Resorting to an argument about the morals of tax planning highlights the flaws in the current system, says Mike Fleming

Moral judgments about tax have been flying around the media like a virus. David Cameron’s condemnation of Jimmy Carr’s tax arrangements as “morally wrong” made headlines.

Carr’s public apology, after withdrawing from the avoidance scheme in question, added to the moral overtone. Further moral judgments were made following Cameron’s refusal to comment on Gary Barlow’s tax affairs, with speculations surrounding Barlow’s relationship with the Conservative party and his recently awarded OBE.

Code of conduct

Never has the relationship between an individual’s tax code and moral code been more widely conflated. Moral pronouncements of ‘right and wrong’ sit uneasily within an objective system. Clearly we should all pay a correct share of tax but this needs to be achieved through the introduction of watertight legislation, rather than pointing the finger at individuals.

The government does have plans to combat tax avoidance through the introduction of a General Anti-Abuse Rule (GAAR). Unfortunately the very generality of the rule means that it’s more of a blunderbuss than a sniper’s rifle.

The government requires tax avoidance legislation that will operate with the precision of a surgical scalpel, allowing them to excise tax avoidance schemes which are aggressively abusive, without compromising businesses and individuals engaged in legitimate strategic tax planning.

Sadly, a GAAR could actually be more detrimental to smaller businesses and sole traders than to the ‘big fish’ it was designed to catch. The application of the GAAR hinges around one word – ‘reasonable’ – and a judge’s perception of what it constitutes.

So, common business tax planning behaviour which has been endorsed – and even encouraged – for generations could suddenly be held up under the microscope and result in a hefty fine.

If you owned a garage, for instance, and wanted to take your 21-year-old son/daughter into the business, it would make sense in terms of tax to make them a partner. As a sole trader may well be a higher-rate taxpayer, but by introducing a partner you split the income and therefore each pay tax at a lower rate.

Fair advantage

This sort of strategic tax planning supports business growth, especially for SMEs and also promotes family business. Under the GAAR such a business could well find themselves caught, and fined, for engaging in activity where ‘it was reasonable to conclude that the obtaining of a tax advantage was the main purpose of the arrangements’.

Isn’t that the case for many legitimate business arrangements?

The ‘catch all’ premise of the GAAR sets it up to create casualties where the government should be building areas of strength – in SMEs and family business. HMRC has declined even to provide a clearance process - whereby conscientious individuals could submit their tax arrangements to the Revenue for approval – so increasing the likelihood that unsuspecting members of the public will be hit.

To come back to morality, if anything’s immoral it’s the government’s presentation of the GAAR as something which will promote fairness and equality. In fact it is likely to favour those who can afford to engage in lengthy law suits hinging on the definition of what is ‘reasonable’.

It’s no coincidence that the GAAR draft legislation follows the suggestions of a committee chaired by a lawyer. One wonders who will be involved in arguing the meaning of the word ‘reasonable’? At the very least, we deserve certainty when dealing with the state in terms of tax. The government plans to introduce a scheme which will undermine this. Where’s the morality in that?

Mike Fleming is tax director at Straughans Chartered Accountants www.straughans.co.uk