Analysis: Taxman struggling as schemes evolve to slip through loopholes

By JOHN BARNETT
Published on 22/06/2012 02:42

There is a lot that HMRC is already doing to shut down tax avoidance schemes.

Every year the government passes a Finance Bill packed with anti-avoidance measures.

Since 2004 we’ve had a rule which requires anyone promoting an arrangement designed to give a tax advantage to tell HMRC. If HMRC thinks it falls foul of existing rules it might take it to a tribunal.

If the promoter has found a loophole, HMRC can introduce new legislation to block it.

So why are schemes like those in the news this week still operating?

First of all, it is time-consuming for HMRC to take a scheme to a tribunal. The music industry investment scheme publicised this week is due to go before a tribunal in November and may go to appeal after that.

If HMRC is successful, it will eventually get the tax due. If it is unsuccessful we may see new legislation in this area.

Second, it is very difficult to make the system water-tight.

Last year, 59 pages of legislation were passed on “disguised remuneration” (roundabout ways of paying people that try to avoid tax).

However, those running the K2 scheme clearly think they have found a way round this.

Third, HMRC is under-resourced and getting to grips with complex schemes can take a lot of time and effort.

So, what more can the government do?

The general anti-abuse rule announced in the Budget is an attempt to get a step ahead of anti-avoidance schemes.

But many worry that the proposal is too imprecise and will create uncertainty, while not catching many of the headline-grabbing cases.

Resourcing HMRC properly would be more productive. In austerity times, making cuts in a department which brings in the money seems a strange thing to do.

The wrong answer is to pile on new laws. More laws create more complexity and more loopholes. The long-term answer is simplicity.

We need a grown-up debate about the tax system coupled with a rule that no changes can be made which do not move towards that goal of simplicity.

• John Barnett is chairman of the Chartered Institute of Taxation’s capital gains tax committee