Treasury cautioned over avoidance laws

Link: PBR: Tax avoidance measures announced

The challenge is most likely to be made under the Human Rights Act, although the legislation, which allows the principle of retrospection to be applied to tax avoidance schemes, could also fall foul of European law.

An inquiry into the pre-Budget report conducted by the House of Commons Treasury committee, picked up on legislation that outlined the Treasury’s decision to clamp down on employee-related tax avoidance schemes ‘where necessary’ with immediate effect.

‘We support the government’s determination to tackle unreasonable tax avoidance schemes, but we recognise that some experts have indicated that its approach could lead to challenge in the courts,’ said the Treasury committee report.

Tax experts have already expressed their dismay at the announcement, claiming that it would lead to the principle of retrospection being extended to other areas of the tax avoidance disclosure regime.

Guy Brannan, head of tax at City law firm Linklaters, said the legislation, which will be introduced in the 2005 finance bill, was ‘a 50/50 ball’ over whether or not it was legal. ‘But, I would say that the Inland Revenue is probably in the right,’ he said.

Brannan added that the Revenue would be playing a dangerous game if it branched out into other areas of tax with the retrospective rule. ‘If it tries to do that more widely, it is moving away from accounting with law towards accounting with what the Revenue believes the law to be,’ he said.

The Treasury committee also fired a warning shot at the government over tax receipts, saying that ‘although (tax receipts) have grown strongly by historic standards, they are emerging below forecast for the fourth consecutive year’. The committee said it was important that forecasts for tax receipts be ‘accurately constructed and avoid an over-optimistic trend’.

Meanwhile, the House of Lords came down in favour of the Revenue in an eagerly awaited case concerning capital gains tax. This was the latest in a series of blows to taxpayers concerning tax avoidance schemes. The so-called ‘flip-flop’ avoidance schemes used two separate trusts with a loan arrangement between them.

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