What view would Tax Counsel take of a General Anti Avoidance Rule?

The Tax Journal has published the results of a readership survey that reveals two conflicting views. On the one hand a clear majority (55%) of the 175 respondents do not favour the introduction of a GAAR. And the published comments from respondents largely reflect this.

On the other hand almost two-thirds' (64%) would support a GAAR if there was a pre-transaction clearance procedure. This is surprising as a smaller majority (53%) would only support a GAAR if all existing targeted anti-avoidance rules were repealed.

It would be interesting to know whether there is any difference in view between those Tax Journal readers who are accountants in practice, lawyers in practice or in-house Tax Directors. I suspect their views could be quite different. Indeed, in July I wrote a piece: Would a GAAR mean less work for accountants? In it I referenced a recent conversation with a Tax Director that had prompted that idea.

I'd like to raise a different issue now. That is: the reaction of Tax Barristers (Counsel) who advise on tax schemes.

If a GAAR is introduced the reaction of Tax Counsel will be key. I would expect that the more bullish members of the Tax Bar will continue to give their robust opinions. These will include a note that the Courts may take a different view and that (even after it has come into force) the effect of the GAAR is, as yet untested.

Thus the introduction of a GAAR will not stop the creation or marketing of tax schemes. Only the application of the GAAR will do this. Just as now, promoters of schemes only move onto the next one when the law is changed or after HMRC has succeeded in challenging the old one in court. This often takes many years.

In this context Tony Beare, Head of Tax at Slaughter and May, writing in the Tax Journal recently suggested that HMRC might not litigate the GAAR:

"One can easily foresee the possibility that HMRC might use a GAAR in a similar way to its past practice in relation to the TAAR in CTA 2009 s 441, which is to raise the possible application of the provision in any ongoing dispute but not take the matter to litigation, with the result that the exact parameters of the provision are never circumscribed by a court."

Which takes us back to my earlier point. If the rationale for introducing a GAAR is to limit the promotion of structured avoidance schemes, much will depend on the views of Tax Barristers. Until then the promoters will continue to proudly announce that they have yet to lose their arguments in court.

The 300th blog post on TaxBuzz - tax insights and clarity

A little self celebratory I know. But an achievement worth recognising anyway I think.

I started this blog at the end of 2007, to coincide with the launch of the Tax Advice Network.

There were 86 TaxBuzz posts in 2008 and 113 in 2009. We already have over 100 posts so far this year - which should mean this becomes a bumper one - easily beating my initial target of an average of 2 posts a week. Although, to be fair, I have slowed down a little over the last month!

Readers(?) feedback as to topics to address here are always welcome.

"The taxman is happy with my return' - Sure?

As we move towards the first filing deadline for 2009/10 personal tax returns you may find it helpful to reflect on a key aspect of our tax system. Many people seem to misunderstand how things work. They mistakenly assume their affairs are in order long before they have any real evidence that this is actually the case.

The concept of "Process now - check later" - is a key element of our self assessment tax system. It means that tax returns are processed by computer long before a real person checks them. In most cases the computer then generates statements showing the tax payable or repayable based on the entries on the tax returns as submitted.

At this point no one has reviewed any exception reports generated by the computer and no real person has checked any of the entries or disclosures on the tax returns. So little comfort can really be drawn from the statements issued confirming that a tax return has been 'processed'.

And it is especially important to keep this in mind when you hear stories about how people have supposedly got one over on the taxman. This includes those who have claimed what might be spurious deductions on their tax returns, omitted to report potentially taxable income or secured the hoped for tax treatment of a tax avoidance scheme.

So when you hear anyone boasting about their own success or that of their clients just remember that the real timescales are much longer than they might imply. This is especially true for anyone who is referring to transactions they have undertaken since 6 April 2009. Transactions undertaken from that date through to 5 April 2010 will be reported on tax returns that need to be filed (online) by 31 January 2011. HMRC then have 12 months from the date the return was filed (so potentially until 31 January 2012) to start asking questions.

So it's a little premature to determine your own attitude and approach by reference to the way that someone else has supposedly beaten the taxman on a tax return that has yet to be checked or challenged.

No - ISAs are not a form of tax avoidance

Kirsty Wark on BBC's Newsnight has just put it to Vince Cable that:

"at one level, using ISAs is tax avoidance."

She was suggesting that Nick Clegg and Danny Alexander had made a mistake by referring to plans to challenge both tax avoidance and tax evasion. Except that they were deliberate in their choice of words. There was no mistake.

Throughout my 25 year career as a tax adviser I stuck to the old adage that tax avoidance is legal and tax evasion is illegal. When I started to be troubled by the morality of tax avoidance I gave up giving tax advice.

As former British Chancellor of the Exchequer Denis Healey memorably explained:

“The difference between tax avoidance and tax evasion is the thickness of a prison wall”.

This distinction remains true today. But something has changed. As Nick Clegg stressed, the Coalition Government wishes to stamp out (as did the previous administration) tax avoidance that is:

"perfectly legal but morally questionable"

For Kirsty's benefit - and that of anyone else who is confused, let's be clear. It is self evident that investing in in an ISA (Individual Savings Account) is not 'morally questionable' and thus not under attack. As long as all the published conditions for saving through an ISA are met it is simply good tax planning to make use of the facility to save money in a tax-free structure (ISA) specifically intended for this purpose. So perhaps we do need to be able to distinguish acceptable and unacceptable tax avoidance.

In this connection I again refer back to a post on this blog from over two years ago: Distinguishing Tax Evasion, Tax Avoidance and Tax Planning.*

* The distinction was first made by Richard Murphy and I note that he has more recently published a new tax briefing on the subject. Whilst I may not agree with his politics or all of his views, I think on this he may be right.

Doesn't everyone try to avoid or evade taxes?

In the light of recent announcements to limit tax avoidance and tax evasion I am forced to ask an uncomfortable question: Doesn't everyone try to avoid or evade taxes?

Well maybe not 'everyone' but certainly a large majority. I'm thinking of those who, for example:

• Are self employed and are keen not to have to pay tax on all of their trading income (perhaps taking 'cash in hand');
• Are employees and are keen to receive benefits, gifts and bonuses without them being subject to tax;
• Are receiving a pension and do some work 'on the side'
• Claim personal expenses as deductions from their taxable income (profits) when they 'put it on the business' despite the primary 'non-business' rationale for the expense;

All of the above constitute 'tax evasion' of one sort or another. It's just that many people tend to assume that it's something that only the rich and famous do and for much larger amounts of course. (And don't get me started on the MPs again!)

Again, many ordinary people are keen to avoid tax (legally). This may simply be a question of wanting to do all they can to avoid falling within 'tax traps' and thus avoiding that tax otherwise payable if they are within the rules for:

• IR 35 (the freelance contractors tax)
• Inheritance tax
• The new top rate 50% income tax (which can create an effective liability of 60% in some situations)

And the financial pages and websites are full of adverts tempting us to avoid or reduce our tax bills. Where should the line be drawn? Last year I wrote a piece here: Tax avoidance - what are you allowed to do? A simple guide. And two years ago I wrote a piece: Distinguishing Tax Evasion, Tax Avoidance and Tax Planning.

Many of those supposedly targeted by the Coalition Government's new initiative will continue to accept advice that they can reduce their tax bills using tax avoidance schemes that are within the letter of the law. They will be unfazed by the suggestion that such tax planning is 'legal but morally questionable'.

And everyone else will continue to do what they can to keep their own tax bills low. To the extent that this is simply sensible tax planning there should be no problems. I wonder though whether accountants ever come under pressure to overlook, what we might term, amateur tax evasion by their clients?