George Osborne's new plans to tackle tax avoidance
In his Budget speech, Chancellor George Osborne spoke of his disdain for tax evasion and aggressive tax avoidance, describing both as "morally repugnant".
It was against this backdrop that the chancellor announced the Treasury's plans to introduce a General Anti-Avoidance Rule (GAAR).
This follows on from a report, produced last year by tax expert Graham Aaronson QC, which recommended that such a rule would improve HM Revenue and Customs' (HMRC) ability to tackle tax avoidance without damaging the competitiveness of the UK as a place to do business.
So, what exactly is a GAAR, how significant is it and what does it mean for the man on the street?
Avoidance v evasion
A GAAR is aimed at deterring abusive tax avoidance - as opposed to tax evasion - schemes by reducing legal uncertainty around what constitutes aggressive tax avoidance and what constitutes legitimate tax planning.
Tax evasion is, and has always been, illegal. Tax avoidance, however, has historically been a grey area, making it much more difficult, and costly, for HMRC to prevent.
HMRC needs to legislate against each and every individual tax avoidance scheme deemed to be aggressive.
A GAAR would act like a blanket legislation to differentiate between what counts as responsible tax planning and what is abusive tax avoidance.
It would apply initially to the main direct taxes of income tax, capital gains tax, corporation tax, and petroleum revenue tax, as well as National Insurance contributions.
In terms of the exact detail, more will emerge over the next year. The government will consult on the new rule and legislate for it in next year's Finance Bill.
Since the chancellor's announcement there has been much debate as to the exact implications. What extra powers will there be for tax investigators? At what point will the rule bite? What will be the evidence needed for a claim being rejected for tax relief? Will there be an appeals process?
None of this is currently clear and it is expected that these issues will feature prominently in the consultation. There is already some concern from advisers about the level of power that tax inspectors currently have.
Indeed, the weight of power has shifted considerably over the years. For example, HMRC can request information about someone's tax affairs from third parties such as a bank or solicitor.
HMRC also has powers to inspect business premises which, in serious cases, could be unannounced. They also have the right to issue a tax bill if somebody refuses to file tax returns.
Moreover, the appeals process is sometimes quite costly and time consuming. As such there will no doubt be discussion about what safeguards for the taxpayer will be built into the legislation.
This announcement is very significant, as it reiterates the government's commitment to tackling tax avoidance. This is something they are really cracking down on, as is clear from recent cases.
Last month, the Treasury blocked two "aggressive" tax avoidance schemes (one retrospectively) used by Barclays in an attempt to avoid £500m in tax.
Crucially, the GAAR illustrates the ever-closing gap between tax evasion and tax avoidance.
Furthermore, this is a politically popular way for the government to deal with its sizeable budget deficit. When viewed in conjunction with the other anti-avoidance measures in this year's Finance Bill, the chancellor has claimed that the resulting tax revenue will increase over the next five years by around £1bn.
The legislation is most likely to affect wealthy individuals - often referred to as high net worth individuals by HMRC - and companies. It is these who gain the most from using tax avoidance schemes, given that they often pay the most tax.
That said, it important for middle-income earners to be aware of what is likely to be covered.
There are a number of tax avoidance schemes currently being used that we would expect to fall under a GAAR. These include, for example, those such as film partnership and capital redemption policies, where people effectively generate an artificial loss for tax purposes.
The key point to consider is whether the tax arrangement would be viewed as artificial. It has to be clear whether the arrangement has the sole or main purpose of achieving an advantageous tax result.
Some would argue that it is obvious that schemes, such as those generating an artificial loss for tax purposes, are infringing HMRC rules, and that the tax advisers are the problem. In fact, this development goes hand in hand with another HMRC campaign clamping down on dishonest tax agents.
For honest taxpayers wanting to avoid the trap of inadvertently using an aggressive tax avoidance scheme, there are certain hallmarks to look out for.
Off-the-shelf tax planning schemes offered proactively by tax advisers where, for example, they have already sought a lawyer's opinion as to whether a scheme is legal, are often too good to be true. To be safe, tax advice should always be sought on a bespoke basis.
It is important to remember that this is not aimed at legitimate tax planning which can include activity such as selling a property to gain tax benefits around capital gains.
Generally speaking if there is a legitimate explanation, or valid commercial reason for a tax scheme being utilised, this will not be an issue for HMRC.
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