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The future of tax planning in the UK

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Thursday February 21, 2013 at 9:00am
I attended the Peak Tax conference recently and one of the highlights was hearing Robert Venables QC speak on the well-publicised GAAR or General Anti Abuse Regime, about to be introduced in the March budget. This new regime is intended to stop abusive tax planning. Some useful comments were made. This was the second eminent QC I have listened to that advised that the GAAR would actually be greatly weakened to the point of being ineffective by being cast too wide. The more abusive tax planning it tries to catch the less it will succeed in catching.

What is abusive tax planning anyway?

Part of the reason for this contradiction is evidenced even in the name of the legislation. It is not possible for the courts to define subjective statements like abusive tax planning; abusive to one is sensible and reasonable to another. For example, a business owner may reasonably view the legal mitigation of tax in order to retain more money for investment in his business as sensible planning. The government however would prefer that he pays the tax so they can decide how it is spent, on funding additional borrowing, public sector unfunded pensions etc.

The more subjective and nonspecific the legislation the more the courts will try and apply narrower definitions to the point where little is left. Judges do not interpret rhetoric they interpret law. This was just the experience in Australia whose GAAR equivalent has been very disappointing to the government as it was drafted too widely.

Interpreting tax planning laws

Some clients have expressed concern about how the courts will interpret legislation in the future bearing in mind the current financial crisis. In particular, will the courts have more sympathy with the government and HMRC position? There is even talk from HMRC about them appointing people to an “independent” GAAR panel. The comment was made that we actually won the last war; hence we do live in a democracy where the judiciary are truly independent of the government. As soon as we lose that we lose an important part of the fabric of democracy. Clearly this is not lost on the judiciary and the feeling is that the higher up the legal system you go the less bias you will encounter.

Publicity around tax planning

Another source of some concern for clients is the adverse publicity surrounding tax planning in the press and especially from politicians like Margaret Hodge about people paying the right amount of tax. However, to the court there is no such thing as the right amount of tax, only what the legislation says is payable. This has not stopped HMRC from sending aggressive, misleading and in some cases inaccurate and threatening letters directly to clients. This will probably not stop but in my view is wholly counterproductive to HMRC in the long run.

If you think about it most tax is collected via the PAYE system or the VAT system. Both rely on the tax payer to collect tax on HMRC’s behalf. HMRC have a lot to lose if they alienate their unpaid tax collectors and their agents, none of us want to live in a Greece or Italy where tax evasion is rampant.

The future of tax planning

So, as to the future of tax planning the GAAR premise is based on the reasonableness of a transaction rather than the artificiality of a particular transaction. As a result it can be seen as a wider anti avoidance rule which risks introducing uncertainty into commercial tax planning thus undermining the UK as a home for inward investment. The case of Ramsay v CIR in 1981 established the need for commerciality in tax planning transactions and this is nothing new. Introducing a need for reasonableness is unworkable and will bog down the courts and an already under resourced HMRC in litigation for years to come.

Andy Parker
Chartered Accountant and Tax Planner

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