Rob Barber is a Management Consultant and former Chiltern District Councillor
The more things change, the more they stay the same. A quote
often wrongly attributed to Cicero has the great statesman and
constitutionalist opining that: “The budget should be balanced, the Treasury
should be refilled, public debt should be reduced, and the arrogance of
officialdom tempered and controlled.”
One does not have to be a Roman philosopher to appreciate
that – at a time when the UK still spends £99.5 billion a year more than it
brings in, and with a public debt of £1,000 billion – it is essential for the
Government to make the business climate as attractive as possible. To grow the
tax base and maintain living standards in a competitive global economy, the
Government must encourage entrepreneurship and remove barriers to investment
and job creation.
A key platform of the Government’s deficit reduction
strategy has been to take a strong stance against tax avoidance. It is
understandable that with tough spending choices needing to be made, the Treasury
wishes to ensure everyone is paying their fair share and close down avoidance
loopholes and maximise revenue. But some of the rhetoric around tax avoidance has led
to bad policy decisions. Whether it has been the Exchequer Secretary declaring
cash payments to tradesmen morally wrong, or the Prime Minister opining on the
tax affairs of a well known comedian, this year has seen tax avoiders overtake
bankers and benefit cheats as the public enemy to be thrown to the lions.
The Government’s flagship policy on tax avoidance is the
introduction of a General Anti-Avoidance Rule (GAAR), through this year’s
Finance Bill. The purpose of the GAAR is to deter tax avoidance activity, while
creating stability and certainty within the tax regime, and reducing costs to
smaller companies and consultants by providing clarity about what kind of tax
arrangements are acceptable.
Unfortunately, the details of the GAAR, published at the end
of March, may have the opposite effect by making an overly convoluted tax system
worse. The Institute of Chartered Accountants in England and Wales has warned
that the GAAR will cause greater confusion about the difference between tax
avoidance and acceptable tax planning. This may tie up the tax courts for years
at great cost to individuals and businesses, without meeting the public
expectation test that large companies will be forced to pay higher tax bills.
That the complexity of Britain’s tax code – which has
doubled in size since 1997 and now runs to almost 18,000 pages – discourages small business
activity, entrepreneurs and innovators is not in question. What is equally
troubling is the way in which this complexity has resulted not only in lost or
discouraged business activity, but in real hardship and injustice to those who
fall between the cracks of legitimate tax planning, and the way in which
successive governments have ridden roughshod over accepted standards of fairness
and the rule of law to plug gaps in revenue.
In 2000, the then Government introduced IR35 to combat what
it saw as “disguised employment” by freelancers, contractors and consultants.
However, IR35 resulted in far higher tax demands being placed on consultants
who fell within its scope – more than would have been the case had they been in
regular employment. It also created great uncertainty about when the provisions
would apply, leaving contractors fearing future demands and being pursued for
unexpected liabilities. IR35 is now recognised as bad legislation, and the
Government has pledged to review it – although this has not taken place and the
term “disguised employment” has simply been redefined. leaving contractors in
exactly the same position of uncertainty.
To obtain greater certainty about their tax affairs, many
consultants instead used a tax planning product that was widely marketed by tax
consultancies and promoters, and which utilised double taxation agreements and
trading trusts to create greater certainty. It also had the added effect of
substantially reducing tax liabilities, and hence could be considered tax avoidance
and a tax loophole. Nonetheless, these arrangements had been debated by
Parliament as far back as in 1987, had been reviewed by HMRC and were included
in their tax manual. HMRC accepted money claims under the arrangements, encouraging
its dissemination and creating legitimate expectation that the practice was
tolerated. Between 2000 and 2008, several thousand IT consultants, contractors
and freelancers entered into the arrangements to gain more certainty about
their tax position.
In 2008, the Government noted growing numbers of people using
these arrangements and gaining a financial benefit, so itsought to shut them down.
In doing so they passed the notorious Section 58 of the Finance Act 2008.
Against all accepted practice, and completely unannounced, this closed down the
arrangements but also applied the changes retrospectively. As a result,
thousands of contractors are being hit with huge demands for PAYE and National
Insurance back tax running into hundreds of thousands of pounds, plus interest.
A survey by the No To Retro Tax group, which campaigns against the use of
retrospective legislation, has indicated that of those affected, 47% will have
to sell their homes and 30% will be bankrupted by these backdated demands.
Today, there is a growing campaign for justice for those
affected by Section 58, with 18 Conservative, Labour, Liberal Democrats, Greens
and Democrat Unionist MPs supporting a letter calling for the Chancellor of the
Exchequer to repeal the retrospective element of the legislation and Conservative
MP Mark Field calling for justice for victims during Second Reading of the Finance
The temptation to introduce punitive tax changes against
whichever group is the enemy of the month can be high – particularly when it
affords the opportunity to plug the gap from disappointing growth figures. Such
short term raids rarely work as expected. According to answers to a
Parliamentary Question, IR35 brought in only 1% of the revenue it was supposed
to collect. HMRC believe that a retrospective raid on freelancers and
contractors through Section 58 will net them £200 million. The reality is that
with a large proportion facing bankruptcy, they will be lucky to gain a fraction
of this amount.
If the Government wishes to reduce tax avoidance, it should
lower the tax burden and write better and clearer legislation, rather than
allowing a practice to be tolerated for almost twenty years before shutting it
down retrospectively. If Ministers wish to return to growth, ensure prosperity
in challenging times, and prevent Britain’s position in the world economy from
being undermined, they should reject quick fixes such as retrospective
legislation and instead provide a stable environment which makes it easier and
simpler for people to plan their tax affairs.