House of Lords - The Finance Bill 2011 - Economic Affairs Committee

The Finance Bill 2011 - Economic Affairs Committee Contents

CHAPTER 3: ANTI-AVOIDANCE WITH SPECIAL REFERENCE TO DISGUISED REMUNERATION

Context

124. This chapter examines the latest Government initiatives in combating avoidance and assesses their impact and acceptability to outside commentators. In addition to the anti-avoidance strategy generally, it focuses on the draft legislation on disguised remuneration in the current Finance Bill.

125. In its latest figures[112] for the tax gap[113], HMRC estimated that the total for 2008/09 amounted to £42 billion. Of this[114], avoidance represented around 17.5%, some £7.4bn. Evasion, the hidden economy, criminal attacks and 'failure to take reasonable care' taken together amounted to 52.5%, some £22bn.

THE GOVERNMENT'S ANTI-AVOIDANCE STRATEGY

126. In June 2010 the Government launched its new strategic approach to tackling avoidance, as part of the consultation document on tax policy making.[115] In March 2011, alongside the Budget, HMT and HMRC published a document specifically on combating avoidance. This stated that "The key elements of this new approach are:

· making the most of opportunities to make the tax system more watertight against avoidance, for example, as part of wider policy reform;

· reviewing areas of the tax system that have been under repeated avoidance attack, to get to the heart of the problem and develop sustainable solutions; and

· creating new generic defences against avoidance, going beyond closing identified avoidance loopholes, including considering the case for a General Anti-Avoidance Rule (GAAR)."[116]

127. In the foreword to the March 2011 document, David Gauke MP, Exchequer Secretary to the Treasury, wrote "But I want to be clear that being open for business does not mean being open to tax avoidance … We inherited a tax system with a 'tax gap' of around £40 billion … one-sixth is estimated to be due to tax avoidance—that is, reducing tax liabilities by using the tax law to get a tax advantage that Parliament never intended … Clearly, there is a problem we need to tackle and we are committed to tackling it differently from our predecessors. That means a more strategic approach that gets to the root of the problem, rather than treating the symptoms."[117]

128. Chapter 1 of the March document introduced HMRC's new anti-avoidance strategy, showing how HMRC's activities will put the Government's approach into practice. It focused on "three core elements:

· preventing avoidance at the outset where possible;

· detecting it early where it persists; and

· countering it effectively through challenge by HMRC."[118]

129. Chapter 2 "sets out four strands of work on legislative defences:

· a new proposal to reduce the cash flow benefits that taxpayers can gain from using high risk avoidance schemes;

· a new rolling programme of reviews on high risk areas of the tax code;

· work in hand on a GAAR; and

· the targeted tax measures that sit alongside this strategic work to address specific avoidance risks that have emerged."[119]

130. Chapter 3 "looks at the operational effort by HMRC in support of the anti-avoidance strategy."[120] Inter alia, the chapter sets out how HMRC is addressing risk within and across the large business and wealthy individual customer groups, including by taking appropriate action through litigation.

131. Chapter 4 set out the final version of a protocol on unscheduled announcement of changes to tax law setting "out the criteria that Ministers undertake to use in deciding whether an announcement of immediate change to tax legislation is justified, and the process that will be followed for announcements."[121] This followed a discussion document published in December 2010[122] which invited comments on a draft protocol.

FINANCE BILL MEASURES

132. The Finance Bill contains a number of provisions to tackle avoidance. Chief amongst them is Clause 26 and Schedule 2, which will raise an estimated £750 million per annum throughout the years to 2015/16. The legislation is designed to tackle third party arrangements which seek to avoid or defer the payment of income tax or national insurance contributions due on employment income or avoid restrictions on pensions tax relief (the so-called "disguised remuneration" legislation).

