Taxation – Hands up who can spot tax avoidance

In my last column, I pointed out that the economic secretary to theas. Treasury had told parliament the Inland Revenue intends to tape-record telephone calls (2 July, page 6).

I was at the English ICA tax faculty’s annual Wyman debate the other day where someone from the Revenue rushed to reassure me that it is only in the Revenue’s dedicated call centres that calls will be taped. The caller will also be told in advance that it is happening – so if you do not like it you can hang up before you give your name (and hope that the Revenue will not dial 1471). I am happy to pass on this reassurance.

The Wyman debate was on the desirability or otherwise of a general anti-avoidance rule. The draft personal portfolio bond (PPB) regulations emphasise the potential dangers of a GAAR, namely the massive discretion it allows the tax authorities.

What a difference today makes

A GAAR clearly ought to affect attempts at avoidance. The problem is to recognise what avoidance is. A PPB is an unacceptable tax-avoidance device in the eyes of parliament, which has introduced a nasty anti-avoidance rule in the current finance bill.

So what is a PPB? It is a single premium insurance policy linked to a portfolio of investments selected by, or on behalf of, the policyholder, other than one in which the selection can only be made from units in certain collective investments, property in an internally linked fund of the insurer, or certain general published indices. Even if investment is wholly in a selection of such items, all of a class of policyholders must be entitled to invest in the same items.

So if I take out a PPB and ask the insurance company to invest the whole of the money in publicly available unit trusts, the government accepts that is not tax avoidance. It makes no difference if the insurance company is in the Bahamas and all of the unit trusts are offshore vehicles; it is not tax avoidance. That sounds reasonable to me. When I surrender the bond, there will be a tax charge and I am avoiding nothing.

If, though, I take out a PPB and ask the insurance company to invest all the money in a work of art – that is apparently tax avoidance. Why? I do not have a clue. When I surrender the bond there will be a tax charge – exactly the same tax charge as if the funds had been invested in unit trusts.

Suppose a friend of mine sets up a UK company to manufacture widgets, or something else to benefit the UK economy. I feel patriotic and take up 10% of the shares because he begs me to help provide finance. He cannot raise all of the money he needs and asks me to take up a further 10%. I do not have the funds available. Fortunately, I have a PPB with a UK insurance company invested wholly in UK unit trusts. I ask it to take up the extra shares. It does so. They form 0.1% of the total funds in the PPB.

The government will give me tax relief on my investment in my friend’s company under the enterprise investment scheme. The PPB’s investment in the same company is such wicked tax avoidance that not only does that 0.1% of the PPB attract a special tax charge, but it also turns the entire PPB into an unacceptable tax avoidance vehicle so that the other 99.9% of the funds also attracts the special tax charge, even though yesterday it was a perfectly acceptable investment.

Careful with those powers

If today, without a GAAR, I am good but my PPB is wicked when we both make the same investment, and my PPB’s investment in unit trusts is wicked when yesterday that same investment was acceptable, who is capable of recognising tax avoidance?

Certainly not me. Under a GAAR, the sole arbiter of this difficult question becomes the Revenue. That does not seem reasonable to me.

In a climate where many people regard tax avoidance as highly criminal, it becomes especially important that there should be a large measure of agreement on what is avoidance before giving the tax authorities wide-ranging powers to combat it.

Robert Maas is a partner with Blackstone Franks.

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