Budget 2016 predictions: Expect measures to combat tax avoidance and evasion
Donald Drysdale looks ahead to some of the Budget measures expected on 16 March.
Trying to predict what the Chancellor of the Exchequer will say in his Budget Speech on 16 March would be a fool’s errand. However, we already know that anti-avoidance and anti-evasion will be pervading themes.
The UK has a tax gap – the difference between tax collected and the sum that should have been collected. Unfortunately HMRC’s published estimates of the tax gap are over-shadowed by public relations hype such as “HMRC's approach is delivering steady and sustained progress”.
The bottom line is that, in 2013/14, HMRC failed to collect £34 billion, which is 6.4% of all tax liabilities – or more than the entire annual cost of the UK’s defence budget.
The tax gap concerns us all. It represents a real loss to compliant taxpayers, who have to pay more tax as a result. Effective measures are needed to eliminate evasion. However, the right to undertake legal tax planning must be preserved.
No government has yet succeeded in drawing a clear line between acceptable tax planning and unacceptable tax avoidance. For this to happen we need better tax laws.
The general anti-abuse rule (GAAR) was introduced in 2013 to counteract tax avoidance arrangements considered to be abusive. A new penalty of up to 60% of the counteracted tax will be introduced, to apply when a submission by a taxpayer includes arrangements which are later found to come within the scope of the GAAR.
The GAAR procedure will also be changed to facilitate counteraction of the same arrangements by multiple users.
The existing regime to deter promoters of tax avoidance schemes (POTAS) provides two key sanctions – a conduct notice which HMRC may issue where a promoter meets a threshold condition, and a monitoring notice which they may issue where a promoter breaches a requirement in a conduct notice.
A new threshold condition is to be introduced under POTAS, allowing HMRC to issue conduct notices to promoters who have marketed multiple tax avoidance schemes that are regularly defeated.
Serial tax avoiders
From April 2017 new sanctions will apply to taxpayers who persistently engage in avoidance schemes defeated by HMRC. Following a first defeat, HMRC will place the taxpayer on warning that using any further schemes in the following five years, if defeated, will result in penalties based on the understated tax.
While on warning, a taxpayer will have to make annual declarations regarding any further schemes used, on defeat of which they will face tax-based penalties of 20% rising to 60% and will have their names and other details published. If they use at least three defeated schemes seeking to exploit tax reliefs in ways not intended by Parliament, they will be denied most reliefs for a period of three years.
To encourage transparency and compliance, large businesses (groups, sub-groups, companies and partnerships) will have to publish their UK taxes strategies online.
Under a new regime to be introduced, a large business may be subject to ‘special measures’ if it has an ongoing history of aggressive tax planning or refusing to engage with HMRC. After a twelve-month warning period, the business may be put on special measures for at least two years, possibly longer.
In these circumstances it may face a variety of sanctions, which may include removing the defence of reasonable care in relation to behaviours previously notified, withdrawing certainty by removing access to non-statutory clearances, and (after two years) naming the business as being in special measures.
Offshore tax evasion
New civil penalties will apply to individuals or businesses that deliberately help taxpayers to hide assets or taxable income or gains outside the UK in order to evade their UK income tax, capital gains tax or inheritance tax responsibilities. The penalties will include a new financial penalty of up to 100% of the tax evaded, and (in the most serious cases) a new power to publish information about the enabler.
Minimum penalties are to be increased for inaccuracies, failure to notify a charge to tax or failure to deliver a return, where the penalty addresses deliberate behaviour in relation to an offshore matter or transfer.
The rules for naming deliberate defaulters are to be changed, and in some cases extended to naming others who have benefited. A new asset-based penalty, calculated by reference to the value of the underlying asset involved in the evasion, will be introduced for the most serious cases of deliberate offshore evasion.
There are to be new criminal offences for those who evade their UK income tax or capital gains tax responsibilities in respect of income or gains outside the UK. These will be strict liability criminal offences – in other words, the guilty intention of the taxpayer will not have to be proven. They will apply where a taxpayer has failed to declare offshore income or gains, leading to a loss of tax over a threshold amount which will be defined in regulations.
The public naming of tax evaders is one thing. It is quite another to name those who engage in behaviour regarded by HMRC as tax avoidance – particularly where the dividing line between planning and avoidance is a grey area and not generally understood by the public at large. Naming of taxpayers invokes mob rule, and the tax authorities should use it with caution.
Much of the widely perceived shortfall in tax revenues is not part of the tax gap at all. It arises because many multinationals have succeeded in paying little more than token amounts of UK tax because of inadequacies in tax laws.
Many of these businesses are high profile brands, attracting vast custom from the same British public that is reportedly outraged by their very well publicised tax avoidance behaviours.
Naming and shaming offenders is not a new phenomenon. For hundreds of years the stocks and the pillory were used to punish miscreants before the mob. But excessive use of such punishments for contravening imperfect laws might engender public sympathy.
After all, when Robinson Crusoe author Daniel Defoe was pilloried, it is said that the crowds pelted him with flowers, and later he rose to great eminence in society.
Article supplied by Taxing Words Ltd
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