133. The proposal to legislate to combat the avoidance around disguised remuneration was announced in the emergency Budget of June 2010 (confirming an announcement in the Budget of March 2010). Draft legislation was published on 9 December 2010 and at that stage extended to 25 pages. The draft Explanatory Note identified the purpose of the legislation as introducing rules that will tax "certain loans of money or assets by third parties to the employee; the earmarking of money or assets for the employee by a third party; and to the outright payments of money or transfers of assets to the employee by a third party where these are not otherwise charged to tax as earnings from the employment."[123]

134. The draft legislation met with much criticism that it went too wide by not excluding many bona-fide arrangements. As a consequence of the large number of comments received, a list of frequently asked questions (FAQs) was published by HMRC on 21 February 2011 and a second version on 31 March 2011, the date the Finance Bill was published. The introduction to the later version of the FAQs accepted that the draft legislation had raised concerns on the part of external commentators and confirmed that the legislation had been "extensively refined to take account of concerns raised in areas where the Government agreed that changes should be made … The primary aim of the legislation remains to protect the Exchequer ... [and] … the relatively complex nature of many vehicles used in this sphere means that the legislation is also necessarily comprehensive."[124] The draft legislation had grown to 59 pages.

135. Against that background, we wanted to hear whether the changes made to the draft legislation satisfied our witnesses that it no longer caught unintended situations. We turn to the evidence on this after looking at the Government's new anti-avoidance strategy in general.

Anti-Avoidance: The Government's Strategy

136. The Government's anti-avoidance strategy and the focusing on the three elements set out earlier met with wide-spread approval from our private sector witnesses. The CIOT thought that "the idea of a strategic approach to tackling avoidance is sensible and in many ways much needed." They continued "We are pleased to note that the new Protocol on unscheduled announcement of changes to tax law explicitly recognises that retrospective changes to tax legislation will be wholly exceptional … It is good to see that the Forum for Tax Professionals will be monitoring the operation of the Protocol and recommending changes where appropriate."[125]

137. The IoD thought that although the "detailed articulation of the strategy may be new, we would be surprised and concerned if more than a small proportion of the practices that it mentions were new."[126] They agreed with taking "away the cash-flow advantage of using high-risk avoidance schemes that fail."[127] The CBI echoed this "We support the Government's adoption of a more strategic approach to tax avoidance."[128] The ICAEW thought that "Tackling Tax Avoidance makes a number of sensible recommendations. We have welcomed previously the new Protocol on unscheduled announcement of changes to tax law which reiterates the fundamental principle that any tax changes should be made prospectively and not retrospectively."[129]

138. Mr Alex Jackman of the Forum of Private Business (FPB) was positive "I appreciate the Government's need to crack down on tax avoidance." But he had a concern "We do not want to see small business unfairly targeted. The government has given something like £900 million to HMRC to tackle tax avoidance and, while there are a few big wins out there, I think the view might be taken by HMRC that there are a few more easy wins at the lower end of the business spectrum. That is something we would be seeking to avoid."[130]

139. On the rolling programme of reviews of high-risk areas of the tax code, most of our private sector witnesses were content with HMRC having chosen income tax losses and unauthorised unit trusts as the first two areas to be considered. Only Mr Murphy thought that these areas "seem to be relatively minor compared to major issues such as profit shifting, the use of tax havens, the abuse of the domicile rule, the residence rules and what they are giving rise to."[131]

140. We welcome the introduction of the strategic approach to anti-avoidance set out in Tackling Tax Avoidance. If the measures set out in the document are pursued vigorously, it should improve the tackling of avoidance and reduce the loss of tax therefrom.

Tackling Avoidance Early

GENERAL

141. Some of our private sector witnesses were of a mind that avoidance should be tackled early before it became widespread with the potential to affect voluntary compliance. For example, Ms Redston thought that "Left unchecked, avoidance corrodes compliance. Successful avoiders pay less than their share; those who see others succeed feel betrayed by the system and resent their own contributions."[132] She saw a need for early action to nip avoidance in the bud.

142. We asked officials what they were doing in practice to implement the commitment in the anti-avoidance strategy to detect avoidance early. Mr Hartnett referred to the disclosure rules which require the promoters of avoidance schemes to notify HMRC of the nature of the scheme and to whom they had provided it. He went on "Over five years, there have been 62 anti-avoidance measures informed by the disclosure rules, blocking £12.5 billion of tax avoidance and bringing in some money as well. That is our key and crucial tool for dealing with avoidance."[133]

143. Ms Walton expanded on the approach to the disclosure rules "The earlier we get information, the better chance we have of taking action to disrupt avoidance activity … We see the disclosure regime as something that needs to be dynamic. We keep revisiting it to make sure that it is working effectively. We also see people applying their ingenuity to getting round the disclosure requirement just as much as they do inventing tax avoidance schemes."[134]

