GAAR is like another tax rise

January 28, 2011 4:12 PM

Exchequer Secretary David Gauke MP has set up a study group to consider the introduction in the UK of a General Anti Avoidance Rule (GAAR).   With a new GAAR he hopes to raise billions in extra tax revenue.  Tackling tax avoidance is successfully marketed as fighting crime or immoral behaviour.  But it is like another tax increase: the GAAR will tax today what was not taxed yesterday.

Ever since a judgement by Lord Templeman in 1986 the methods of reducing one’s tax bill have been divided into three categories.  On the criminal side of the spectrum is tax evasion: using illegal means to dodge tax.  Tax mitigation is the opposite: using expressly legal means to pay less; e.g. by saving in an ISA.  Tax avoidance relates to the opaque world in between: where the law is not 100 per cent clear.  In those cases courts try to find The Intention of Parliament to decide on the legality.

Some measure of vagueness and ineffectiveness is intrinsic to every law.  One can never foresee every situation.  Courts interpret and find a reasonable legal outcome.  When avoidance becomes widespread and/or the courts’ interpretations off the mark, parliament can change the law.  Some now think that for tax law the doctrine of legislative supremacy and judicial interpretation to deal with an uncertain world in a reasonable manner isn’t good enough anymore.

An effective GAAR must allow the taxman to tax whenever there are doubts or unforeseen circumstances.  To cover all those situations a GAAR cannot be precise; it must be a blanket legal cover for whatever HM Revenue comes up with.  This is extremely dangerous.  Actions previously believed not to be taxable may suddenly become taxable at the say-so of the taxman. Parliament’s express intention is no longer sought before independent judges: it is the unelected civil servants in HM Revenue who decide on legality. Entrepreneurs will constantly have to seek HM Revenue guidance, a bureaucratic and lengthy process.

This evolution towards discretionary tax law is nothing new.  As I pointed out in an earlier article, during Labour’s tenure three methods were used to increase tax.  Under the taxed by law and untaxed by practise principle, wide tax laws are introduced and specific categories of people are then exempt.  Principles-based tax law sets out tax principles rather than precise rules, making tax law unpredictable, and dependent upon HM Revenue guidance.  The third iniquity is retrospective tax law.

With discretionary laws legal certainty and a proper balance between state and individual go out of the window.  Knowing when tax will be owed, an intrinsic part of the cost/benefit analysis of every business transaction, becomes increasingly difficult and costly. A discretionary GAAR will be seen for what it is: just another tax rise, and another costly administrative burden on business.

The hunt for potential taxpayers is driven by spenders, short-term politicians, and the media.  Spenders never cut, they always rise.  In the short-term politicians like the GAAR as it will bring in more tax – moving to another jurisdiction takes some time.  And now Tax Planners get the same negative press as Bankers.  To some, empty coffers are not the result of excessive spending, but simply of tax avoidance and evasion.

For an entrepreneur, paying tax experts is just another commercial consideration: the higher the taxes, the more potentially lucrative it becomes to employ experts to avoid it.  They have been very successful in this: notwithstanding the increase in taxes and taxes rates the total tax take has remained more or less stable at 36 – 38 per cent of GDP over the last two decades.  Yet instead of endangering the rule of law with the introduction of a discretionary GAAR, there is a much easier way of reducing tax avoidance and increase revenues.  It is to simplify and reduce taxes to make the economy and the taxable mass grow.Exchequer Secretary David Gauke MP has set up a study group to consider the introduction in the UK of a General Anti Avoidance Rule (GAAR).   With a new GAAR he hopes to raise billions in extra tax revenue.  Tackling tax avoidance is successfully marketed as fighting crime or immoral behaviour.  But it is like another tax increase: the GAAR will tax today what was not taxed yesterday.

Ever since a judgement by Lord Templeman in 1986 the methods of reducing one’s tax bill have been divided into three categories.  On the criminal side of the spectrum is tax evasion: using illegal means to dodge tax.  Tax mitigation is the opposite: using expressly legal means to pay less; e.g. by saving in an ISA.  Tax avoidance relates to the opaque world in between: where the law is not 100 per cent clear.  In those cases courts try to find The Intention of Parliament to decide on the legality.

Some measure of vagueness and ineffectiveness is intrinsic to every law.  One can never foresee every situation.  Courts interpret and find a reasonable legal outcome.  When avoidance becomes widespread and/or the courts’ interpretations off the mark, parliament can change the law.  Some now think that for tax law the doctrine of legislative supremacy and judicial interpretation to deal with an uncertain world in a reasonable manner isn’t good enough anymore.

An effective GAAR must allow the taxman to tax whenever there are doubts or unforeseen circumstances.  To cover all those situations a GAAR cannot be precise; it must be a blanket legal cover for whatever HM Revenue comes up with.  This is extremely dangerous.  Actions previously believed not to be taxable may suddenly become taxable at the say-so of the taxman. Parliament’s express intention is no longer sought before independent judges: it is the unelected civil servants in HM Revenue who decide on legality. Entrepreneurs will constantly have to seek HM Revenue guidance, a bureaucratic and lengthy process.

This evolution towards discretionary tax law is nothing new.  As I pointed out in an earlier article, during Labour’s tenure three methods were used to increase tax.  Under the taxed by law and untaxed by practise principle, wide tax laws are introduced and specific categories of people are then exempt.  Principles-based tax law sets out tax principles rather than precise rules, making tax law unpredictable, and dependent upon HM Revenue guidance.  The third iniquity is retrospective tax law.

With discretionary laws legal certainty and a proper balance between state and individual go out of the window.  Knowing when tax will be owed, an intrinsic part of the cost/benefit analysis of every business transaction, becomes increasingly difficult and costly. A discretionary GAAR will be seen for what it is: just another tax rise, and another costly administrative burden on business.

The hunt for potential taxpayers is driven by spenders, short-term politicians, and the media.  Spenders never cut, they always rise.  In the short-term politicians like the GAAR as it will bring in more tax – moving to another jurisdiction takes some time.  And now Tax Planners get the same negative press as Bankers.  To some, empty coffers are not the result of excessive spending, but simply of tax avoidance and evasion.

For an entrepreneur, paying tax experts is just another commercial consideration: the higher the taxes, the more potentially lucrative it becomes to employ experts to avoid it.  They have been very successful in this: notwithstanding the increase in taxes and taxes rates the total tax take has remained more or less stable at 36 – 38 per cent of GDP over the last two decades.  Yet instead of endangering the rule of law with the introduction of a discretionary GAAR, there is a much easier way of reducing tax avoidance and increase revenues.  It is to simplify and reduce taxes to make the economy and the taxable mass grow.

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