Lifting the Lid on Tax Avoidance Schemes - HMRC Consultation Document
THE UK HM Revenue and customs has issued a Consultation Document on Lifting the Lid on Tax Avoidance Schemes.
Tax avoidance represents nearly 14% of the UK tax gap. It involves using the tax law to gain an advantage that Parliament never intended and frequently involves contrived, artificial transactions that serve little or no purpose other than to reduce tax liability. And it enables some taxpayers to gain an unfair advantage, undermining confidence in the tax system.
In March 2011, the Government introduced a new HMRC anti-avoidance strategy in the document Tackling tax avoidance. The strategy focuses on three core strands:
1. Preventing avoidance at the outset where possible;
2. Detecting it early where it persists; and
3. Countering it effectively through challenge by HMRC.
The Government has taken robust measures to tackle tax avoidance; e.g. announcing legislation that, in effect, has closed schemes down with immediate (and in one exceptional case, retrospective) effect. The Government is currently consulting on a General Anti-Abuse Rule ('GAAR') that is targeted at artificial and abusive tax avoidance schemes. The GAAR is expected to act as a deterrent to those engaging in such schemes in the first place; and where avoidance persists, it will provide an additional tool to enable HMRC to challenge and defeat these.
More robust legislation has led to both a reduction in the quantity and ‘quality' of avoidance schemes being marketed. Fewer schemes are now being sold and more are being challenged operationally, rather than through a change in the law, because it is clear that they do not work and simply do not deliver the tax advantages advertised by those who promote them.
The Disclosure of Tax Avoidance Schemes (‘DOTAS') regime is a key component of the detection strand of the strategy, and it also plays an important role in deterring avoidance, and hence in preventing it at the outset. DOTAS was introduced in 2004. It was an innovative approach to countering tax avoidance and so was initially limited to schemes that concern one or more of income tax, capital gains tax (CGT) or corporation tax (CT). A separate, but similar, disclosure system was introduced for VAT at the same time.
The initial focus of DOTAS was upon gaining information about avoidance schemes, particularly new and innovative schemes, to identify loopholes in the law that were being exploited and inform legislation to close them down. DOTAS has performed this role well and has informed over 60 measures in Finance Acts since 2004.
Something for India to copy?