Accountants for contractors might like to know that both PM David Cameron and his deputy Nick Clegg have indicated that a general anti-avoidance rule will probably be included in this year’s budget.

Nick Clegg, the Deputy Prime Minister, said in a recent BBC interview that the government has received a report from Graham Aaronson QC pointing out that a GAAR is feasible. He also attacked the rich elite who spend a fortune employing an army of accountants to help them avoid paying tax.

Clegg was also quick to point out that normal taxpayers, who are struggling to make ends meet, are becoming increasingly angry and frustrated with large companies that avoid paying their fair share of tax. A GAAR would lead to a simpler, more transparent tax system that is not open to abuse.

David Cameron recently explained that HMRC collects taxes in a fair, business-friendly manner. However, the government needs to take a tougher approach with companies that practice tax avoidance with the help of fancy corporate lawyers. Lawyers and tax accountants know that the current legal and taxation systems are complex and they try to capitalise on this to lower their client’s tax bills.

The government is pushing on with its plan to reduce the rate of corporation tax that businesses need to pay. But the fact remains that they have to pay rather than avoid the tax, Cameron added.

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Image: I Can’t See You… by tropical.pete

Don’t know about you but I usually have that optimistic hope at this time of the year that things are going to get better. Possibly fuelled by an excess of several Christmas spirits, but mainly on the basis that they couldn’t get much worse. But even I might struggle to feel optimistic about 2012, even if Mother Nature keeps out of it and doesn’t produce any more tsunamis and earthquakes. The economy isn’t what you would call robust; although ours is looking healthier than many thought it would, it’s still not that good and badly threatened by our continental friends and their strange ideas on fiscal unity.

But there are always glimmers of hope from which to take comfort.

The fragrant Ms Primarolo is standing down at the first opportunity. St Vince of Cable sounds like he’s been put back in his box. Hartnett is retiring. Moribund and Balls seem to be losing everyone’s respect, even their own supporters’. And the Deputy PM has come out against tax avoidance.

Actually that last one is quite amusing if you think about it. It’s come about because HMRC have been caught out rather badly; cutting deals with companies with no obvious justification and thereby not collecting some £25bn in taxes owed. You may recall me writing about Goldman Sachs and their interesting approach to penalties, a position supported against all reason by a certain Mr Hartnett. Or even my much earlier railing against the shopkeeper Mr Green, paying a personal dividend some £500 million in excess of his net profits and, just to rub salt into the wound, paying no tax at all since it wasn’t actually his dividend, it was the Monegasque Mrs Green’s.

So eventually the slumbering giant awoke and took notice. Which is nice…

However you have to say that, as usual, said slumbering giant has once again failed to understand one of the basic drivers of commerce: if there is a small pinhole by which you can save even a little money, someone will engineer a coach and horses to drive through it.

Nevertheless, Corporal Clegg has started making serious noises about attacking unacceptable avoidance. He wants to see a general anti-avoidance rule to prevent corporations employing armies of lawyers to find ways to avoid paying taxes.

So near and yet so far.

The problem is not people avoiding taxes. The problem is that there are so many complications and exemptions and offsets in tax law that finding loopholes is actually quite simple. The problem is that most of HMRC don’t actually understand the laws they are trying to enforce and when they do, their own management decides not to bother enforcing them. The problem is that any such rule will have to be so loosely framed that it will more than likely impact a whole raft of people that it was never meant to; people who don’t have armies of lawyers on tap and who therefore will end up paying taxes they probably don’t owe while the real culprits take no notice.

When will it dawn on our political masters that more and more rules are not the answer? We need fewer rules, with clearer definitions of how they apply. We need an enforcement body that knows what it’s doing and how to do it. And we need politicians who understand that avoidance is legal and if you want to stop it you make it illegal so it can be correctly described as evasion. The problem is a lack of clarity of purpose. The problem with a general anti-avoidance rule was in fact neatly summarised by Macbeth, “It is a tale told by an idiot, full of sound and fury, signifying nothing.”

Anyway, have a Happy New Year. Fingers crossed…

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Image: ST027: Figure 12.1 by Rosenfeld Media

You may recall a while back that Arctic Systems was major news. A case that was taken all the way to the House of Lords where, to the great relief of many, HMRC’s assertion that a husband and wife could not share the profits of their company was comprehensively thrown out. S660a does not apply between spouses; end of. So I was more than a little surprised to read this week that HMRC had just lost another S660a case on appeal.

So just what the hell is going on?

The difference between Arctic and this later case – Pattmore vs HMRC – is to a rational mind utterly trivial. Whereas in Arctic the shares were identical, in Pattmore they were non-voting shares. In other words, they were purely a source of income for the spouse. This, it seems, warrants prosecuting the Pattmores under S660a and demanding they pay £20,000 more in taxes.

Luckily, the judge at the Tier 1 Tribunal ruled that the circumstances of the share ownership did not fulfil the criteria for an S660a settlement. Therefore Mr Pattmore was not liable for the tax HMRC said he owed on Mrs Pattmore’s dividend income. Gosh, who’d have thought it…

OK, so good news for the Pattmores, but slightly more worrying news for the rest of us small businesses. That HMRC feel they are justified in pressing this case in the face of a very solid ruling from the highest court in the land almost beggars belief.

I don’t know about you but I thought that HMRC’s duty was to collect taxes owed in line with the legislation in place. Not to chance their arm pressing a case that any sane person would have thought impossible to win, and one that would seem to be vindictive at best.

However that is not the only concern. In the last budget, Osborne raised the spectre of a General Anti-Avoidance Rule, or GAAR for short, which aims to simplify the boundary between acceptable and unacceptable avoidance. Now this might be something worth doing if it is to be applied consistently and fairly and if the boundaries are clearly defined. The bit that worries me is that phrase “applied consistently”: I really don’t have a lot of faith that an organisation that would bring the Pattmore case should be entrusted to apply what would be a largely subjective assessment. And come to that, an assessment that almost certainly would be disputed and so need a court case to establish the answer. Déjà vu, anyone?

And finally, just to confuse things even further, there are mutterings in the press about HMG relaxing their stance on avoidance in general. No idea what that means yet, but we will no doubt find out soon. If true, it would be welcome; there are far more worthy targets than UK’s 4.2 million freelance workers.

But the obvious conclusion to my mind is that Mr Osborne needs to look at the mindset of HMRC very carefully before he starts giving them something as potentially dangerous as the GAAR to play with. Hector needs to re-learn what he is there to do. Chasing un-winnable cases is not it.

Alan Watts can found at LinkedIn.
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