IoD: Tax planning and tax avoidance are not the same

Monday 2 December 2013

The Institute of Directors (IoD) has called on the government to rethink the way it speaks about tax issues.

Issuing its list of priorities ahead of the chancellor’s Autumn Statement on December 5th, the business leaders’ organisation has urged George Osborne to remind ministers that tax avoidance and tax planning should not be treated as one and the same thing. By conflating the two, IoD fears that officials are actually damaging the government’s drive to encourage businesses, as well as seriously threatening investment from overseas, economic recovery and job creation.

“The chancellor should provide a lead to all ministers and both their parties, to ensure that, despite the best efforts of politically motivated critics, tax compliance, tax planning, tax avoidance and tax abuse are no longer discussed as if they were a single concept,” says Stephen Herring, head of taxation at IoD.

According to IoD, political rhetoric has blurred the lines between legitimate tax planning and the kind of arrangements that veer into avoidance, even though the two are fundamentally distinct.

“He should state clearly that authentic tax planning is perfectly acceptable and understandable for both businesses and individual taxpayers,” Mr Herring says of the chancellor. “Otherwise, the coalition government’s business-friendly agenda will be damaged, and UK inbound investment, economic growth and employment prospects will all be reduced.”

HMRC has been both applauded and criticised for its new tougher stance against tax avoidance. It is also beginning to see the improvements: figures obtained by Pinsent Masons last week showed that the number of tax avoidance schemes disclosed to the tax authority has falling rapidly. In September, UHY Hacker Young also obtained data indicating that compliance activity against small and medium-sized businesses alone brought in an additional £565 million in the 2012-13 financial year - a rise of more than 30 per cent from the previous 12 months. Faced with the ambitious target of pulling in an extra £7 billion every year from compliance measures, HMRC is working hard to ensure that unpaid tax is brought in.

However, IoD suggests that legitimate tax planning measures, used by limited companies and other businesses to ensure they do not pay more tax than is necessary, are being unfairly represented as a means of unethically minimising companies’ tax liabilities.

At the moment, a House of Lords select committee is hearing evidence on the use of personal service companies, including the ways in which the use of these structures impacts on tax collection. It will also look at the IR35 legislation, designed to tackle tax avoidance through disguised employment. Speaking ahead of the committee’s opening, chair Baroness Noakes said that it is vital the government receives the right amount of tax, especially in periods of economic uncertainty. However, she added that the tax system should not put “unreasonable burdens” on taxpayers.

IoD has tax priorities of its own it would like Mr Osborne to consider. Smaller listed companies should see the tax system simplified, while personal tax bands should also be made less complicated so iron out what IoD calls “kinks” in the existing setup. Reform of capital taxes, such capital gains and inheritance tax, should also be considered, while IoD adds the government should also combine income tax and national Insurance as well as working on plans to replace corporation tax.

By Victoria McDonnell

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