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Ed Balls tackles a major General Anti-Abuse Rule deficiency

Ed Balls tackles a major General Anti-Abuse Rule deficiency

Ed Balls blogged last night that:

Tackling tax avoidance is a key part of our economic plan. A fair and robust tax system is vital if we are to bring down the deficit, safeguard our National Health Service and maintain public support for the dynamic open economy we need.

At the moment, we are going in the wrong direction. The amount of uncollected tax – the so called ‘tax gap’ – rose again to £34 billion in the latest year on HMRC’s own estimates. It’s up by £3 billion under this government and tax campaigners have suggested the true figure could be much higher.

Having then noted Labour’s latest corporation tax plans he added:

But this agenda will only be delivered if HMRC has the powers and resources it needs to act. We have supported the introduction of a General Anti-Abuse Rule (GAAR). Those who set up abusive schemes should run the risk of being caught by such a rule.

But it is currently a GAAR without teeth. Those who are caught have to repay the tax they tried to avoid, but they do not face a penalty. There is still no disincentive to try and game the system. That is why Labour will bring in a tough penalty regime for the GAAR, with fines of up to 100 per cent of the value of the tax which was avoided. For the first time this will provide a tough and genuine deterrent to those who try to abuse the system and avoid paying their fair share of tax.

I welcome this. I included a penalty regime in the general anti-avoidance principle I wrote for Michael Meacher that was presented as a Private Member’s Bill to the House of Commons  (by, in effect, offering a clearance system for transactions so taking them outside penalty risk)  because without teeth any such provision has little more effect than a polite request to not misbehave in future.

I also highlighted the absence of a penalty regime in my commentary on the GAAR when it was published. And the very limited references to penalties in the GAAR guidance are only there because of what I tried to achieve on this issue when on the GAAR advisory panel that largely wrote this material.

But, and I have to add this but, adding a penalty regime to the GAAR is only step in the right direction for the GAAR. The ‘double reasonableness test’ and GAAR advisory panel both have to go before it has anything approaching credibility. Curiously Scotland has already achieved those goals in its new GAAR. My hope is Ed Balls will go down that path too.

But, as the person who fought hardest for this penalty regime I welcome this move: it’s emphatically an appropriate step to take and a damning indictment of the current government’s lack of willing to really tackle tax abuse that such a regime was not included in its original version – despite my very best efforts to draw the need to its attention.

This post originally appeared on Tax Research UK and is cross-posted here with permission.