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Liberty tax avoidance shows need for freedom from complexity

    Last year the Tax Simplifier series of blogs described the UK tax system in less than glowing terms. The last in the series said that reform should mean refocusing on the commercial and economic effects of what people do, and levying tax accordingly.

    The publicity given this week to the more than 1500 participants in the Liberty partnerships who attempted to avoid tax on income totalling more than £1.2billion supports this approach.

    The scheme involved matching income with expenditure so that there was no economic gain or loss, but the intention was that the income would not be taxable while the expenditure was allowable for tax purposes. If successful, therefore, big tax losses were generated by the scheme which could be set against other income.

    We won’t know whether the tax planning has succeeded before the issue reaches the courts in March next year.

    The Government is worried about tax avoidance, and there are frequent announcements about how steps are being taken to block particular schemes, about new rules for naming and shaming tax cheats, and about  new codes of practice for banks etc. What these fail to achieve is a satisfactory legislative tax base. Tax should be assessed by reference to economic reality, not on our current hotch potch of tax rules. Overseas jurisdictions do this, and tax avoidance is much less of a problem as a result.

    Can reform be achieved? This autumn our Tax Simplifier series will continue with a paper setting out what a reformed tax code for business might look like. The paper will be too long for all of it to be published in hard copy, but it will, it is promised, be shorter than the fog of tax legislation which it seeks to rationalise!

    David Martin enjoyed a career spanning 23 years as a tax lawyer within a large City Law Firm, latterly as Head of the Tax Department, before taking early retirement in 2002. During that time he advised both company and individual clients. He now lives a less pressurised life in Devon with his wife and two daughters and maintains an active interest in tax law.

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