Taxing budget for solicitors

The government has moved to legislate in haste to close tax loopholes. But history suggests this is unwise.

One legal figure to crop up in the chancellor’s budget statement published yesterday was the ubiquitous Sir Brian Leveson. The president of the Queen’s Bench Division receives a namecheck in the budget’s section on cutting the cost of government.

With uncharacteristic caution, the budget says the government ‘notes’ the recommendation of Sir Brian’s report on the efficiency of court proceedings and ‘will explore’ how his recommendations can be taken forward.

The budget is less cautious on other matters that may interest solicitors – notably on closing tax loopholes and on those who give professional advice on the subject.

There is particular bad news for principals planning on taking advantage of entrepreneurs’ relief when selling up. The history of entrepreneurs’ relief, introduced by the last government to encourage a start-up culture, could provide a case study of the perils of nudging businesses through targeted tax breaks. Last year, when the chancellor clamped down on tax benefits enjoyed by ‘disguised employees’ of LLPs, it looked like a good move for partners to divert profits into companies, paying the ‘entrepreneur’ rate on liquidation.

Yesterday’s announcement that ‘we will close loopholes to make sure entrepreneurs’ relief is only available to those selling genuine stakes in businesses’ seems to mean that liquidation partners will now face the full capital gains tax rate of 28% – at least until the next targeted tax break comes along. Does anyone fancy investing in my symphony orchestra?

We are also still waiting to see the small print of the government’s response to the Office of Tax Simplification’s review of partnerships, though the budget says the government ‘will consider or take forward over 70% of its recommendations’.

However, potentially the most worrying aspect of this low-key, no-rabbit-out-of-hat budget, is the haste with which the government is rectifying its historic failure to tackle offshore tax evasion. Undeterred by responses to a consultation last year, the Treasury is pressing ahead with the creation of a strict liability offence of offshore tax avoidance.

As the Law Society said last year, ‘the introduction of strict liability for what has traditionally been understood as a crime of dishonesty is a very serious matter which, if it is to be pursued, must be supported by a strong policy rationale’.

Here, the policy rationale seems to be a panicked imperative to be seen to be fighting the twin evils of avoidance and evasion.

See for example, the decision to implement the new diverted profits ‘Google tax’ at the end of April. The hasty introduction of a new strict liability offence is even more alarming, especially as no politician in the current wants to be seen standing up for tax evaders.

The history of legislation rushed through in times of outrage – the Official Secrets Act, the Prevention of Terrorism Act, the Dangerous Dogs Act – provides warning enough against haste. It is unlikely to be heeded.