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Jill Kirby

Jill Kirby: Retrospective legislation may produce applause today but it will damage Britain in the years to come

As the government see-saws between speaking up for business and appeasing the mob, I'm beginning to feel distinctly queasy. Giving up on principles and formulating policies according to public opinion carries many dangers, not least the possibility that the various interest groups you are trying to please will all be unhappy, and the public will be confused.

Yesterday the Treasury clearly felt they had a perfectly calibrated message, by announcing a retrospective tax grab from one of the most unpopular wealth creators in the UK: Barclays Bank. Who could possibly object? Surely everyone hates tax avoidance as much as they hate bankers. As for the principle that tax planning is legal unless the law forbids it, who is going to step up to defend that quaint idea? Some business leaders might feel uneasy about the implications of the Treasury's actions but they'd have to be pretty brave to speak out against this, given the current climate.

There was a time – not so long ago – when Conservatives thought that retrospective legislation was unfair and would lead to uncertainty, breaching two of Adam Smith's principles of good taxation. In 2008, when the Brown government retrospectively outlawed a number of tax avoidance schemes in the Finance Act, Conservatives voted against granting retrospective powers to the Revenue and David Gauke, then a Shadow Treasury minister, was among those expressing concern.

Not any more. When asked on the Today programme yesterday whether retrospective anti-avoidance measures would be used regularly, Mr Gauke said that it would “depend on behaviour.” In a contest for creating tax uncertainty, that statement surely wins hands down, giving the government carte blanche to punish businesses who, despite complying with the law, are deemed by ministers to have behaved greedily or irresponsibly.

In the present case, Barclays appear to have been guilty of hypocrisy, with one hand patting themselves on the back for paying huge amounts of tax, whilst using the other to minimise their liabilities. But the Treasury had the option of simply closing the loopholes used by Barclays (and other banks) to prevent this “abuse” from occurring in the future. In a country with a proper respect for the rule of law, this would be the natural step to take. Where seeking to repair inadequacies in previous legislation, an administration should not retroactively label an action as unlawful in order to exact punishment. However, Mr Gauke and his colleagues in this cash-strapped government could not resist the temptation to extract a handy £500m from Barclays (and possible undisclosed sums from other banks using the scheme) by backdating the ruling. Concealing a lack of principle with a spot of banker bashing has been favourite ploy just lately. In Mr Gauke's words, “banks are simply not going to be allowed to get away with it.”

Of course there are plenty of jurisdictions in the world where banks can “get away” with paying a great deal less tax. Just as there are many other countries where, as the Prudential pointed out yesterday, international businesses can locate their headquarters in order to escape the crushing grip of European regulation. No doubt we shall shortly hear from the government that is is doing all it can to resist such regulation. Ministers will pop up (on the see-saw) to repeat that hollow cliché about Britain being “open for business.” Maybe even now George Osborne is preparing a speech explaining that UK corporation tax will soon be so low that Barclays won't feel any need to indulge in tax planning.

But there are strong indications that yesterday's tax grab could be just the start of a wide ranging exercise to extend the scope of discretionary taxation, and that it will not stop with the bankers. Last month, to an audience of small business owners, the Prime Minister gave a strong hint that this year would see the introduction of a general anti-avoidance rule, giving HMRC the opportunity to make sure that wealthy individuals and large businesses “pay their fair share.”

In other words, if HMRC doesn't like the look of your tax arrangements, expect to pay up – even though you are acting within the law. This move – likely to be announced in the Budget - will no doubt be sold as a crackdown on those who can afford tax planning, namely individuals and companies who arrange their affairs to take maximum advantage of the UK's complex tax code.

Instead of reaching for catch-all new powers, however, the government should pause to think about how the tax system has become so complex: it is because recent Chancellors (including, regrettably, George Osborne) have been unable to resist the temptation at Budget time to introduce either a new tax or another new allowance. Whether to court popularity, provide a sop to a special interest group or incentivise certain kinds of behaviour, this hyperactivity has led to the present situation. It's not just greedy bankers and big companies, but every kind of business, large and small, as well as many individual taxpayers, who are therefore making decisions based on tax effectiveness.

Rather than cooking up a general anti-avoidance rule, the Chancellor should be concentrating all his efforts on cutting and simplifying taxes so that we have a genuinely transparent and simple tax system. Vesting discretionary powers in the HMRC, with the precedent that such powers may be applied retrospectively if the Treasury considers it “fair” to do so, is a recipe for uncertainty and mistrust.

And for businesses with a global remit, it's a clear signal to take the ultimate tax avoidance option: that of relocation to another country altogether - preferably one with a more predictable tax regime.


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