Theresa May has made a number of changes to policy and personnel in the month since becoming Britain’s prime minister. One thing has not altered, though, and that is the government’s determination to crack down hard on tax avoidance. Mrs May made this a theme of her leadership campaign, calling tax “the price we pay” for living in a civilised state.
Now her administration has opened a new front in the battle. A Treasury consultation paper published on Wednesday has proposed the idea of extending the penalties for avoidance schemes disallowed by Her Majesty’s Revenue & Customs to those who advise on them. Under the new regime, accountants, lawyers and consultants that peddle or assist these schemes could end up paying a fine of up to 100 per cent of the money that would have been lost to the taxpayer.
Taking the battle to the supply side of the tax avoidance industry is sensible. Few individuals, or even companies, go to the trouble of devising their own tax wheezes. Instead they purchase off-the-shelf schemes through advisers, often to a blueprint drawn up by a tax specialist and buttressed by a barrister’s opinion that can be shopped from a compliant QC. For the most part, the client has only the dimmest idea of what is actually being done in his or her name.
The existing rules do little to curb this activity. The taxman poses no direct threat to the underlying promoter and its associates, whose main concern is being sued by irate clients for negligence, or, perhaps, in losing their reputations. Set against that, the financial reward from marketable schemes can be significant. Take, for instance, a recent, unsuccessful, avoidance scheme involving the UK brewer Greene King. Dubbed Project Sussex, it was peddled to a number of companies and aimed to save in aggregate about £30m in taxes. Had it passed muster, its promoter, the accountant EY, would have walked away with 10 per cent of that amount.
The proposed rules would throw a clod of grit into this machinery. First, they would apply to a wide range of advisers, from the scheme’s promoters to those playing a more distant enabling role, such as company formation agents. That means that even should the creators be offshore, their onshore agents could be caught in the net.
Second, the rules should act as a particular disincentive to those promoting and enabling speculative and aggressive wheezes. Even if heavy fines turn out to be rare events, the very possibility of their happening should elevate the cost of advisers’ professional indemnity insurance - at least until they demonstrate a low claims experience. That in turn should raise the cost of such avoidance schemes, limiting their appeal to those looking to massage down their tax.
While the simplicity of the proposal is an advantage, the government should take care to ensure that it does not unreasonably hit defensible tax planning. Tax rules are not ultimately set in aspic. Avoidance is generally defined as creating a tax-break that parliament never intended. Yet what legislators mean at a particular time can change as circumstances evolve.
Tax rules would be easier to administer if the whole tax code was less complicated. Britain, along with other advanced economies, has allowed its fiscal regime to become an ugly and convoluted sprawl. Unpicking and simplifying that is no less of a necessary endeavour for Mrs May and her administration to act upon. But in the meantime, and with the flawed system Britain has, a tougher line on the agents of avoidance would do no harm at all.
