Labour’s response to the debate on tax avoidance should speak to fairness and social justice whilst being proportionate and pro-business. This would help to lay a path to the sort of ‘big tent” politics that could reach deep into a watchful middle England whilst at the same time re-connecting with voters north of the border.
- A balanced approach
In times of austerity, it is important that the tax system remains fair. This has meant closing tax loopholes and increasing penalties for egregious forms of tax avoidance. At the same time, if the UK’s tax system is to be internationally competitive, it must support economic growth by providing incentives for investment and not seeking to penalise success. Labour’s tax policy offering must show that it can marry fairness and competitiveness harmoniously.
- A different approach?
Successive UK governments have had to play a “cat and mouse” game of uncovering new tax schemes and shutting them down on a piecemeal basis. This has contributed to the UK having one of the longest tax codes in the world. Perhaps it is time to question this orthodoxy and to ask whether there are any better ways of tackling the issue. Could we, for example, adopt a broader or more principles-based approach to rule-making?
Whilst the traditional objection to this approach has been that it creates too much business uncertainty, the risk in simply endorsing the status quo is that novel thinking and progress could be stifled. Equally, it could also be argued that business confidence is not currently well served by an inordinately complicated tax code. In the past, inertia has often won the day and the UK’s experiments with principles based legislation have not flourished (for example, the taxation of financial products in 2008/09). Other attempts at generalised legislation have been significantly compromised (see, for example, the TUC’s paper in 2013 entitled “The Deficiencies in the General Anti-Abuse Rule”).
If principles based rule-making has successfully contributed to the regulation of the financial services industry, amongst other areas, should we re-consider its potential application to tax law?
- Changing behaviour
It has become trite to say that where tax planning is within the law, there is no moral obligation to volunteer to pay tax. This is a complex issue. It must be recognised that tax planning covers a very wide spectrum that stretches from the arrangement of a taxpayer’s affairs so as to make routine use of tax reliefs precisely as intended by Parliament, on the one hand, to the implementation of artificial tax-driven structures with no genuine commercial purpose on the other. In the broad centre ground of tax planning, the line between unacceptable tax avoidance and commercially-minded arrangements has inevitably become blurred.
Against this background, should the government use any alternative means to effect behavioural change and, if so, how?
One option would be to require high standards of tax compliance as a pre-requisite for private sector businesses that tender for public procurement contracts or public-private joint venturing. In spring 2013, the coalition government introduced a requirement for each applicant for a central government contract over £5 million to self-certify that it has not been “successfully challenged” by HMRC or foreign tax authorities under certain tax rules (such as the General Anti-Abuse Rule). The requirement is arguably very narrow in what it identifies as tax avoidance and it is notable that it focuses on central government departments (see Cabinet Office Action Note 03/14), not local authorities. On that basis, whilst the 2013 measure was a step in the right direction, it is unclear whether it will have been meaningfully successful.
- International co-operation
Globalisation means access to international markets and the use of a broad range of cross-border tax strategies, in particular, by multinational groups. The UK’s active participation in the international debate and its early adoption of international measures is an example of how the UK can be a leader in this field, for example, through the OECD’s multi-lateral Base Erosion and Profit Shifting (BEPS) project and cross-border measures around “tax transparency” (such as the OECD’s Common Reporting Standard).
Sanjay Mehta, tax lawyer.
This views expressed here are solely those of the author in his private capacity.