Tax system: keeping it simple

Significant simplification is urgently required to restore some sense to the tax system. Surely the tax code should be understandable by those who need to interpret it to determine their tax liability?

Here’s a suggestion for two reforms that could produce a simpler tax system, in which tax planning is acceptable, while protecting the Exchequer.

First, create a statute to the Duke of Westminster case [1936] A.C.1, which contains the immortal phrase (to tax practitioners at least): ‘Every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be.’(CIR v. Duke of Westminster [1936] A.C.1)

Section 1 to a new simplified Taxes Act could read: ‘Every taxpayer has the right to pay the minimum amount of taxes due under the law applying at the time of the relevant transaction.’
Secondly, begin a debate about introducing a general anti-avoidance rule (GAAR) that can satisfy both HMRC and professional advisers.
HMRC will understandably want to protect future tax revenues from schemes that are solely intended to reduce a tax liability. Rather than head piecemeal towards a case law GAAR, the introduction of a legislative GAAR might now be acceptable to business, subject to the following three conditions.

• Advance Clearance Mechanism.

There would need to be an efficient clearance mechanism, both in terms of time taken and scope, which is legally binding if all the relevant facts have been disclosed. Where clearance is withheld, the taxpayer should be entitled to know why.

• Publication of rulings

In Canada tax rulings are published, let’s do the same in the UK. This will build a body of published rulings and allow reasonable certainty from a study of the precedents.

• Simplification

With a GAAR in place, huge swathes of the current anti-avoidance legislation could be repealed – we do not want to have a GAAR layered on top of all the existing anti-avoidance legislation. But for some practitioners there is an attraction to the ‘known’, even if that ‘known’ is more comfortable than loved.
The current direction of tax legislation is becoming unsustainable.

Something has to change to restore the UK as an attractive place to do business and one where businesses can plan their activities with certainty of tax treatment.

These reforms may be a step in the right direction.

Derek Allen is director of taxation at ICAS