Reform roundtable seminar introduced by Ben Gummer MP, Member of Parliament for Ipswich, on Thursday 23 February.
By Dr Patrick Nolan
When we go to the shop we expect that the cashier will tell us exactly how much our bill will be and how different products contribute to this bill. In fact any shop that fails to provide this information would soon find lines of customers demanding greater transparency and threatening to take their money elsewhere. The relationship between a citizen and the government is clearly different to the relationship between a customer and a shopkeeper. Yet why shouldn’t the standards of transparency that we expect in everyday life apply to government?
As David Gauke MP has written, for many people the tax system is a mystery and so they are unlikely to engage with the system and ensure it works for them. If members of the public do not have even the most basic information on how taxes and spending affect them then the chances of informed and democratic debate are limited.
One idea proposed by Ben Gummer MP to help demystify taxes and spending is for the government to release personal tax statements. These statements would show individual taxpayers the tax they have paid, both in the year just gone and the one to come, and how this is broken down into the main items of government expenditure. On Thursday this week Reform held a lunch with Ben Gummer MP to discuss the idea of tax statements. This event was held under the Chatham House rule.
The idea of a personal tax statement has received a lot of support. The transparency created would help encourage valuable debate. As Philip Johnson has written in the Daily Telegraph: “if you were to discover, for instance, that £4,000 of the £10,000 you have paid in tax and NICs for the year went on welfare, it might put the argument over capping benefits into a different context.”
Yet increasing HMRC’s engagement with taxpayers could mean a change in direction. For years the focus has been on reducing “compliance costs” and moving to more automated systems. HMRC is developing a real time information system for assessing PAYE and this is being taken even further in the welfare system with the introduction of the Universal Credit. The goal has been to reduce engagement with taxpayers. Changing tack and increasing engagement may be the right thing to do – but this will have implications for tax administration.
Given technological changes it may be possible that the administrative implications are overstated. Yet tax statements face another challenge – complexity. One consequence of the UK’s complex tax system is that the effect of taxes and spending on families’ incomes is often not straightforward. How should tax statements treat indirect taxes like VAT and tobacco and alcohol excises? How should these statements treat variations in the consumption of public services (like the NHS)? And what about payments to the EU, employer’s National Insurance payments or company tax?
Tax statements do not need to answer all of these questions and, indeed, many problems could be solved by thinking carefully about the way in which data are provided (e.g., through letters or web based applications). A simple tax statement could make a contribution to debate and encourage people to seek out the answer to any further questions. This could change behaviour. At the very least this could encourage demand for tools and support to help taxpayers understand the tax system. This would not only change the role of HMRC, but help encourage HMRC, employers and other actors (like accounting and software companies) to work more closely together.
Reform roundtable seminar on tackling tax avoidance through a General Anti-Abuse Rule on Thursday 21 June 2012. Introduced by Graham Aaronson QC, lead author of GAAR study into tax avoidance and responsible tax planning for HM Treasury.
By Lauren Thorpe
“It’s a game of cat and mouse. The Revenue closes one scheme, we find another way round it”. This is how an accountant this week described the tax planning practices adopted by his firm. A General Anti-Abuse Rule, currently under consultation by HM Treasury, would seek to target tax avoidance schemes that are found to be abusive, while at the same time protecting normal tax planning. Yesterday Reform held a roundtable discussion on “tackling tax avoidance through a General Anti-Avoidance Rule (GAAR)” with Graham Aaronson QC, lead author of the GAAR study into tax avoidance and responsible tax planning for HM Treasury last year.
This lunch could not have been more timely. Newspaper headlines have this week been dominated by cases of high profile tax avoidance. No tax law has been broken, but the use of complex and novel investment vehicles has been described as an error of judgement and immoral. This can be disputed, yet a tax rule focusing on “abuse” rather than “avoidance”, is being widely touted as a mechanism to prevent the ‘fancy footwork’ that some use to limit their tax liability.
There was a general consensus that a GAAR now seems inevitable, but we should not expect too much. Though a GAAR would represent a stronger approach to tackling tax abuse than currently in place, the lunch raised a number of concerns over the unintended consequences of any legislation.
There was concern that a GAAR could increase the complexity of our tax system further, contradicting the current UK tax policy objective of tax simplification. One strength of the UK tax system, though complex, is its rule-based and consistent application. Frequent changes to the tax system are a major concern to businesses and investors in the UK, and a GAAR would introduce an element of uncertainty into the tax system. Rulings on tax affairs would be determined by advisory panel on the basis of what is “just and reasonable”.
Those who believe that reducing tax abuse will improve the UK’s fiscal position will be disappointed. The last published figure for the tax gap (the difference between the tax collected and the theoretical amount that should be collected) is £35 billion. This includes £10 billion of tax avoidance and ‘legal interpretation’ and £4 billion of evasion (i.e. deliberate under declaration of tax liability) – in total just 2 per cent of annual Government spending. In addition to focusing on increasing tax revenue, the Government should continue to target Government spending reductions.
In spite of these arguments there was support around the room for a GAAR. The UK is one of few countries that doesn’t already have some form of anti-abuse rule in place, and many hoped it could pave the way for a change in culture and attitude towards tax planning. With a rule in place, individuals and tax planners could be less likely to participate in tax schemes that put them at the margin of what is considered acceptable. This would no doubt benefit society by rebuilding trust between business and the public, and reducing the opportunities to attack wealth creators – there was consensus that this harms the UK PLC and is contrary to the pro-business message that the Government seeks to deliver.
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