At a time of fiscal austerity across many countries in Europe, clampdowns on tax planning by large corporates or wealthy individuals play favourably with voters. But they can also undermine competitiveness and the fragile economic recovery.

The UK tax authorities have pursued a number of high-profile claims in recent months that point to a more aggressive approach to tax collection by HM Revenue and Customs (HMRC), bringing the pay packets of footballers and tax returns of large banks such as Barclays into the spotlight. However, these are also examples of what many see as a violation of one of the most important principles of a good tax regime – that laws should not be changed retrospectively to penalise schemes that were once regarded as legally sound. 

The financial difficulties facing Rangers Football Club in Glasgow continue to generate headlines – not least the reported £43m ($68m) that the club may be forced to pay to HMRC as a consequence of its use of Employee Benefit Trusts (EBTs). But there are wider issues at stake in this other than the pay packets of sportsmen and the future of a football club.

EBT debate

To begin with, the use of EBTs – a tax structure that football clubs have been using for years to remunerate top earners – is not confined to the sporting world. Banks, hedge funds and many UK corporates have used EBTs as part of their remuneration arrangements. They enabled employee beneficiaries to defer payment of income tax and national insurance at the time when their employers settled funds on the EBTs. They were also able to draw on the funds by way of loans without adverse tax consequences.

However, under legislation introduced in December 2010, EBTs have been stripped of any tax benefits they may have offered. In addition, HMRC is now investigating EBT arrangements that have existed in periods predating the new legislation. It is believed there are as many as 280 other cases currently under way, all involving EBTs. The potential tax exposure could run into hundreds of millions of pounds.

In other recent developments, UBS and Deutsche Bank have appealed first-tier tax tribunal decisions involving, in each case, arrangements through which bonus payments were made to corporate vehicles. HMRC's argument includes the suggestion that these were tax avoidance schemes that had the significant aim of reducing a tax and national insurance liability.

Wider implications

The real concern is HMRC’s increasing attack on structures that, at the time of implementation, were regarded as legitimate tax planning. HMRC is using its powers of investigation and information gathering to challenge these structures and the onus is on those who used them to demonstrate that no tax is due – or face a liability that could run into millions. Evidence and documentation that was relevant at the time of implementation of the arrangements may not be available and key decision-makers may no longer be able to testify as witnesses. These matters could result in costly and lengthy litigation.

The tax authorities’ intent to tackle aggressive tax avoidance can be understood. However, their motive in also challenging structures that were once seen as legitimate is questionable. With the public finances under unprecedented strain, new ways of generating revenue to fill the tax gap are likely to be seized upon. Anti-wealth sentiment currently being stirred up by the media has created the perfect climate for HMRC to target high earners and City firms, corporates and financial institutions.

In the EBT context, passing new legislation that kills off the use of future EBTs, together with challenging historic EBT arrangements, is one way of doing it. Another way of doing it is to be bold by simply passing legislation that is applied with retrospective effect. The closure of two tax schemes sought to be implemented by Barclays is the most recent example of this approach.

Reputational risks

The consequences of this behaviour are far-reaching but crucially it has resulted in a lack of certainty, which is one of the fundamental principles of the UK legal system. This system has always allowed taxpayers to arrange their affairs in accordance with the law in force at the time. The new order seeks to rewrite history, applying law in the past at a time when no law existed. There are now significant reputational risks attached to entering into tax schemes that could later be deemed unacceptable.

If the UK's businesses and those who drive them are frustrated in their attempts to manage their tax obligations in a predictable way, the country's international reputation as a fair and stable place to do business will be compromised. We also do not know how many potential new businesses and individuals will be prompted to stay away as a consequence. But we do know that if it happens, much-needed economic growth will be compromised. 

Politicians understand this, of course, yet they do not stand up for accepted good practice. The UK Office of Tax Simplification warned last year that taxation should not be politically motivated, but it is hard to imagine a UK budget where tax is not reduced to a series of bargaining chips.

The relationship between taxpayers and the taxman has, by definition, never been an easy one. However, against this backdrop companies and individuals are experiencing new levels of frustration and concern. The combined impact of complexity, unreliability and, crucially, a lack of certainty, is creating an unhealthy environment and making it difficult for the UK's economy to bounce back and prosper.

Liesl Fichardt is a partner in contentious tax at law firm Berwin Leighton Paisner in London.

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