Government pretends crackdown on tax avoidance with hand deliberately tied behind its back

According to the Boston Consulting Group, Britain now has just over 1,000 ‘ultra-high net worth households’, i.e. those with more than $100m (£65m) in private financial wealth, excluding property. Much of this will be stored in tax havens, and most of it will have been filleted by expensively-paid lawyers and accountants to ensure that next to no tax is paid on it.

When according to the Sunday Times Rich List this same group of 1,000 persons, just 0.003% of the population, have increased their wealth by no less than £190bn since the 2008-9 crash while the inflation-adjusted incomes of almost everyone else has shrunk, why are these ultra-rich not being made to contribute their (substantial) share of the tax burden to reduce the budget deficit? An NAO report published last November offers a lot of the answer.

HMRC’s strategy to deter tax avoidance is via its Disclosure of Tax Avoidance Schemes (DOTAS). This regime requires those that design and sell certain types of tax avoidance schemes (the ‘promoters’) to tell the HMRC about each new scheme they introduce. Over 100 new avoidance schemes have been disclosed under DOTAS in each of the last 4 years, but that still leaves two problems.

One is that it can take HMRC many years to defeat any of these schemes if tested in court, and the other is that some promoters will go to great lengths to avoid disclosing a scheme, and even if the promoters are are detected and taken to court, the penalty is only £5,000 – which is laughably insignificant in cases that may involve attempte to avoid tax of tens of millions.

It says a lot about this Tory government that it boasts publicly about cracking down on tax avoidance, but then confine themselves to policy measures to achieve this which are feeble and risibly ineffective. Yet it’s not difficult to think of what needs to be done if the government were genuinely serious about rooting out tax abuse. Such action should include:

• Since HMRC’s working definition of tax avoidance is ‘using the tax law to get a tax advantage that Parliament never intended’, tax avoidance on that basis can and should be made illegal.   That would deter tax avoidance promoters far more effectively than the soft touch of DOTAS,
• Where nevertheless an artificial contrivance was still promoted which the courts judged was not what Parliament intended, the promoters of the scheme would not only have their contrivance struck down and full payment made in accordance with the tax laws, but those who promoted the scheme and those companies/individuals who sought to take advantage of it should be subject to a penalty of a multiple of the tax charge, say 5-10 times according to the gravity and blatancy of the offence,
• To confirm this new and much-needed approach to tax law, a General Anti-Tax Avoidance Principle bill should be introduced which makes it clear in statute that any scheme the primary purpose of which is to avoid tax rather than any genuine economic transaction would be invalid at law and struck down with a sizeable penalty for attempting to subvert the will of Parliament.