business for themselves, and makes tax legislation relating to mainstream tax planning for the self-employed a very interesting subject for any government wishing to maximise its chances of re-election.
The last Labour government took a protracted legal pot-shot at the use of limited companies to share trading income between spouses, which was ultimately unsuccessful. They then shelved proposed legislation to make this practice less effective for tax purposes. There remains a highly significant advantage to profitable businesses in operating through limited companies and extracting profits as dividend rather than salary. Whilst the mixed partnership anti-avoidance legislation referred to above nibbles at the edges of this practice, the fundamental tax advantage remains in place, at massive cost to the Exchequer.
When, if ever, we will see a government prepared to court the electoral unpopularity of addressing this huge issue is one of the most interesting political questions in modern Britain. I have one prediction, which is that if we do, it will be in the first Budget of a Parliament rather than the last!
Mark Simpson
Simpson Tax Consultancy Limited