On 9 May 2019, the House of Commons Library published a lengthy report, “Tax avoidance and tax evasion” (the “Report”). The Report summarises some of the government’s key measures to tackle tax avoidance and tax evasion, highlighting the government’s focus on countering mass-marketed tax avoidance schemes in order to further reduce the tax gap.
The Report opens by exploring the meaning of tax avoidance and tax evasion, quoting politicians’ attempts to clarify the distinction between tax evasion (which is illegal); tax avoidance (which is technically within the letter of the law but contrary to the purpose or spirit of the law); and legitimate tax planning. It also provides an update on the current tax gap in the UK: in June 2018, HMRC published revised estimates with the total tax gap being £33 billion for 2016/17. This represents a significant and long term reduction in the tax gap over the prior ten years.
The Report states that, historically, the UK's approach was to introduce legislation to specifically target specific avoidance schemes as and when they arose, rather than adopting a more general and purposive approach towards tax avoidance. To counter the resulting “arms race” between HMRC and taxpayers, the government introduced multiple initiatives, including the Disclosure of Tax Avoidance Schemes regime (DOTAS), the General Anti-Avoidance Rule (GAAR), and the follower notice and accelerated payment notice regimes. The latter regimes have been the subject of particular concern, and subject to multiple judicial challenges by taxpayers, due to their arbitrary nature and the limitations imposed on taxpayers’ rights of appeal.
The Report also comments on the highly controversial 2019 Loan Charge which was introduced to counter historic disguised remuneration schemes which HMRC may otherwise have been time-barred from challenging. The measure has raised considerable concerns, particularly with respect to its significant financial impact on unsophisticated taxpayers and its retroactive nature. However, despite 154 Members of Parliament criticising the measure, the legislation came into force on 5 April 2019.
The lack of clarity over what constitutes tax avoidance provides the revenue authorities with the desired flexibility to tackle a broader range of activities and to adapt to changing trends in the market, but it undermines taxpayer certainty. The government’s purposive approach to tackling tax avoidance and tax evasion aligns with the political narrative of the UK’s zero-tolerance approach to tax non-compliance, but serious concerns remain over the lack of safeguards for taxpayers. The House of Lords Economic Affairs Committee highlighted the imbalance of power between HMRC and taxpayers in its report in December 2018; the question remains whether anything will now be done about it.