Following the publication of the government’s consultative document on a general anti-avoidance rule (GAAR), submissions are now flooding into the Treasury. These coincide with the government’s new thinking, that it should be ‘joined-up’.
In Opposition, New Labour talked of compatibility of objectives. But they are in danger of losing their way when it comes to GAAR. The Treasury states that GAAR ‘must deliver what it sets out to do – discourage the future development of contrived avoidance schemes and reduce the existing use of such schemes’.
There are three difficulties with this approach. GAAR will introduce uncertainty into the business community. It will increase the compliance burdens on business. And it will not achieve its purpose of inhibiting those involved in contrived schemes.
GAAR might also be anti-democratic, since it shifts the power to determine tax liabilities away from parliament to the Inland Revenue. Will the benefits to the Exchequer outweigh the burdens of uncertainty and administration which will fall on business?
Clearly, GAAR will damage the commercial activities of the vast majority of companies which are not aggressive tax avoiders, but which wish to carry out commercial transactions in a tax-efficient way.
Inward investors will be particularly sensitive to perceptions of turbulence or uncertainty in our tax system and GAAR will do nothing to encourage them.
There will also need to be an adequate clearance procedure to make GAAR effective. This will need to be financed and a further layer of bureaucracy created. Nor will there be any way of avoiding the need for large numbers of clearance applications.
The scope of GAAR will cover corporation tax, PRT and income tax payable by companies, but in its search for joined-up government and compatibility of objectives, while wishing to stay business-friendly, the government should remind itself of an old-fashioned danger.
That of throwing the baby out with the bath water.
Stuart Bell is Labour MP for Middlesbrough and adviser to Ernst & Young
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