Wake up and smell the coffee

Not so long ago, tax only made the headlines on Budget day. These days, nothing excites the media more than the whiff of tax avoidance – especially when it involves a household name that sells Britain’s favourite cup of coffee. Yet no-one seems particularly clear on what tax avoidance is, nor on what the government is doing about it.

What’s the difference?

The first thing to be clear about is that tax avoidance is quite different from tax evasion. Evasion occurs when a taxpayer deliberately misstates profits, income or gains. In reality, there is a tax liability, but the taxpayer conceals the fact from HMRC. This is, of course, an offence which can result in prosecution. At the other end of the spectrum is tax planning. It is a long-standing principle that everyone is entitled to arrange their affairs in a way that minimises the amount of tax they have to pay. If there are two ways of doing something, there is no reason why you should not do it in the way that incurs the smaller tax liability. Somewhere in the middle is tax avoidance. Generally, this involves doing something artificial, or with no real economic substance, to reduce a tax liability. Until now, the only response of successive governments has been to plug specific loopholes, only to find at least as many new ones appearing to take their place.

HMRC’s new weapon

From this summer, HMRC will have a new weapon: the General Anti-Abuse Rule (GAAR) is intended to be the net that will catch at least some of the cases that slipped past the old rules. So how widely cast is it? The GAAR catches several types of arrangements. Predictably, these include schemes that involve contrived or abnormal steps. But they also extend to arrangements that are considered to be contrary to the principles of the relevant tax legislation – whether or not those principles are actually spelled out in the statute. More worryingly, they also include arrangements that simply exploit so-called ‘shortcomings’ in the legislation. A cynic might be tempted to think that this will be used to catch anything that doesn’t suit HMRC’s view of the legislation, but fortunately, an independent panel of experts will decide what is caught.

Don’t get caught

HMRC will undoubtedly use GAAR to target packaged tax avoidance schemes. In particular, any scheme that purportedly creates a tax loss greater than the participant’s cash outlay is likely to be attacked. But the tax authorities have also made clear that they will apply it to some of the more popular inheritance tax (IHT) planning techniques, such as those involving IOUs on the family home. Anyone who has undertaken this type of planning should urgently review their arrangements, as they may well be caught by GAAR. This is highly advisable, even if the planning has been carried out before GAAR becomes law as there is a risk that you may be caught. GAAR does not make tax avoidance illegal. It simply enables HMRC to take counteractive measures, to put the taxpayer and HMRC, back in the position that would have existed but for the planning. And it is certainly not the end of tax planning. We now have the world’s longest tax code, and navigating through it to find the most tax efficient route requires an expert hand on the tiller. Whether this will put an end to multinational tax planning is another matter entirely.

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