Sunday, June 28, 2009

Get ready for the biggest revolution in tax compliance for 5 years

Somewhat later than expected it seems that we are at last about to see a draft code of practice for banks involved with tax avoidance - whether as regards their own affairs or that of their customers. But the impact of this code will be much wider than expected.

The code was originally announced by Alistair Darling in a statement to the House of Commons on March 16. He hoped to include a draft in the Budget on 22 April but that simply promised publication by mid-May. During his speech on 16 March, Mr Darling spoke about:
"the way in which investment banks and others have sometimes sought to develop instruments in order to avoid paying taxes."
In that context he continued:
That has, in itself, posed a systemic threat to the system, which is one of the reasons we need a code, so that people abide by the letter and the spirit of the law." (emphasis added)
Since then of course the MPs' expenses scandal has revealed MPs (including Mr Darling) defending their claims by reference to the 'letter' of their rules rather than the 'spirit' - even though this is clearly set out in the Green Book. So perhaps they appreciate that crafting the distinction is not as easy as they thought.

Latest reports of the imminent release of a draft code suggest that it will be contained in a consultation document to be published tomorrow. An unnamed source quoted in the WSJ suggests that:
"The code of practice will build on a similar mechanism that Her Majesty's Revenues and Customs office has used to minimize tax avoidance from leading U.K. businesses."
This makes no sense to me as the existing rules on Disclosure of Tax Avoidance Schemes already apply to all taxpayers and to all promoters of tax schemes. So the new code cannot simply be a "similar mechanism". It MUST, by definition, go further than the existing rules - originally introduced in 2004 and tightened up in every subsequent year.

Going back to the original announcement of this code I suspect that the first draft will include attempts by HMRC and Treasury to clarify what they mean by compliance with the 'spirit' rather than simply the 'letter' of the law. As such, this could be the start of the biggest revolution in tax compliance since the introduction of the first disclosure regime in 2004.

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