Finance bill attempts to close net on avoidance schemes

The long-term viability of artificial tax avoidance schemes hinges on the forthcoming finance bill, with experts divided on whether it will suppress their use entirely, or give way to new tax loopholes.

As Accountancy Age reported last week, tax advisers have observed a correlation between the increase in redundancies with a growth in the number of tax avoidance schemes. But it remains questionable whether the finance bill – due for release following the Budget on 22 April – will strengthen the government’s tax avoidance powers.

According to Nigel Davies, principal at ITEPAdvisors, the recession seems to have pushed many more taxpayers to focus upon their individual wealth, increasing the likelihood they will enter into some form of avoidance.

Davies says the introduction of ‘new and complex’ legislation has the potential to limit opportunities in one area and create them in another.

‘Given the rate at which legislation is being introduced at the moment, I would not bet against another scheme coming out of this year’s Finance Act,’ he says.

As Davies points out, any new legislation is subject to the ‘law of unintended consequences’, which means it can do the opposite of what was intended; in this case, provide new opportunities for avoidance.

He says the legislative framework underpins both the development and distribution of these schemes, which take advantage of loopholes in new pieces of legislation.

‘Presumably, the modus operandi of a scheme developer is to look at the exemptions, and then seek to create the facts that make it possible to fall within them. Once one learns of the shelter being offered, it is generally not too difficult to reverse engineer it,’ he says.

But as Mike Warburton, senior tax adviser at Grant Thornton, points out, the Tax Avoidance Disclosure regime – introduced in 2007 to force tax advisers to declare a scheme to the taxman almost as soon as they put it into action – has allowed the government to stamp out many artificial schemes. The finance bill is likely to strengthen the regime.

The sheer volume of many disclosures has led the government to investigate arrangements it considers unacceptable under the terms of the regime.

One £200m scheme was uncovered by HM Revenue & Customs in January this year, and shut down within a matter of days.

A statement by HMRC at the time said the scheme sought to abuse tax reliefs available for employment-related liabilities incurred by current and former employees.