The UK Chancellor unveiled last week what he called "one of the largest ever packages of tax avoidance and evasion measures presented at a Budget." These have been largely welcomed by business representatives, who nonetheless pointed out that many of George Osborne's initiatives had been pre-announced.
Tabling his 2013 Budget on March 20, Osborne said that tackling avoidance and evasion was "the right and fair thing to do." The Budget document, known as the Red Book, provides greater detail on the changes sketched by Osborne in his speech. The Red Book sets out four key areas in which the Budget represents a crack-down, focusing on offshore tax evasion, the avoidance of employment taxes, tax avoidance schemes, and corporation tax. It is estimated that collectively Osborne's measures will raise over GBP4.6bn (USD7bn) in new revenue over the next five years. The immediate closure of ten loopholes will also protect against the loss of billions in revenue, the Treasury calculates.
On the anti-avoidance front, the Red Book confirms the inclusion of the UK's first General Anti-Abuse Rule (GAAR) in Finance Bill 2013. It says that the GAAR will "provide a significant deterrent to abusive avoidance schemes and strengthen HM Revenue and Customs' (HMRC's) means of tackling them." No further details were advanced in addition to the draft legislation and guidance published last December. The Government has made clear that it intends for the GAAR to have a comparatively narrow application, targeting artificial and abusive tax avoidance. It is thought that a "broad spectrum" GAAR would not be beneficial for the UK. However, concerns over the scope of the GAAR were recently revealed in a report by a specially convened House of Lords Sub-Committee. While a majority of Committee witnesses supported the concept of a narrow focus, and the Committee was "fully persuaded that the GAAR will not apply to issues involving the taxation of multinational groups," it was thought necessary to communicate to the press and the public that it will not be used to "slap" multinationals "with massive tax bills." Instead, a more international approach should be taken - a concern Osborne appears to have taken on board. He promised in his speech that the UK's presidency of the G8 would be used to promote the updating of rules regarding the taxation of multinational businesses, and the Red Book describes the Government as being "at the forefront of calls for collective action."
Also confirmed in the Budget are proposals to target the promoters of tax avoidance schemes. The aim here is "to tackle both the supply and demand of these schemes." The Government will shortly consult on this plan, and HMRC will carry out a parallel consultation on an inter-related "naming and shaming" initiative. Last month, HMRC publicly revealed the details of "deliberate" tax defaulters for the first time in a list that will be updated each quarter. Similarly, the Budget builds on an announcement made in February that companies and individuals found to have been involved in failed tax avoidance schemes may be disqualified from receiving Government contracts. Potential suppliers will be obliged to declare whether they have had an "occasion of non-compliance" in recent years. The Red Book adds that the Government will review the policy's effectiveness within the next year, and will amend the rules if necessary.
The Government will also now act on a warning made by Osborne at the 2012 Budget that he could introduce retrospective legislation to address aggressive stamp duty land tax (SDLT) avoidance schemes. A separate document published alongside the main Red Book explains that, in spite of the Chancellor's cautioning, two specific SDLT schemes have been growing increasingly popular. They in particular target residential properties and abuse the transfer of rights rules. Onward sales made under the schemes are intended to not be completed for a number of years, with the result that the immediate purchaser is left in possession of the property. This purchaser then bears no SDLT liability, and the transfer of rights falls below the SDLT threshold. These schemes will be closed, and the enabling legislation made applicable from March 21, 2012 - the date of Osborne's last Budget. Loopholes relating to inheritance tax and the corporate tax loss relief system are also to be closed.
With regards to offshore tax evasion, the Budget again represents more of a confirmation of earlier initiatives than the unveiling of new ones. Osborne will proceed with his "Son of FATCA" agenda, promoting last week the pre-announced conclusion of information-sharing agreements with the Isle of Man, Guernsey, and Jersey. According to the Red Book, these deals "will significantly increase the amount of information on potentially taxable income that is automatically exchanged, in order to further clamp down on tax evasion." Disclosure facilities have been put in place, and an additional GBP1bn in revenue over the next five years is anticipated. The Government is also looking to sign similar agreements with other jurisdictions, and is in discussions with its Overseas Territories. Further, in result of a review announced at the 2012 Autumn Statement, the Red Book states that the Government will strengthen employment obligations, to ensure that the correct income tax and national insurance contributions (NICs) are paid by offshore employment intermediaries. A consultation on the details will be launched imminently.
Commenting on the Budget, Kevin Nicholson, tax partner at accountancy firm PwC, said: "There was much in the Budget about tax avoidance but businesses knew this was coming and there was little that hadn't been pre-trailed." His colleague and head of tax policy, Mary Monfries, agreed, highlighting the fact that many of the initiatives had been pre-announced "as part of the drive for behavior change." Overall, the reaction to Osborne's anti-avoidance measures has been largely positive. John Cridland, CBI Director-General, echoed much of what has been said by Government officials, stressing that "Everyone should pay their fair share of tax. The tax system needs to be updated for the digital age, at a global level."
Nonetheless, there was a note of caution from some. Nick Farmer, Tax Partner at Menzies LLP, for instance, believes that the Government must be careful to strike a "sensible balance" between Osborne's "open for business" rhetoric and the "mounting pressure on multinationals to pay their fair share of tax in the UK." Farmer describes the lowering of the corporate tax rate to 20% as a "carrot", but warns that "the anti-avoidance stick to beat multinational companies with should be tempered for now." Similarly, Sean Drury, international mobility partner at PwC, cautioned that the Government will need to prevent any unintended consequences for businesses in reforming employment rules for offshore intermediaries, and Gary Ashford of the Chartered Institute of Taxation (CIOT), stressed that HMRC must "recognize that merely having a bank account overseas does not mean you are going to be at fault with your tax affairs." Concern is also clear in the response to the "naming and shaming" of avoidance scheme promoters initiative. CIOT President Patrick Stevens called for "proper procedures to ensure it is only those who promote abusive schemes that are targeted," and said that there "must be certainty over what behavior would be caught and an appeals process to ensure justice takes place."
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