GAAR becomes an object of desire

GAAR becomes an object of desire

Is the complexity of the current corporate tax regime undermining the UK’s position as a leading destination for inward investment?

Swathes of new corporate and personal tax legislation have been enveloping
companies and their tax advisers for months now.

Pre-Budget announcements led to Budget confirmations on far-reaching changes
to corporation tax disclosures and reporting. The reforms, while more attractive
than tax rises, have resulted in claims of massively increased costs to
businesses, not to mention confusion as they get to grips with the changes and
apply them.

The costs, experts say, are likely to be passed on to customers and, at a
time when most industry sectors in the UK face difficult global market
conditions, rising consumer debt as well as interest rates that some say are
still too high.

Many now question whether the complexity of the current corporate tax regime
is undermining the UK’s position as a leading destination for inward investment.

Despite the government’s talk of ensuring the UK remains one of the most
attractive places in the world to do business, its actions on the tax regime
appear to contradict this point.

The UK enjoys a legally and politically stable regime – a necessity for
business to flourish – and, at least until the 7 July bombings, Britain appeared
culturally and socially harmonious.

And we have the language of business, as well as deep, liquid capital markets
and a broad financial community to back it up. But the complexity of our tax
system, warn experts, is rapidly diminishing all these advantages.

A glance at the most up-to-date official statistics on inward investment to
the UK reveals a fall, which many attribute, in part, to our tax regime.

Net direct investment by foreign companies in UK plc amounted to £12.4bn in
2003, a decrease of £3.6bn on 2002 figures, according to the Office for National
Statistics.

‘Other countries have leapfrogged us,’ says Derek Allen, director of tax at
the Institute of Chartered Accountants of Scotland.

‘The evidence from overseas is that companies are choosing to locate
elsewhere. The compliance burden is a factor in that,’ he says.

It has reached a point where even tax advisers are suggesting that a general
anti-avoidance rule may well be better than the status quo. Advisers have
resisted attempts to introduce a GAAR for years. But they say the current system
amounts to a mini-GAAR but ‘without the proper clearance mechanisms’.

In June, ICAS wrote to ministers suggesting it was time to revisit the debate
on a GAAR. It was last mooted in 1998 and ICAS opposed it.

Since then, Allen says, the tax system ‘has gone way beyond what is
acceptable’ and ‘it’s time to revisit a GAAR’.

At the end of August ICAS tax experts will sit down with the Revenue to
thrash out proposals for a GAAR, but John Whiting, tax partner at
PricewaterhouseCoopers, is gloomy about the current situation.

‘I don’t advocate one, but we are getting to the worst of worlds: a mini-GAAR
without the safeguard of proper clearance,’ says Whiting, who is past president
of the Chartered Institute of Taxation.

The CIoT has written to the government raising questions about the quality of
legislation and seeking acknowledgement of the problems. Whiting hopes that open
dialogue between ministers and tax advisers will follow. ‘More complex
legislation is not in anyone’s best interests,’ he adds.

So advisers demand some recognition that the status quo is far from workable,
which would go part way to easing their concerns for the future.

For experts it is essential for the government not just to listen, but to
show it is listening and explain its actions, even if that means taking a hard
line on collecting tax.

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