Dave Hartnett, ex Deputy Chairman of the Inland Revenue and now one of HMRC Commissioners, was addressing the Chartered Institute of Taxation's (CIOT) London Branch as part of its 75th anniversary celebration.
He began by outlining the history of the tax avoidance industry and the various attempts by Governments to counter schemes to minimise or eliminate tax and NIC liabilities on employment income.
This culminated in a Treasury statement in the House of Commons on December 2 2004 that the Government will introduce legislation, with retrospective effect to 2 December 2004, if it discovers employment related schemes in the future to ‘avoid’ what the Government considers to be the correct liability.
Mr Hartnett noted that in the 1940s PAYE came in to collect tax from the working classes because previously they spent the money and couldn’t pay. But said that 'in an interesting social shift, the challenge nowadays is to get PAYE from the middle classes because they won’t pay - or at least, sometimes they need some encouragement.
He ran through the background to various Government attempts to ensure that PAYE and NI was paid appropriately which led to 'the avoidance industry turning to new and ever more artificial schemes.
He said: "As schemes grew more complex, so we saw increasingly detailed and complex provisions resulting from the attempt to leave no chinks of light or loopholes to be exploited....
"...It is clear that the history is one of squeezing the balloon in one area only to see a new bulge emerge in another.
He examined the various methods of avoiding, in particular, NI payments. He said: "It was a fundamental principle of the national insurance scheme that contributions should be paid on cash earnings. It is hard to see how it can be contrary to that principle to seek to apply the charge to cash earnings dressed up to look like something else."
Brilliant new wheezes
He questioned what is the answer to this cycle of brilliant new wheezes and legislative counteraction after the event.
While litigation is one route, he acknowledged that it is 'slow and risky'.
Gamekeepers and poachers
Mr Hartnett outlined where we can go from here and warned that 'the gamekeeper is unlikely to go back to playing the game according to the poacher’s rules.
He said: "I hope it emerges clearly from what I have said that successive Governments have for a decade and a half been active in trying to tackle avoidance of tax on employment income effectively, in the face of sustained and inventive attempts to circumvent whatever preventive measures are put in place.
"Throughout, the Government has tried to take action which is proportionate - for example, in response to representations on the 1994 legislation, it excluded own company shares from the tradeable assets legislation. Only to find that the exclusion was exploited for avoidance purposes and that it was necessary to plug the gap later.
"The most recent developments we have seen are designed to change the rules of the game so that the gamekeeper is not left in the position of always being several steps behind the poacher."
The first of the recent significant changes has been the rules about disclosure of marketed schemes. Those rules enable HMRC to identify avoidance schemes much earlier and respond to them more quickly. He said: "They put HMRC on the front foot in dealing with avoidance and change the balance of risk for promoters of schemes.
He gave various examples of schemes which had been reported to the Revenue and said: "So we are seeing all sorts - but the key point is that we get the tip-off early and Government can act quickly where appropriate to close schemes down."
The second significant change recently was the announcement by the Paymaster General at the time of the Pre Budget Report 2004 that the Government remains determined to close down schemes designed to avoid charges on employment income and intends to bring forward legislation to achieve that, if necessary with the provisions taking effect from December 2 2004.
The retrospective nature of this proposal has caused concern among professionals and users who feel the goal posts are being shifted after the ball is in the back of the net. He recognised that this 'marks a significant shift in the approach to tackling avoidance'.
Mr Hartnett justified this action by saying: "The statement is perhaps a measure of the exasperation and frustration felt in the face of the sustained determination to avoid PAYE and NICs on remuneration.
"But the important thing about both the disclosure rules and the statement is the way they change the balance of advantage in relation to avoidance.
"Instead of legislation delivered years after the schemes have had effect and biting only on those too slow to realise the game had moved elsewhere, there is the opportunity to move much more quickly to close schemes and to deny avoiders the benefit of schemes that have already been used, instead of shutting the stable door.
"I think this means a decisive change in the climate for avoidance schemes in this area. It is too early to tell for sure but the early signs are that the avoidance industry has taken a decisive knock. There has been a fall in disclosures in this area and anecdotal evidence of bonuses being paid in good, old-fashioned cash.
"Some are worried that the scope of the measures now being proposed is potentially too wide-ranging. We understand those concerns but it has been made clear that the target is those who seek to avoid the proper charges on their rewards from employment and in particular the area of high value City bonuses paid in ways designed to avoid tax."
He concluded with a veiled warning to the professionals that there should be 'no illusions about the determination to tackle artificial and abusive arrangements designed to avoid the proper charges on the rewards from employment'.
He said: "I hope this look back over the history of anti avoidance provisions in the employment income area has provided some context to the most recent developments. I think the Paymaster General’s statement marks a break with the way we have done things in the past.
"It will be interesting to see what happens next - has the balloon burst or should we look for a new bulge elsewhere? One thing I think is clear, however - the gamekeeper is unlikely to go back to playing the game according to the poacher’s rules.
"I want to close by sending you home tonight with a single thought in your minds - the history of tax avoidance through remuneration in non-cash form is testimony to the creativity and ingenuity of the tax avoidance industry. But what if all that creativity and ingenuity had been used differently, to promote productivity and enterprise in the UK?"
Later, the CIOT made a few observations relating to the disclosure of marketed schemes, which it believed went much further and targeted bespoke schemes and planning and said it was an instance of the Government wanting a bigger blunderbuss than others considered to be necessary.
The CIOT concluded: "There is a concern that in its enthusiasm to stamp out what it considers to be unacceptable avoidance the Government will undermine the trust that needs to be the bedrock of relations between Government and taxpayers. There needs to be a rational dialogue between Government and taxpayers to take account of changing business conditions and to provide some understanding of what is or is not acceptable business and tax behaviour. To demonise one side or the other is neither helpful nor ultimately will it promote the competitiveness of the UK economy."
Full text of the speech is available on HMRC's website
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Susie Hughes © Shout99.com 2005