DISGUISED REMUNERATION: THE COST OF NOT TACKLING IT EARLY

144. Current Exchequer losses from avoidance around disguised remuneration, estimated using HMRC data on known schemes, suggest that Exchequer losses in 2008/09 were in the region of £1.1 billion. The loss in the current year would have risen to around £1.54 billion, had no action been taken. After taking into account behavioural responses (including shifting to other avoidance devices and making use of acceptable incentive schemes) which are expected to reduce the yield by between 50% and 60%, the yield from enacting the legislation is estimated to be around £750 million for each year from 2011/12 to 2015/16. According to the policy costings document "The main uncertainties in this costing relate to the size of current tax losses, which are projected from 2008-09 data, and predicting the different ways in which employers will respond to the measure."[135]

145. The Tax Information and Impact Note for disguised remuneration states that "In relation to the arrangements known to HMRC, there are approximately 5,000 employers who are currently using these schemes, with an estimated 50,000 employees thought to be indirectly benefiting. The take up is likely to be wider than this as there has been extensive marketing and widening accessibility of the arrangements over the last few years."[136]

146. The OBR endorses these figures, with a general caveat around all avoidance measures that "the main uncertainty associated with these measures is the sustainability of the yield over time. In general, the costings in this document assume that some individuals switch to other forms of tax avoidance. By its nature, this effect is subject to a wide margin of error."[137]

147. In her evidence, Ms Redston used the disguised remuneration situation as an example. She put it to us that "The issue with disguised remuneration is … the size and difficulty of the underlying problem. This avoidance began on a small scale, years ago. By the time the legislation was formulated, avoidance was endemic, packaged and easily available."[138]

148. We asked our other private sector witnesses whether they agreed with Ms Redston's view that avoidance around disguised remuneration was endemic by the time action was taken to combat it and that the action should have been taken much earlier. They also commented on her view that it was not just wealthy people who were involved. Mr Greenbank said "But it is probably true to say that it starts with the very wealthy. The marginal cost of doing these things decreases all the time and eventually you get a mass market scheme."[139]

149. Mr Stratton's experience was to have "encountered it with what you would regard as highly remunerated people. It appears to be widespread among highly remunerated people … but I have encountered it there more than among the lower paid. It could be rolled out to the lower paid, so something needs to be done."[140]

150. Mr Whiting thought "the scale is evidenced by the number of schemes that we have seen around and the number of specific instances. We have seen data from HMRC in terms of the likely loss or the amount of tax at risk and we think that seems very plausible."[141]

151. Mr Menzies-Conacher agreed and emphasised the wide-spread nature of the avoidance "Certainly they are sold if you have any set of employees, and this is not just major companies. This runs all the way down."[142] Others agreed, though some were unsure how far down the income scale the avoidance went. Mr Woolhouse thought "You have to earn quite a lot to make it worthwhile bothering to do it."[143]

152. We asked officials why they had not acted earlier to tackle the disguised remuneration problem and why the disclosure regime had not made action possible. Mr Hartnett thought that the disclosure regime "did everything that it could, but where you have promoters outside the UK … the disclosure regime has no bite. That has been the difficulty." [144]

153. As to why HMRC did not move earlier and faster, he told us "Some of the offshore arrangements have been pretty opaque to us for some time."[145] He continued "some of this is very difficult stuff. Is it right to tax a loan? That is something we wrestled with for a while. How do you get the offshore information? Eventually, our advice was that this needed to be all-embracing and to take out things that did not need to be taxed. We looked at targeted anti-avoidance rules, but we did not think that we could make that work in the context."[146]

154. We fully agree that avoidance needs to be tackled early before it gathers momentum. We are pleased to see the emphasis on early action in the anti-avoidance strategy. We are concerned, however, that it was not until this year's Finance Bill that action was taken to tackle avoidance through disguised remuneration. Very large amounts of tax were being lost as a result of this avoidance. HMRC should have realised that this avoidance was mushrooming and Governments should have acted earlier to stem the loss of tax.

155. HMRC should learn the lessons from the case of disguised remuneration. We recommend that HMRC carry out a review to establish why the avoidance activity was not detected sooner, or if it was, why its growth potential was not recognised and action taken at that earlier stage.

Tackling Avoidance Effectively

GENERAL

156. Our private sector witnesses also commented on the broad approach to combating avoidance more effectively which we record for HMRC's consideration.

