I hear a number of contradictory messages when it comes to tax.
On one side we have the regular outcry that some people are not paying their fair share, usually in response to something in the news such as the recent headlines about the travellers or the regular stories about footballers paid via trusts. On the other hand, tax inspectors are regularly portrayed as an unnecessary evil that blight our lives. In my opinion, tax inspectors, and indeed tax, are necessary if society is to function as we would like it to. I think the main problem is that at one extreme we have people illegally evading tax whilst at the other extreme we have people using complex, contrived schemes to legally avoid it. So it would appear that neither are paying their fair share.
In this article I want to take a brief look at the upper end. Why dont HMRC just clamp down on the avoidance schemes? Well the reality is, they try. However, there are a number of barriers to doing so. Firstly, the tax legislation in the UK is massive and highly complex as it has been added to and amended with each passing year. This means that loopholes creep in which can be exploited. Each time a loophole is identified, further legislation is enacted to close it which just adds to the complexity and opportunity for further loopholes.
To counter this, some countries have enacted general anti-avoidance provisions which allow them to nullify transactions entered without any commercial justification taken purely to create a tax advantage. However, these are not in force in the UK. This means that our legislation has to be interpreted strictly as written. So if an avoidance scheme is developed that drives a coach and horses through the intention of the legislation, but is in accordance with the actual wording, it may well succeed. However, it may not be a bad thing that HMRC do not have the power to overrule tax reliefs if they believe them to be artificial. After all, one mans tax planning is anothers avoidance and who is to say what would be deemed illegal if such powers were in place. Most owner managed businesses mitigate national insurance by paying low salaries and regular dividends to the director/shareholders. Hardly complex avoidance but disliked by HMRC all the same. Would it be successful if general anti-avoidance were in place?
So HMRC have to work within the constraints of the existing rules and this is not a quick process. Once an avoidance scheme is deemed by HMRC to be unsuccessful, it is not merely a case of informing the participants and collecting the additional tax, interest and perhaps penalties due. The scheme providers, and their barristers, will typically take a different view and the argument will ultimately be decided in court. I know of one company that partook of a scheme in 1998, the outcome of which has yet to be resolved. This lengthy process eats up manpower and money.
HMRC are currently recruiting 2,250 additional Inspectors to target what they believe to be ineffective avoidance. I imagine no one paying tax under PAYE will have an issue with this.
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