TAX NEWS - 
2010
UK Tax: Best way for HMRC to cut down on tax avoidance schemes
HM Revenue & Customs' current zero tolerance strategy towards tax avoidance produces less in revenue than it does in expensive, heavy-handed litigation.
This approach, designed to recoup billions of pounds of uncollected tax, demands to be revisited in an era where public sector staff cuts and a lack of litigation funds make a return to a conciliatory approach more appropriate.
Prior to 2004, tax avoidance was dealt with in a more relaxed fashion, but in that year the then chancellor, Gordon Brown, decreed tax avoidance was unacceptable.
The shift brought an end to an era where outstanding sums were pursued through negotiation, with both sides agreeing a realistic deal on what could be paid, rather than the authorities pursuing the full amount through the courts at the expense of other taxpayers.
It is important to remember there is a fundamental and critical difference between tax evasion and tax avoidance. Tax avoidance – also known as "tax mitigation" – uses existing legislation to legally minimise the amount of tax paid, as it has always been recognised that the individual has the right to organise their tax affairs to minimise their liabilities.
Tax evasion, on the other hand, is unlawful and normally involves an act of deliberate concealment or fraud.
Evasion is rightly viewed by HMRC as a criminal act, with those involved being pursued and severely dealt with. However, in recent times, HMRC's
view of the difference between avoidance and evasion has become somewhat clouded.
The HMRC has refused to release figures revealing the amount of tax that has been evaded in recent years.
Shortly after Brown's policy statement, HMRC introduced specific legislation requiring accountants and other parties involved in avoidance planning to provide early information to the government of tax avoidance schemes or tax planning arrangements.
Over the years these requirements have been significantly extended and tightened through the introduction of a number of adjustments to counter tax planning, which HMRC deems to be an unacceptable practice and potentially an abuse of tax legislation.
In October 2005, Dave Hartnett – then the director general of HMRC and now its permanent secretary for tax – announced a major change in the campaign against tax avoidance, going as far as saying that "tax avoidance would be stamped out by 2008".
His attitude drove a hardening of response by HMRC, leading to a policy of non-negotiation.
Instead of negotiating, officials would immediately resort to litigation if they did not agree that a particular planning strategy was within the law.
As might be expected against a background of steadily rising taxation, the degree of tax planning or tax avoidance grew proportionately.
According to HMRC's own figures, the number of avoidance cases almost doubled – from 1,100 in 2005-06 to 2,035 in 2009-10.
This growing caseload occurred against a background of staff cuts at HMRC, and shrinking resources.
Needless to say, it has resulted in a substantial backlog of tax schemes under challenge, waiting to be heard either at tribunal or in the courts. There is no information available to reveal how long this list might be.
The proposals in the recent Budget to introduce general anti-avoidance regulation would seem to me to be a step too far – indeed, similar proposals were thrown out in 1999 amid fears such laws would be the proverbial sledgehammer to crack a nut.
Existing legislation or specific amendments to that legislation should be enough to counter tax avoidance.
Given recent events in the global economy and the urgent need to raise funds for the exchequer expressed in the coalition government's emergency Budget, there is a case for HMRC to soften its approach from litigation to negotiated settlement.
Given the substantial backlog – one case heard in the courts this year was originally lodged in 2003 – there is an appetite among long-suffering taxpayers to settle outstanding differences in interpretation of legislation.
Agreeing such settlements would at least give those in dispute more clarity and certainty about their financial position.
Such a move would also relieve pressure on HMRC staff and save litigation costs for everyone involved. All this could be achieved without impinging on HMRC's stated policy of robustly challenging tax avoidance arrangement, or its power to litigate as and where appropriate.
Indeed, it would retain the ability to move (and in some cases completely remove) the goal posts during the game.
That surely gives it an advantage without recourse to sweeping anti-avoidance rules.
The Government and HMRC should remember that the surest way of reducing the need for tax avoidance or tax planning is to introduce a fairer and more competitive tax system in this country.
The requirement to make tax contributions in accordance with circumstances and ability to pay at a reasonable level is by far the simplest and clear way to proceed both for business and for Her Majesty's Revenue & Customs.
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