The prickly issue of tax avoidance (or tax planning as it is sometimes termed) has had a prolific couple of months with barely a week going by without the issue rearing its head in the press.
The recent high-profile protests by UK Uncut; the revelations that massive corporates such as Barclays paid only a proportion of the corporation tax they "should have paid" last year; the Treasury's launch of a study group to investigate the issue of corporate tax avoidance and the possibility of a "general anti-avoidance rule" (GAAR) all demonstrate it’s an issue that’s not going to go away.
So, what does the current tax system mean for small and medium-sized businesses, and does it need to be changed to support the backbone of the country’s economy?
As things stand
Growing businesses need to manage their tax costs as much as larger, more established operations. Some of that management can be done at the outset, for example through simple decisions about the choice of business medium. Many assume that setting up a business involves incorporating it as a company, for example. This may be the right vehicle, however if a large part of the success of a new business depends upon its human capital, perhaps dealing in services rather than goods, a limited liability partnership could be a better option. Rewarding those upon whom the business depends through a share of profits, rather than salary and bonuses, now saves a swingeing 13.8% employers’ National Insurance cost.
Many also assume that a new or growing business must be missing out on opportunities to avoid tax devised by the clever (and expensive) advisers to their larger competitors, as they simply can’t afford to spend large sums on "efficient tax planning". To some extent this is true; however, many tax avoidance opportunities depend on taking advantage of the ways in which tax systems of different countries operate. So, serious tax avoidance is mostly about businesses operating and arranging their finance across borders and is therefore realistically only available to FTSE 100 multinationals.
Nevertheless, HMRC estimates the current "tax gap" (the difference between the tax they collect and what they think they ought to receive) is a staggering £42bn. Should the law change to make it harder to avoid paying taxes? And what would the impact be on smaller firms if a different legal framework were put in place?
What’s the alternative?
There is an ongoing debate about whether tax avoidance can be curtailed as a whole, either by introducing a GAAR which would make it harder to avoid paying tax, or by changing the way in which tax laws are drafted in the first place – with a similar result.
The Treasury's study group plans to report on GAAR this autumn and will consider the fact that on the one hand the government is under pressure to fill its coffers as much as possible, but on the other lies the question of the freedom of the citizen (and business) to arrange their affairs in the most tax efficient way – which would arguably be taken away with the introduction of GAAR. The last time a GAAR was considered the proposition foundered on the principle of "legal certainty" (more of which below). Taxpayers and their advisers responded by saying that if the power to strike transactions down was going to be given to the Revenue, there had to be a mechanism for the Revenue to clear transactions in advance. The Revenue's view was that it had neither the skills nor the manpower to offer such a service. But there is a bigger point here – giving that much power to the Revenue is a further infringement on the freedom and rights of the citizen.