Spending review avoidance drive must not damage UK reputation

While yesterday’s Comprehensive Spending Review (CSR) is true to its name, reference has understandably been made to taxation within the sections concerning the chancellor’s departments, ie. HM Treasury and HM Revenue & Customs. There are some valuable pointers to the priorities of both departments.

The chancellor has repeated the target to raise an additional £7bn per annum from tackling tax evasion and avoidance and is devoting extra investment of £900m to help to achieve this. There is an additional target to deliver £2bn of savings from tax credit fraud and errors by 2014/15. Almost everyone will applaud these intentions and there is clearly widespread support for much harsher penalties and more vigorous pursuit of both tax evaders and tax credit fraudsters.

There also appears to be much greater public antipathy, and not just in the United Kingdom, towards those who are engaged in excessively aggressive pre-packaged tax avoidance schemes; one seldom hears ”good luck to them” which might have been the view in the late 1970s after years of excessively high and confiscatory tax rates. Tax advisers rightly make the point that a degree of caution remains appropriate but also need to recognise the change in public sentiment which is underpinning the harsher stances being adopted by many international tax authorities, including HMRC.

In my view, both ministers and HMRC need to take much more care to describe the tax avoidance they are bracketing in the same sentence as tax evasion. It is quite understandable that HMRC should seek to counter artificial pre-packaged schemes with increasingly broadly drafted anti-avoidance legislation, much more demanding disclosure requirements and a far harsher penalties regime. However, HMRC ought to state publicly that they accept that taxpayers undertaking commercial transactions are fully entitled to structure these to minimise the incidence of taxation; that is not tax avoidance. Such tax strategies ought to be acceptable even where HMRC may take a different view of the effect of the legislation concerned.

The CSR states that HMRC will invest in “dedicated tax experts to extend HMRC’s coverage of large businesses, focused on providing resources to tackle high risk areas”. Hopefully, these experts will be directed towards artificial schemes and not create an environment whereby businesses come to view the United Kingdom as having a business-unfriendly tax authority which views all tax planning as tax avoidance. Such an environment would have the inevitable consequence that businesses would search for more friendly jurisdictions. This search would not be limited to Continental Europe and North America but would increasingly look to the Far East, where many jurisdictions have less pressing need for tax revenues from business and are actively seeking to attract businesses to increase their medium to long-term prosperity.

The coalition government has made a good start by, for example, reducing the corporation tax rate and simplifying the previous government’s grossly over-complex pension’s regime. More clarity around what they consider to be unacceptable tax avoidance is now overdue. Let’s hope this emerges through consultations over the next few months and there are announcements early next year.

Stephen Herring is senior tax partner at BDO and a member of HM Treasury’s Tax Professionals Forum. The views expressed above are his own.