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UK Urged To Intensify Anti-Avoidance Crackdown

by Robert Lee,, London

23 November 2012

The UK tax authority, HM Revenue and Customs (HMRC), has failed to adequately clamp down on the persistent use of the most aggressive tax avoidance schemes, an oversight that is depriving the UK Exchequer of billions of pounds in revenue, according to the National Audit Office (NAO).

A new report by the NAO on HMRC's efforts to tackle marketed avoidance schemes found that while the authorities are making some headway in reducing opportunities for tax avoidance, over 100 new schemes have been disclosed in each of the last four years.

The report is not entirely gloomy reading, although it is largely critical of the extent to which HMRC initiatives are having any impact. The 100 yearly disclosures picked up on by the NAO were made under DOTAS, the disclosure regime introduced by HMRC in 2004. The NAO found that DOTAS has helped HMRC to change tax law and prevent some types of avoidance activity. Since 2004, HMRC has initiated 93 changes to tax law designed to reduce avoidance, and DOTAS has been used to alter the marketing of avoidance schemes, with the NAO pointing out that the larger accountancy firms are now less active in this area.

HMRC has also increased its focus on the tax affairs of high net worth and affluent individuals, with its high net worth unit bringing in GBP200m (USD318m) of revenue that would otherwise have been lost in 2011-12.

Nonetheless, there remain 41,000 open avoidance cases relating to marketed schemes used by individuals and small businesses, and the NAO believes that HMRC has yet to demonstrate how this number will be reduced. Further, the NAO found no evidence of a decline in the use of avoidance schemes, in part because tax avoidance is not in itself illegal - a potential avoider can use a scheme to gain a tax advantage until HMRC can prove that the arrangement is not consistent with tax law.

The NAO admits that this is a resource-intensive process which takes time and often requires litigation. However, while HMRC has a good success rate when it litigates, its investigations can take many years to resolve and it cannot always successfully apply the rulings in lead cases to other cases.

HMRC is also failing to monitor the costs of its anti-avoidance strategy and has not yet identified how it will evaluate its effectiveness. This limits its ability to make informed decisions about where to direct its avoidance activity, the NAO concludes.

Publishing the report, Amyas Morse, head of the NAO, urged that HMRC "push harder to find an effective way to tackle the promoters and users of the most aggressive tax avoidance schemes."

Reacting to the findings, Miles Dean, Founder of Milestone International Tax Partners, criticized successive governments for adopting a "sticking plaster" approach to reform of the tax system, and said that this has only led to the existence and exploitation of loopholes. In addition, "penal" rates of taxation tend to hit entrepreneurs, with the result that Dean is not surprised that the avoidance industry has proliferated. His answer to the problem would be the introduction of a flat rate of income tax for individuals, and the creation of a system whereby company profits are not taxed when distributed to shareholders.

TAGS: individuals | tax | small business | business | tax avoidance | law | entrepreneurs | United Kingdom | tax authority | tax planning | tax reform

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