The Hindu Business Line : Sticking-plaster attitude that gives law additional layers of complexity

THE site of Edinburgh Castle was occupied as early as 900 BC, informs www.undiscoveredscotland.co.uk. "By the time the Romans made their brief visits to Scotland in AD 80 and AD 139 it was an important fort of the Votadini people, later known as the Gododdin, who called it Din Eidyn," it continues.

"Din Eidyn was besieged and captured by the Angles in AD 638. They Anglicised the name to Edinburgh, which is how it stayed after they were evicted by the Scots under Malcolm II in 1018."

Throughout its long and distinguished history the castle has withstood sieges from battle-hardened troops, music fans and daily hordes of tourists, but never anything quite like this, wrote William Lyons, the Arts Correspondent, on http://news.scotsman.com, while reporting how the castle was "magically transformed into a Hogwarts replica" for the launch of the latest Harry Potter book.

The site has a poll running on `Best Harry Potter book so far?' and Half-Blood Prince leads the tally, though it has scored only 32.2 per cent of the 451 votes, polled at the time of writing this. Goblet of Fire and Prisoner of Azkaban are in the second and third spots with 28.4 per cent and 22.8 per cent respectively.

Even as the National Library of Scotland continues to deploy high security to protect "in a carefully constructed cradle for three weeks" the Rowling-signed copy of "the very first book to be printed" of the latest release, and kids around the world escape into a parallel world much to the delight of the publishers, let us descend to reality, and move to CA House, 21 Haymarket Yards, Edinburgh.

That's where the head office of the Institute of Chartered Accountants of Scotland (ICAS) is situated. "The world's first professional body of accountants," declares www.icas.org.uk. It received its Royal Charter in 1854, has over 16,000 members worldwide and "the CA designation is reserved exclusively for their use in the UK".

Of interest is the latest campaign by the ICAS for a simplification of the UK tax system, and its missive to the chancellor on the possibility of introducing a general tax anti-avoidance rule (GAAR). The ICAS was not previously in favour of a GAAR but has now changed its approach as a result of the Government's ongoing purge of tax avoidance, notes www.accountingweb.co.uk.

Be that as it may, the idea to press for simplification is creditable. And the Institute's letter reads thus: "There is growing concern that complex anti-avoidance legislation is impenetrable to many users and adds significant cost to compliant businesses."

The ICAS, therefore, seeks respect for the principle that taxpayers should pay the right tax at the right time, and that there should be greater certainty about the tax to be paid.

Three points that the ICAS makes as recommendations are: repeal of much of the existing complex anti-avoidance legislation; introduction of a GAAR to enable avoidance to be challenged; and a pre-transaction ruling system to give certainty.

The ICAS hasn't lost sight of the big picture, though, because its letter draws attention to the impact of tax complexity on the UK's competitive position, citing Martin Sullivan's work in Tax Notes, a US tax journal.

"In 1999 the profit of US multinationals declared in the UK was $29 billion whereas by 2002 that profit had reduced to $19 billion. The UK has moved from the largest profit declaration area to number four now falling behind Ireland (which has moved to number one)."

Returning to GAAR, you may be surprised that the idea is not new. The UK's Inland Revenue had floated the thought in 1998, as a `Consultative Document', which you can download from www.hmrc.gov.uk, informs.

Though it discusses only issues in relation to the corporate sector, "where some of the most contrived and costly avoidance takes place", Dawn Primarolo, the Financial Secretary to the Treasury, had then expressed the hope that a similar document would come for other sectors too to make the tax regime fairer.

The document laments that new devices for avoiding tax continue to be developed, despite the Ramsay ruling. "For example, a company with a cash surplus available for a short-term investment purchases a newly-incorporated company from a bank. The purchase is arranged so that at the end of a set period, the acquired company will have liquid assets (provided by the bank) worth more than the purchase price.

"The margin is broadly equivalent to the interest which would have been paid if the company had placed its cash on deposit with the bank. Such interest would have been income subject to tax.

"This arrangement creates a potential chargeable gain but there is no need to sell the company, so no tax charge arises. The liquid assets can be used by the parent company straightaway."

A complex arrangement that is, possibly going beyond the comprehension of many, but the point that the document emphasises is that the UK is unusual among developed countries in having neither a statute nor an established legal principle to counter tax avoidance in general.

"Many other countries in the developed world have found such a rule or principle to be a very useful remedy for countering tax avoidance, although not a universal cure."

Thus, the aim of GAAR would be to reduce tax avoidance, while at the same time not unduly harming the level of certainty of tax treatment enjoyed by businesses that are not engaged in avoidance. Which is why the ICAS is eager to renew debate on the GAAR document that has been gathering dust all these years.

"There has been an unwelcome and unhealthy blurring by politicians and senior fiscal officials of the distinction between evasion and avoidance," states the Institute, criticising recent legislation on disclosure and notification, and the `greater uncertainty' brought in by retrospective legislation. And there are more angry growls in the Institute's letter!

`Poorly targeted legislation', `law which is impractical or unduly harsh', `poorly drafted legislation', and "almost with a sticking plaster attitude, the law gains additional layers of complexity to try to cover the gaps" are samples of `grrs' on the lack of GAAR from the Institute in its forthright attack on the tax regime, so refreshingly different from the meek verbiage from professional bodies closer home that we're only too familiar with.

"New legislation is not debated properly in Parliament. Finance Act 2005 runs to 212 pages of legislation yet was passed through Parliament in under four hours," charges ICAS, and the position here may not be very different. Or, is it worse?

To those who are already fantasising a simpler tax law, here is some sobering realism from the ballad of `Nearly Headless Nick', available on `J. K. Rowling Official Site' (www.jkrowling.com): "... He swung the axe up in the air,/ But oh the blunt blade!/ No difference it made,/ My head was definitely there./ The axe-man he hacked and he whacked and he thwacked... / but my faithful old head/ It never saw fit to desert me."

For, governments generally prefer to avoid any moves aimed at making things less complicated.

AccountSpeak@TheHindu.co.in

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