Under the tax spotlight

Matheu Smith looks behind the consumer backlash over tax avoidance to examine how HMRC is actually tackling the issue and where their spotlight will be focused in 2013.

From the private equity favourite of extracting revenue via loan repayments to entities in low tax jurisdictions to the ownership of property through offshore vehicles tax avoidance seems to have become ubiquitous. In 2001, even HMRC did a sale and leaseback deal where it handed over ownership and management of 60 per cent of its offices to a business that holds its assets in Bermuda, arguing that the tax avoided benefited the taxpayer through lower costs charged to HMRC.

When the global economy was booming and tax receipts were enough to keep the public finances looking reasonably healthy objectors found few who were willing to listen to their complaints. However, as the protests of the squeezed middle have grown louder, tax avoidance has become an extremely high profile issue.

Plainly there is a lot of point scoring at the moment, as witnessed in the attacks on Google, Starbucks and Jimmy Carr. Politicians seem to be engaged in a contest to see to who can most publically and fiercely castigate alleged tax avoiders. Unsurprisingly, this is proving to be more of a vote winner than taxing pasties and so those involved look set to feature on the front pages for the foreseeable future. However, it is important for the Government and HMRC to be seen to translate this rhetoric into action and in the short term that may involve a certain amount of sleight of hand.

A number of those trying to defend legal tax avoidance are complaining that is being wrongly conflated with illegal tax evasion. Public opinion seems to be that both evasion and avoidance are immoral and should therefore be stamped out. However this muddling may actually help the avoiders. It is much easier to take relatively quick and very public action against tax evaders to satisfy public demand to see justice done, rather than tackling the more technically challenging issue of tax avoidance even if that has more potential for improving the public finances. HMRC already has a number of well advanced projects primarily aimed at targeting tax evasion which are being trumpeted more loudly.

A simple but effective tactic has been for HMRC to focus its resources through the use of special taskforces to investigate specific business sectors, often within a specific geographical area. The ‘high risk’ groups currently under the magnifying glass include the rental property sector in the South-East, hair and beauty salons in the North East and a notoriously unscrupulous bunch described by HMRC as ‘the legal profession in London’.

A long running clampdown on those holding assets in overseas banks is also bearing fruit. Some of it has come about almost by accident through HMRC acquiring details of UK taxpayers with assets in banks in Liechtenstein and Switzerland from disgruntled bank employees as the weaknesses of modern IT systems undermine old fashioned notions of secrecy. Other related measures coming into effect include, from 1 January 2013, UK taxpayers with Swiss bankable assets (cash balances, precious metals, all forms of stocks, shares and securities, debts and much more) will face a choice between disclosing details of those assets to HMRC or suffering a one-off levy amounting to between 19% and 34% of the value plus future withholding taxes such as 48% on any further interest earned.

Then there is HMRC’s recently expanded Affluence Unit which has the job of combing through mountains of data to identify ‘affluent’ people. This includes the records of the Land Registry, Companies House and credit reference agencies. It will then examine what they have declared to HMRC in terms of income, capital gains, inheritance receipts and so on, searching for any evidence of undeclared or under-declared income or other receipts. Changes introduced in September 2012 will see everyone believed to have net assets of £1 million or more come under the scrutiny of the Affluence Unit. Previously the threshold was £2.5 million. To facilitate this change the number of officers in the unit is being increased by 50%. The only exception will be for those thought to have more than £20 million of net assets, who are watched over even more closely by the ‘High Net-Worth Unit’.

It seems likely that even more effort will be put into getting these initiatives to produce results. In addition to extra tax brought in, with the public, media and politicians clamouring for something to be done, more emphasis may be placed on naming and shaming of those caught out and a greater willingness to pursue and publicise criminal prosecutions.

Astute readers will have noticed that none of these initiatives will tackle the sort of tax avoidance practiced by some corporations and wealthy individuals that have been in the headlines of late. The difficulty is that tackling true tax avoidance either means changing the law or fighting through the courts to prove that the relevant scheme is not effective. Neither of these options is quick or easy to do or to explain in a TV news bulletin. Hugely technical measures to tackle specific avoidance schemes continue to be announced from time to time, but a sea change may be on the way with the introduction of a General Anti Avoidance Rule (GAAR) which is slated to feature in the 2013 Finance Bill.

Emboldened by the growing level of public support for tackling tax avoidance (or embarrassed by the criticism of the past failure to do so) an HMRC officer armed with a GAAR, and not afraid to use it, may be heading Amazon’s way soon…well eventually. In the meantime, as Starbucks has already demonstrated, for some companies the fear of a customer backlash may turn out to be a more immediately effective deterrent.

All joking aside, the reputational damage that may arise from ‘immoral tax avoidance’ and the extra support and resources HMRC is receiving should be taken into account in future tax planning and should prompt a reconsideration of current arrangements before HMRC turns up or customers disappear. For anyone who feels that they might attract the attention of the Affluence or High Net-Worth Units, it is best to act to resolve any potential issues before you do.