June 7, 2009

A Commitment to Anti-Avoidance?

Posted in Tax Justice at 11:00 am by Paul Sagar

Following the G20 summit Gordon Brown wrote to the OECD calling for the need “to make further advances in the fight against harmful tax practices”. He claimed his priorities were “to address urgently the issue of tax avoidance”.

Alistair Darling also pledged that the Government was taking steps to tackle tax avoidance head-on. He stated: “We have identified loopholes and schemes, which, when closed, will result in £1bn of extra revenue over the next three years.”

So it might be surprising to hear the Government is repealing one of the main anti-avoidance provisions in UK law. Buried away in the depths of the Finance Bill currently before Committee is the tedious sounding Clause 37 Schedule 17, which will repeal Section 765 of the Income and Corporations Tax Act 1988. Yes, it’s boring. But as often in life – and tax law – the boring is important.

Section 765 has existed in varying forms for 58 years. It demands that companies enacting schemes moving funds out of the EU receive consent from the Revenue before doing so. It’s a hangover from the days exchange rates were fixed and flows of sterling had to be carefully controlled. At first glance it should have been redundant when the UK switched to floating rates in 1979.

Yet the retention of 765 has proved remarkably useful, for it forces companies to disclose their schemes and plans to the Revenue before undertaking them. 765 is backed-up by draconian measures – including custodial sentences for non-compliance – meaning it’s taken very seriously indeed. The result? UK Revenue authorities get “real-time information” about the activities of multinational corporations.

Normally, state revenues play a constant game of catch-up. Corporations undertake schemes, and then a revenue body (tries to) find out about them, correcting for impropriety after the event. Section 765 is virtually unique in tax law because it allows the Revenue to know what companies plan to do before they do it. As a result, 765 is a major anti-avoidance measure: by forcing multinationals to receive Government consent, many tax-avoidance schemes are stopped before they’re started.

The downside of 765 is that it’s not something which a definite savings figure can be attached to: it’s pre-emptive rather than corrective, the legislative equivalent of the sleeping policeman. Just as we can’t point to a speed bump and say it saved X number of lives by forcing drivers to slow down, we can’t point to 765 and say it saved X number of pounds. However, one former senior revenue official described the planned repeal as a Treasury “own goal” because it will be part of a package costing £375m every year, whilst also forgoing revenue estimated at over £100million per annum.

Perhaps Labour Minister Dawn Primarolo had such thoughts in mind when she defended Section 765 just 4 years ago:

“[Section 765] was introduced to counter tax avoidance…it has done that successfully and should not be repealed, as it protects a great deal of revenue”.

Primarolo went on to say that if 765 were ever made redundant, then the Government would repeal it. But it is hard to see why it is now redundant – unless “redundant” means “despised by the CBI, who have lobbied incessantly for repeal”.

One way to make 765 redundant would be introducing an after-the-event reporting regime which enforces corporate compliance. That is, companies would be forced to pass on all relevant information for tax purposes to the Treasury, facing severe penalties for failure. This would reduce costs to companies, and is more in line with modern international business realities. But a look at the provisions replacing Section 765 don’t inspire confidence.

Firstly, companies will only be required to disclose information about transactions or events totalling over £100million. This is despite the fact companies with a value of less than £10million can easily engage in tax avoidance, whilst it’s child’s play for multinationals – with turnover in the billions – to disguise transactions into artificially smaller ones, avoiding the need for disclosure. Secondly, the penalty for failing to report will be a paltry fine of £300, plus £60 for every day of non-reportage. Such small penalties are an invitation for companies not to bother disclosing what they want to keep secret – regardless of whether ordinary citizens lose out.

With the UK finances in dire straights, Alistair Darling is set to practically give revenue away. Many rich individuals and wealthy corporations already believe tax is only for little people like you and me; in its current form, the Finance Bill declares that the Government agrees.

Yet there’s still time to act. The Government can abandon the repeal of Section 765, preserving revenue when national finances need it most. Alternatively – and at the very least – Labour should accept Liberal Democrat amendments designed to help tackle avoidance.

Will Gordon Brown do either of these things – or will partisan intransigence and corporate pressure carry the day? Will the irony of the present Government disaray be that nobody notices the Government handing yet more power to the corporate sector, at the expense of us little people?

Watch this space.

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