Evade or Avoid?

Reposted from Accounting Web

Leading tax experts have called on the government to settle a backlog of 65,000 tax avoidance schemes, as more evidence emerged that the “Hodge effect” is making HMRC staff reluctant to settle disputes without recourse to litigation.

“We have reached the point where the open wound that is the huge backlog of schemes is not worth the ongoing damage to the UK’s international reputation and the sheer amount of resources that HMRC has to commit to it,” said Ray McCann, tax partner at Pinsent Masons.

McCann, writing in Tax Journal, warned that “there are more avoidance schemes out there than HMRC can reasonably expect to clear up by any conventional means, such as scheme-by-scheme litigation”.

He suggested an “overall resolution strategy” to facilitate settlement of any kind of scheme. “Getting rid of the backlog will be of huge benefit to the UK exchequer and those who are tired of the status quo. Opponents … will need to reflect upon a simple fact: they have no practical workable alternative.”

Tax barrister Jolyon Maugham said last night that the taxpayer has “some £14bn” of exposure to marketed, artificial tax avoidance schemes, while scheme users are “desperate to settle”.

A courageous government would “act in the public interest and settle these cases at knock down prices”, he said, and “relinquish the contingent £14bn in return for a certain £11bn”.

The ‘Hodge effect’

Tackling marketed tax avoidance was the theme of Maugham’s Hardman lecture at the ICAEW’s Tax Faculty. He found the notion that there is a moral element in taxation to be “entirely free of difficulty”, but warned that the moral voice “must not be confused with the legal voice”.

“More serious – but no less alarming – is the notion that the moral voice should become an arbiter of tax consequences. And there is a lot of that happening.

“There are some inspectors at HMRC who are refusing to do deals with taxpayers that they absolutely should do,” he said. “And they are refusing to do those deals because they are afraid of those deals being hauled over the coals by the Public Accounts Committee. And I know this because they’ve told me. Explicitly.”

Pinsent Masons tax disputes partner Ian Hyde told the Telegraph in July 2013: “The public has a perception of HMRC settling too readily. [HMRC] wants to settle but they need to win cases in public to show they’re fighting – and that takes time and money and clogs the system up.”

‘Compromise can be reasonable’

McCann said Sir Andrew Park’s review of five large tax settlements, prepared for the National Audit Office in 2012 amid controversy over the taxation of multinationals, “made it clear that compromise can be reasonable and lawful”.

The NAO reported that “these large settlements are complex and there is no clear answer to what represents the ‘right’ tax liability”.

Promoters

Maugham told his audience that accelerated payment notices (APNs), introduced by Finance Act 2014, had fundamentally altered the dynamics of tax avoidance. The attractiveness of some arrangements “really did depend on them being no worse than cash-flow neutral”.

APNs for schemes within the Declaration of Tax Avoidance Schemes (DOTAS) regime would remove the cash-flow advantage, he noted. “So promoters have responded by searching high and low for schemes that don’t need to be disclosed under DOTAS. Or for people who will say that schemes don’t need to be disclosed under DOTAS.”

He argued that tax barristers should be more accountable for opinions given to IFAs, accountants and tax advisers who sell avoidance schemes on the strength of those opinions.

He was concerned that the high-risk promoters regime, also introduced this year, “might be too gentle a piece of legislation”. It requires “multiple failures” before a promoter becomes a monitored promoter, he said.

It is clear, Maugham suggested, that a number of people have found themselves “involved, quite unwittingly, in transactions with a higher risk profile than they would choose”.

There is room for HMRC to “be more activist in encouraging people to engage with reality”, he added, revealing that there are signs that a big four accountancy firm may back his “badging tax risk” project.

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