Avoiding tax avoidance confusion
Tax avoidance can be an emotive subject, as was apparent from media coverage of the revelation that some celebrities used schemes of varying degrees of artificiality to reduce their income tax.
Now, amid discussion of the morality of different ways of reducing tax liabilities, the Government has responded with a consultation on new proposals to tackle some aspects of tax avoidance.
One concern is that taxpayers can often not tell the difference between legitimate tax planning and contrived avoidance, according to David Gauke, the Treasury Minister responsible for tax. In fact it would be surprising if they could, because even the courts find it hard to rule in some cases.
Proposed changes
However, the Government is looking at ways to improve the information available to the public, with proposals to publish warnings and make people aware of tax advisers whose schemes have previously been successfully challenged.
Mr Gauke highlighted organisations he called ‘cowboy tax advisers’. Some of their practices include: changing names frequently to avoid detection; setting up ‘fighting funds’ in their fees; and failing to comply with HMRC’s disclosure rules.
The Disclosure of Tax Avoidance Schemes
Also under consultation is the strengthening of the Disclosure of Tax Avoidance Schemes (DOTAS) regime. The information provided is often not enough for HMRC to decide whether a scheme works or can be legally challenged, or whether new legislation might be needed to tackle it. The Government also wants greater publicity about those taxpayers who themselves use avoidance schemes.
The Government hopes that these measures will persuade taxpayers not to risk losing money by entering into an avoidance scheme that fails or of being ‘named and shamed’, and that this will also deter advisers.
The General Anti-Abuse Rule
In a separate move, the Government is consulting on the terms of a General Anti-Abuse Rule (GAAR). The word ‘abuse’ has replaced ‘avoidance’, an indication that the legislation should not hit legitimate tax planning. However, there is still uncertainty surrounding the criteria for deciding whether or not a scheme is abusive. One part of the definition is that a transaction is not ‘a reasonable course of action’ although several other features need also to be present, such as a significantly reduced profit or greater tax deduction than justified by the economic amount.
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