The UK government's spending review, in which heavy cuts to programmes received wide attention, has also given HM Revenue & Customs £900 million with which to address the tax gap and tackle tax evasion and avoidance. But will such efforts will bear sufficient fruit? James Johnston, Partner within the Private Wealth team of Bircham Dyson Bell has a view.
The reference to tax "avoidance" (in contrast to evasion) as part of the announced commitment to spend £900m on a "crackdown" reflects a current concern by HMRC to be able to challenge more easily any arrangements which they regard as artificial, on the grounds that the arrangements were made purely in order to reduce a tax liability. In the past, if such arrangements were challenged on this basis it was done through the Courts. Now, however, the Government is exploring the introduction of a general anti-avoidance rule (GAAR). When this was first suggested the conclusion was that it would be too difficult to implement in a fair and consistent way, particularly in the absence of a procedure for clearing transactions with HMRC in advance. Such a clearance procedure would need to be introduced if a GAAR is now contemplated.
Capital Gains Tax
The Government might decide to tighten the rules for the payment of CGT on the sale of second homes.
Sometimes referred to as a "voluntary" tax owing to the rule which allows capital to be given away free of tax provided the donor lives another seven years. Might the Government introduce an immediate tax on lifetime gifts (similar to the capital transfer tax of the 1970s)? This seems doubtful. It would be unlikely to raise significant revenue, not least because taxpayers would respond by postponing gifts of capital while the tax was in force, in the hope that it would later be repealed. Meanwhile capital held in the savings accounts of an older generation is less likely to fuel an economic recovery than if it is held temporarily in the current accounts of a younger generation setting up homes, equipping and refurbishing them (and paying VAT as they do so). So a tax that deterred the gradual transfer of spending power to a younger generation seems unlikely.
A new potential Wealth Tax?
Introduction of a wealth tax (i.e. an annual tax on capital would be a possibility, though it would not fall within the notion of "avoidance". But the Government will be alert to the need for a tax system to remain competitive. The French Government's experience of introducing a wealth tax (l'impot de solidarité sur la fortune), perceived as punitive by those liable to pay it, has been to watch a steady stream of wealth creators leaving the country - many of them to work and create employment in the UK. So any idea of introducing a wealth tax would need to be approached with caution.
A change in treatment of non-doms?
A wholesale change to the tax advantages offered to non-doms (temporary foreign residents) is perhaps unlikely. Whilst in opposition, the Government will have taken note of the criticism levied against its predecessor for damaging the attraction of new foreign investment to the UK, when the tax burden on non-doms was increased in 2008 through a series of complex (and somewhat chaotic) changes. One would expect the present Government to be more attuned to the potential loss to the economy in turning away investors and employers from overseas.