157. Mr Gammie thought that "too often, legislation has addressed perhaps a symptom of avoidance rather than the actual cause. Certainly, the current strategy has said very clearly that what the Revenue wants to look at and address is the cause. To the extent that they can go to the heart of the matter they will."[147]

158. Commenting on the review of other countries' approach to tax policy making and in this context to anti-avoidance legislation in particular, Mr Wales's view was that "Getting things right in the anti-avoidance areas is notoriously difficult. From my point of view, the UK has got itself into something of a bind, a difficult position. Over the years we have produced reams and reams of very detailed legislation which, because it is so detailed, encourages people to pore over it in immense detail to find things that it does and does not cover, and behave accordingly."[148]

159. The ICAEW considered "that the right approach to counter tax motivated behaviour that is considered unacceptable is through properly targeted anti-avoidance legislation."[149] Mr Baron provided us with a helpful insight into this, based not only on his time at the IoD but also his 3-year secondment to HMRC. He was asked how to draft anti-avoidance legislation successfully and responded:

"I think there are two different things we have to distinguish here. One is that where there appears to be an avoidance problem, the Treasury and Ministers feel that action needs to be taken but they do not feel it needs to be announced today with effect from today. In that case by far the best thing to do is to do as much talking to industry as possible and be upfront with industry about what they think the problem is, what all their fears are, because they may be hitting the wrong target …

150

THE EFFECTIVENESS OF THE DISGUISED REMUNERATION LEGISLATION

160. Our private sector witnesses were very critical of the legislation produced. They were still unhappy with the unintended consequences that it could deliver.

161. The LSEW wrote "The first comment to be made about the Disguised Remuneration draft legislation is its length. There are 59 pages in Schedule 2 of the Finance (No. 3) Bill. The first 5 pages describe the circumstances in which the charge arises. The next 27 pages contain exclusions from those circumstances … it looks pretty likely that the legislation has been drawn too widely and charges too many 'innocent' situations while also taxing the 'guilty'."[151]

162. The LSEW summarised their understanding of the three principal areas that the legislation was seeking to cover. They went on "The Society believes that the draft legislation does not comply with the Government's own proposals concerning the formulation and implementation of tax policy, contradicts the FSA Remuneration Code, severely restricts the scope for (commercial, but bona fide) flexible arrangements for wider share ownership in companies and is at best difficult to understand and at worst virtually incomprehensible."[152]

163. The Quoted Companies Alliance (QCA) wrote "the current draft legislation … is overly complex and not sufficiently targeted. This goes against the Government's current commitment and the coalition agreement to reduce red tape for business and simplify regulation."[153] The QCA's view was that "a significant number of simple share scheme arrangements, including HMRC qualifying options and share rights for ordinary employees, will incur unintended tax and national insurance liabilities."[154] "The legislation is very difficult to understand even for experienced share scheme practitioners and is incomprehensible for many of those in companies responsible for operating the rules."[155]

164. The CIOT considered that "The proposed revisions to the draft legislation on disguised remuneration answer some of the concerns we expressed on the initial draft but the rules remain very widely drafted and the new exclusions are intricate and heavily qualified."[156]

165. The ICAEW "support the policy purpose behind these measures" but consider that "it is important that any such measures are properly targeted, proportionate and as far as possible do not hinder growth. While we recognise that HMRC have consulted extensively and have been willing to listen to, and act on, the concerns that have been raised, these rules continue to be a cause for major concern. We do not think that the rules are properly targeted and proportionate and that the extra burdens they will put on employers will stifle growth and damage the UK's competitiveness."[157]

166. Mr Whiting told us that the CIOT had just submitted to the Revenue an 18-page paper on remaining concerns. Mr John Kimmer of the Association of Taxation Technicians (ATT) suggested "… why not start from somewhere else and say, 'These arrangements are fine, everything else is not'? I am sure that could be done in a lot less than 59 pages and it would be much more certain than all these clauses and paragraphs and the possibility of other loopholes coming in. I think that would be a much more practical way of solving the problem."[158]

167. Mr Roy-Chowdhury supported the view that the legislation started in the wrong place "On disguised remuneration, I think the point is that it is unprecedented that they consulted on anti-avoidance legislation, but the problem they have is … they consulted once [the legislation had become effective] … They had to find ways of excluding the unintended consequences of the legislation, which is the wrong way around to do it."[159]

