Future Capital Partners estimates that about £25bn of tax is currently in dispute between HMRC, individuals and small companies, with 100,000 individuals and small businesses affected by long-term HMRC enquiries and challenges.
These 100,000 represent a significant proportion of the UK’s wealth creators. Of the tax under dispute, FCP believes about 10 per cent is due in the future, about 15 per cent is held by HMRC and about 75 per cent is in the hands of the taxpayer.
The uncertainty and potential contingent liabilities created by these disputes is affecting investors’ willingness and ability to invest in the UK whilst not achieving any immediate financial benefit for the UK economy. Furthermore the Government has been introducing ever more complex legislation in order to counter tax avoidance – but without effectively preventing the leakage of billions of pounds in lost tax receipts. Government policy in this whole area is expensive, cumbersome and ineffective. It is time for a fundamental change in thinking.
We believe steps should be taken to address these issues, in order to change the dynamic of the tax avoidance market and the litany of longstanding tax disputes. This would enable HMRC to quickly deal with the majority of its backlog, create clarity and release investment into the enterprise economy.
The first step is to introduce a ‘user pays’ rulings system to give pre-approvals to acceptable tax planning. This would quickly wipe out unacceptable practices by making all structures more transparent, and is already working well in the context of the enterprise investment scheme. As a ‘user pays’ scheme, none of the burden of resource would fall on HMRC – indeed it could become a profit centre – and HMRC could access the best and brightest minds to assist with obtaining rulings. This would also help hone and refine government policy and effective legislation. FCP believes that once a rulings system exists, investors would quickly only invest in structures which had achieved a ruling – as is already the case in a number of other jurisdictions.
Secondly, we would recommend that HMRC policy changes to authorise local inspectors to settle certain disputed historic arrangements within a range of acceptable outcomes. The inspectors are best equipped to assess the relative merits of such products legacy arrangements and thus to offer settlement proposals at the right level. Making policy decisions about such matters from the centre is unwieldy, expensive and ineffective.
Thirdly, we believe that those who settle should be asked to sign up to an agreement that they will voluntarily disclose any tax planning they do to HMRC within 30 days, whenever they do it. Additionally, HMRC should introduce a voluntary disclosure scheme for those who create tax planning or tax efficient investments to notify HMRC before any planning or investment is launched.
Finally, litigation should only arise as a last resort after other avenues have been properly explored. The current Litigation and Settlements Strategy is not encouraging this, and is contributing to the backlog of cases under dispute.
Implementing these measures should simplify the process by which HMRC and ordinary investors deal with taxation, and greatly improve the relationship between the two.
Tim Levy is owner, director and founder of Future Capital Partners