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The Chancellor’s latest proposals for clamping down on tax avoidance have been criticised by experts for being over-ambitious, ungainly and likely to confuse employers.
In last week’s Budget, George Osborne forecast that an extra £3.8 billion will be collected in tax through legislation – detailed in Finance Bill 2011 – aimed at stamping out disguised remuneration schemes, which are popular with high-earners seeking to reduce their tax liabilities.
The Exchequer is likely to fall short of its target because of wealthy individuals’ willingness to invest in avoiding tax, according to Richard Lloyd-Warner, a tax partner with chartered accountants UHY Hacker Young. ‘It is relatively easy to close a loophole, but what most tax planners expect is that new schemes will be used to find similar tax savings,’ he warned.
‘For high earners, there is so much potential tax at stake that they are prepared to spend whatever is necessary on legal advice to find the next big, legal saving scheme.’
Mr Lloyd-Warner claimed the Chancellor is likely to have far more success in raising additional tax revenue through the forthcoming switch from the retail prices index to the consumer prices index for adjusting the thresholds of various allowances.
He said: ‘George has put in place a mechanism to collect an extra £2 billion in taxes over the next five years. For each individual taxpayer, that change in the tax bands will be largely unnoticed.’
The Chartered Institute of Taxation (CIOT) called on the Exchequer to reconsider its planned approach to third-party arrangements aimed at deferring or avoiding income tax on rewards from employment and restrictions on pensions tax relief.
‘As things stand, the proposals remain a very blunt instrument and, even though changes are promised, we fear they are still very likely to impact employers and employees in ways that are not intended,’ said Colin Ben-Nathan, chairman of the CIOT’s employment taxes sub-committee.
He warned that the legislation – which focuses on taxing the involvement of a third party rather than the reward or loan in connection with the employment – is likely to result in uncertainty for businesses, especially those that are small and have few members of staff.
‘We foresee that many employers will need to approach HMRC to determine whether or not their current arrangements are affected… [and] we remain concerned that, if discretion is left to the taxman to decide what arrangements are the right side of the line and which are not, the position will always be uncertain and subject to a change of HMRC view,’ said Mr Ben-Nathan.
‘In effect, employers and employees will be “taxed by law, untaxed by concession”, and we do not think this is the right basis on which to frame tax law for UK plc.’