168. Mr Allen, when asked how the legislation could have been done better, commented "I do not think it reflects a lack of competence. I think this is a very difficult area, but I do think it could have been done much better … if it could have been started earlier with the opportunity of an independent review to consider the legislation and its policy objectives, identify the high risks and try to get it in a closer-to-final agreed state with consultation at an earlier date."[160]

169. Mr Haskew was particularly critical "I think it is an object lesson in how not to frame tax legislation … it is bad enough to have 60 pages of this, and the comments I have had from my specialists in this area say that this is the worst legislation they have ever seen. It is totally incomprehensible. I have to say, from looking at it myself, I would probably agree."[161]

170. On 19 May, while we were still taking evidence, the Commons Public Bill Committee on the Finance Bill made 90 Government amendments to Schedule 2. The Exchequer Secretary stated that they would add another 7 pages to the schedule. In justifying these amendments, Mr Gauke said

162

171. Commenting on the amendments which had been tabled just before he gave evidence to us, Mr Allen said "when we have … a list of amendments tabled on Monday, that is not really in anybody's interests. It is good that they are listening. It is good that they have tabled the amendments. Most of them are actually quite welcome, but I would have hoped it could have been done much earlier to give greater certainty."[163]

172. We put these criticisms to officials. Mr Hartnett, probably referring to the analysis by the LSEW of the three principal areas that the legislation was seeking to cover, commented "I think one of the most interesting suggestions put to you, and one of the most worrying from my perspective, was … focusing on the three main areas of disguised remuneration would catch most of it. I have to say that all my experience ... is that if that is what had happened, coaches and horses in vast numbers would have gone through those gaps and the nation would have lost an absolute fortune."[164]

173. Asked if there were lessons to be learned, Mr Hartnett agreed that there were. "One of them—we have learnt the lesson but we have not got the answer yet—is that in a very dynamic tax planning area such as this, how do we really get on top of things that are outside the disclosure regime, that are offshore and the like … If I had to pick up the biggest lesson of all, it is that engagement of the tax industry has been very good on this, even though the tax industry has not liked the outcome … your witnesses gave you a very good idea of what this was broadly about, but as far as I can recall none of them brought forward their most aggressive schemes and said, '… Have a look at this.' That is our job."[165]

174. The legislation to address disguised remuneration avoidance is extremely complex and beyond the scope of most business people to decide whether or not it applies to them. One witness called it 'the worst legislation he had ever seen'. There was clearly a very wide and deep unhappiness with this draft legislation.

175. Many of our private sector witnesses said that 'they would not have started from here' if they had been constructing this legislation. Notwithstanding the justifications put forward by the Exchequer Secretary in the Commons Public Bill Committee and by officials to us, we remain unpersuaded that there was no alternative to this complexity.

176. Although it is clearly too late to change the legislative approach at this stage in the Finance Bill cycle, we recommend that HMRC should carry out an in-depth examination of the alternative approaches that would have been open to them in framing the disguised remuneration legislation. This could be part of the review that we recommended earlier. The lessons learned should help HMRC to avoid similar pitfalls when tackling other avoidance schemes.

The Primarolo Statement

177. This was raised by Mr Murphy and Mr Whiting in their oral evidence[166]. Subsequently the CIOT prepared supplementary written evidence which noted that "In December 2004, the Government made a statement regarding the possibility of retrospective taxation in relation to the avoidance of tax (including NICs) on pay, especially bonuses, commonly referred to as the Primarolo statement."[167] The Primarolo statement[168] included the following paragraph:

"However, experience has taught us that we are not always able to anticipate the ingenuity and inventiveness of the avoidance industry. Nor should we have to. Our objective is clear and the time has come to close this activity down permanently. I am therefore giving notice of our intention to deal with any arrangements that emerge in future designed to frustrate our intention that employers and employees should pay the proper amount of tax and NICs on the rewards of employment. Where we become aware of arrangements which attempt to frustrate this intention we will introduce legislation to close them down, where necessary from today."

The CIOT told us that "The Primarolo statement has led to one piece of retrospective action to date", but that "More generally, it does seem that the statement has been effective."[169]

178. In 2009 HMRC carried out a review[170] of the effectiveness of the Primarolo statement in its early years of operation. This showed that the statement was effective in the part-year 2004/05 and in 2005/06. Additional tax collected as a consequence of the statement was estimated to have exceeded £300 million. The assessment stated that the final revenue collected for these years was likely to be higher. "Some of the forecast yield [from the Primarolo statement] was expected to come from retrospective payments and HMRC investigation settlements. This part of the yield is not evaluated by this working paper because complete information to do so is not yet available."

