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could be repealed – we do not want to have a GAAR layered on top of all the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

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