New Labour, new approach to tax?

Mark Nichols looks at the first few weeks of the new Labour government

One of the key themes to arise out of Gordon Brown's first Budget is the attitude of the Labour government to tax avoidance. The last years of Conservative rule saw a trend in anti-avoidance legislation which can be summarised by the phrase "legislate wide and untax by concession". The new government has eagerly adopted the same principle and also seems to have alighted on a new concept of "taxation by public announcement".

In a number of fields the government has indicated its displeasure at existing schemes and has announced that legislation will be introduced (in the next Finance Bill) to attack those schemes together with a warning that if any other versions of the scheme are introduced they too will be attacked. Which adviser or finance director can therefore safely adopt any of these schemes until the new legislation is seen, presumably after the next budget in Spring 1998?

Perhaps the Labour party will by then have realised the full possibilities of this new mode of assault on tax avoidance. The threat is enough - you don't even need to waste valuable civil servant time in producing the legislation and then policing it to make sure that no clever accountants or lawyers are circumventing the new rules. What's more, if somebody doesn't actually believe that the legislation is ever going to be introduced - the civil servants can then act quickly and retrospectively (after all we did warn people not to be naughty!).

Commercial motives

This new brand of taxation is to be deplored but it is only the first shot in a more heated debate on general anti-avoidance provisions that may or may not be given statutory effect in the next budget. History in the UK and experience in other countries where such provisions have already been introduced would indicate that they will not work. Litigation will increase. The commercial motives which should already be in place behind most good tax planning schemes will only be strengthened and each party (the Revenue on the one hand and the taxpayer on the other) will be more entrenched in its position, the former breathing thunder and the latter screaming injustice.

Windfall tax

Talking about unfairness, what is this windfall tax? You take on a new privatised industry, introduce new efficiencies and increase shareholder value only to discover that the tax assumptions on which you are making those improvements and implementing your investment programme are suddenly changed by a tax imposed five or ten years later! Additionally those prudent finance directors who eschewed the clamour for high dividend pay outs and far-sightedly complied early with Labour's clarion call for profit reinvestment so as to increase capital value may be worse treated than if they had paid out large dividends!

Surely Europe will have something to say about all this? Yes, if someone has the nerve to take the government on.