179. The CIOT's view was that they "will always call for tax to be imposed by clear primary legislation rather than general statements" but that "The change of government has led to questions about the continuing applicability of the Primarolo statement. Nothing has been said on this by a Government Minister and so the position remains uncertain."[171]

180. In his oral evidence, Mr Whiting commented on using the Primarolo statement, or something like it, in the context of the legislation on disguised remuneration "We always prefer tax by law and not tax by concession or whatever. But I think now we are looking at 59 pages and saying, 'Whoa, this is just getting too much', particularly when you need a lot more changes to it. I go back to my comment: it is the infamous joke of 'If I wanted to get there I wouldn't start from here', and ideally we would go back."[172]

181. We asked officials about the Primarolo statement. Mr Hartnett commented "The first reaction is a wry smile, if I may. When the Primarolo statement was issued, I do not think it would be an overstatement to say that in some areas of the tax industry there was complete uproar. They did not like it. It was not legislation; it was a promise of what was going to happen. A huge amount was written in criticism. So I am surprised that there is some thinking that it could be useful … What about the present Government? It has made it very clear that it sees retrospective legislation of the sort promised in the Primarolo statement as wholly exceptional … If ever HMRC was to make a case to Treasury Ministers that something was exceptional ... then a hunch ... is that this might be [such] an area … We are going to be monitoring it carefully, because it is really important that we advise our Ministers on how this legislation works."[173]

182. In their supplementary written evidence, the CIOT added "Developing/adapting the Primarolo statement might have been a better route than developing 59+ new pages of legislation and also mean less chance of creating new loopholes. We could not accept any of the legislation being made retrospective: we have a fundamental objection to retrospective legislation in any event, but here there had been no warning of the continued use of the Primarolo statement in this way. However, the legislation might have been limited to specific provisions to make it clear what was being targeted, coupled with a warning to the effect that the government wants to stop people exploiting EBTs etc and will consider further legislation with retrospective effect if further avoidance in the area emerges."[174]

183. We recognise that in its anti-avoidance strategy, the Government stated that it would legislate retrospectively only in the most exceptional circumstances. It seems to us that a tax loss of over £1 billion each year from avoidance involving disguised remuneration is a truly exceptional circumstance. We think that the willingness of our private sector witnesses to consider the Primarolo statement is an indication of how unhappy they are with the disguised remuneration legislation. We therefore recommend that the status of the Primarolo statement should be clarified and, as necessary, further consideration be given to a revised statement to help deter future avoidance in this general area of the tax system.

Principles-Based Drafting

184. We asked our witnesses about principles-based drafting, that is setting out in legislation the principle of what you are seeking to achieve without attempting to cover every situation in detail. Three recent examples of this approach are the legislation in Schedule 24 Finance Act 2009 on disguised interest, that on transfers of income streams in Schedule 25 FA 2009 and that in Schedule 5 of the present Bill on group mismatch schemes.

185. Mr Gammie thought that "you have to take a value judgement as to whether or not you are going to have legislation that expresses the general principle but allows the Revenue effectively to spell out, through practice statements and other materials, precisely where they think the boundaries should be drawn."[175]

186. Mr Stratton's view was that "As a general matter, we are not particularly in favour of principles-based drafting … In an area like [disguised remuneration], where it is difficult to distinguish what you are trying to target and the Government are nervous about the constant evolution of the industry in the area to get round what they are trying to stop, we feel it would have helped and it might have got a better result."[176]

187. The possibility of a principles-based approach, or smaller targeted measures, to the disguised remuneration problem was raised during the debate in the Commons Public Bill Committee on this legislation. Responding to this suggestion, the Exchequer Secretary said "having looked at that suggestion closely over some time, we are not convinced that it would be effective against the widespread, diverse and, in particular, informal avoidance that occurs."[177]

188. We asked officials about their approach to principles-based drafting. Ms Walton confirmed "We are in favour, and we want to develop our use of principles-based legislation … Our feeling is that it does not necessarily work everywhere. As ever with avoidance, you have to pick the most appropriate route to tackle something. We like principles-based legislation because we see it as being better proof against new forms of ingenuity."[178]

189. Specifically on disguised remuneration, Ms Walton thought "Had we gone to a principles-based approach, we would still have needed to list the exclusions where we did not want the principle to apply, so I am not convinced it would have led us to something shorter. But that is not to say that this is not an approach that we want to develop for the future."[179]

190. We agree that principles-based drafting is an approach that should be developed for the future in appropriate situations. It seems likely that the more it is used, the easier the approach will be to develop in a wider range of situations.

