Will the Paradise Papers influence the 2017 Autumn Budget?

The recent disclosures in the Paradise Papers may put the onus on HMRC to tighten the loop as a measure to eliminate tax avoidance opportunities.

“Philip Hammond could introduce further measures that will decrease the time available on reporting by commercial enterprises in the forthcoming Autumn Budget. The government has been increasingly looking at ways to ensure they get accurate, concise and important information as soon as they can and we would expect that drive to accelerate following recent revelations,” said Rajesh Sharma, international tax partner at Smith & Williamson, the accountancy, investment management and tax group.

The current reporting standards mean that the first sight HMRC have of company documentation is often twelve months after the company’s accounting period. By decreasing the time in which companies have to report the Government believes that it will decrease the amount of time for companies to undertake transactions between entities.

Digital taxation versus tax avoidance

The Government predicts nearly £10bn* of tax from large businesses is falling through the cracks so increased regulation and further anti-tax avoidance measures are expected to feature in the forthcoming Autumn Budget, following the revelations published in the Paradise Papers.

“Ultimately, increased regulation adds an administrative burden on businesses and there is a lack of resource at HMRC to review the additional disclosures. On the other hand, there is far greater loss through illegal activity than through avoidance so the Chancellor should look to combat that.”

The introduction of country-by-country reporting enables tax authorities to identify “sweetheart deals” and perceived tax abuse quicker and easier. Increasingly, multinationals are encouraged to make a formal declaration in the public domain of their tax policies. The disclosures in the Paradise Papers, however, demonstrate that this practice has not been embraced by all multinationals.

“There needs to be international consensus to have a material change on tax avoidance. The UK is actually leading the way on company reporting but until all countries have the same standards, there will always be cracks.”

Political pressure from paradise

Although there are as yet no suggestions that the multi-nationals named in the Papers have engaged in any illegal activities, the issue has political capital. Labour’s criticism of Conservative ties with big business met with a lot of success at the 2017 General Election; there will be pressure on the Government to take action on the issue. The Government may feel forced to consider implementing further additional anti-tax avoidance measures.

“The Government needs to be seen to be doing something. It’s likely there will be a general announcement about tightening down on tax avoiders and claims of how much income the Government will receive from doing so. What we’ve seen, however, is that this kind of announcement regularly has little detail on how it will go about it”, said Rajesh.

Business-friendly Budget?

A greater long-term concern is Brexit, which is causing a lot of uncertainty in terms of international trade and indecision on the UK’s role in the Customs Union. The Government and its communications are not helping; the recent White Paper on the United Kingdom’s exit from and new partnership with the European Union was insubstantial at best.

“People are starting to hedge their bets and beginning to make moves abroad. A little more certainty, such as clarity on passporting rights, would be a great assistance. Banks are already looking to set up in other EU locations; US businesses coming to the UK are already considering setting up in other EU entities,” said Rajesh.

DISCLAIMER
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.