THE INTRODUCTION of more “purposive” tax legislation may help guard against the exploitation of loopholes, tax advisers have suggested.
Poorly-drafted and unclear tax laws cause distortions and provide opportunities for astute, would-be tax avoiders, a heavyweight panel chaired by Margaret Hodge heard in a lively and strident debate.
Greater emphasis on the purpose of new tax laws would help understanding, interpretation and application of laws, Devereux Chambers tax barrister Jolyon Maugham told the panel, which comprised Labour front-bencher Shabana Mahmood, Conservative Nigel Mills, Mazars tax partner Tim Davies, Association of Revenue & Customs president Tony Wallace and Legal & General head of tax Grace Stevens.
The language and lack of practical examples and stated aims currently impedes understanding, advisers said. Parliament can help by clearly explaining what it needs was the message – make the purpose of legislation accessible to laity.
“There’s nothing wrong with tax planning, but many structures go way beyond government intention. Better understanding makes better law,” said ARC president Wallace.
One such example is the IR35 legislation, which has proved complex and confusing for many, and led to accusations of tax avoidance against organisations including the BBC and government departments when it emerged 2,000 senior office holders of public bodies were revealed to be receiving payment off-payroll, while in September 2012 the broadcaster admitted that 148 of its 467 presenters were engaged in the same fashion.
Alongside those issues, the rule has been applied in a sporadic fashion, with 256 cases investigated in 2012/13, compared to just 59 investigations into IR35 in the previous year.
A rather political event by most firms’ standards, Labour MP Mahmood called for the formation of a cross-party group on understanding tax and finance rules to help prevent such poor law. “We do that on the cheap in this country”, she said. “Scrutiny needs to be better”.
Part of improving transparency, she said, was improving public knowledge and education, noting on a recent visit to a constituency school, many students failed to realise tax is deducted from employees’ wages before it hits their accounts.
Indeed, what form that transparency takes in practice was also a source of debate, with advisers suggesting further disclosure does not always help if there is too much data and information to sift through.
That inertia is evidenced in the question of country-by-country reporting, Legal & General’s Stevens noted. “Most seem to want it, but we can’t agree on what should be disclosed, where, and in what form,” she said.
By the same token, advisers suggested HMRC disclose more about companies’ tax positions, with the onus on transparency by comparability.
Moreover, the policy ought to cut both ways, Hodge said, who suggested “properly costing” tax reliefs on an individual basis, rather than just cumulatively.
Conservative MP Mills was more radical, however, admitting the tax system “is not fit for purpose”.
“At some point, we’ll have to bite the bullet and strip it back and rewrite, tax by tax,” he said. “We shouldn’t be giving away crazy tax exemptions to assorted things, such as theatres and specific sports events. They should be treated evenly.”