A General Anti-Avoidance Rule (GAAR)

191. The document Tackling Tax Avoidance refers to the announcement in December 2010 that a study group led by Mr Graham Aaronson QC was being set up to explore the case for a GAAR in the UK. The study group will complete its work by 31 October 2011.

192. We did not find great enthusiasm amongst our private sector witnesses for a GAAR. The IoD thought that "We must wait to see what the study group … concludes, but the main concern will be the need to provide certainty."[180] The CBI considered a GAAR "both burdensome and unnecessary"[181] ICAS thought "There are considerable improvements to the drafting process that can occur without consideration of a general anti-avoidance provision."[182]

193. The CIOT were less hostile. Mr Menzies-Conacher said "There is no doubt it is worth looking at. The issue still remains that the big prize that would make this worthwhile was if you could design a proper GAAR that allowed you to take away the three or four other tiers of anti-avoidance legislation that clutter up the code … so you could simplify the legislation; although that puts a huge amount of faith on getting the wording of any GAAR right and the experience overseas is a bit mixed on that."[183]

194. We agree that a GAAR is worth examining again and we look forward to Mr Aaronson's report.

Evasion

195. Some of our witnesses enjoined us not to forget about evasion. In their evidence, the CIOT wrote "As a final point in this section, we would urge the Government not to lose sight of evasion and other criminal activity, which can have a far greater impact on Exchequer revenues than avoidance."[184] Mr Whiting reinforced this in his oral evidence "One of the pleasing things … is that there is more emphasis coming on evasion not just a total focus on avoidance."[185]

196. Mr Murphy agreed "Let's be blunt about it; the biggest issue with regard to loss of revenue is not with regard to avoidance, it is with regard to evasion, and most people who are evading would in fact be basic rate taxpayers, probably not high rate taxpayers at all. This is cash put in pockets … and a lot of those people will not be making £40,000-plus a year but they will still most certainly be putting cash in pockets."[186]

197. Mr Hartnett outlined for us what was happening to tackle evasion and stated that he was "expecting our numbers from compliance interventions to be very good for 2010-11—probably our best ever." He went on "Under the recent spending review settlement, we have obtained funding from the Government to increase the staff in compliance activity. We are in the throes of recruiting 200 more criminal investigators. We particularly want to focus on people who have hidden money offshore over a number of years, as a product of tax fraud. We have set up new groups around the country, with task forces looking at particular industries … We have teams of specialist investigators who are pursuing people working in the hidden economy."[187]

198. On the basis of HMRC's figures the tax lost from all forms of evasion and default is very much greater than that lost from avoidance: £22 billion compared with £7.5 billion. We welcome action to tackle evasion. We recommend that the Government should publish an anti-evasion strategy in the same way as for anti-avoidance.

112 Measuring Tax Gaps 2010: An Official Statistics Release 2010, HMRC, September 2010 Back

113 "Defined as the difference between tax collected and the tax that should be collected (the theoretical liability). The theoretical tax liability represents the tax that would be paid if all individuals and companies complied with both the letter of the law and HMRC's interpretation of the intention of Parliament in setting law (referred to as the spirit of the law)." Ibid, paragraph 1.1 Back

114 Protecting Tax Revenues 2009, HMRC, December 2009 Back

115 Tax policy making: a new approach, HMT and HMRC, June 2010, paragraphs 2.14 and 2.15 Back

116 Tackling Tax Avoidance, HMT and HMRC, March 2011, page 5, Executive Summary Back

117 Ibid, page 3 Back

118 Ibid, paragraph 1.4 Back

119 Ibid, paragraph 2.3 Back

120 Ibid, paragraph 3.2 Back

121 Ibid, paragraph 4.2 Back

122 Tax Policy Making: Draft Protocol on Announcements Outside Scheduled Fiscal Events, HMRC, December 2010. Back

123 Finance Bill 2011: draft clauses and explanatory notes, HMT and HMRC, December 2010 Back