Attitudes towards the exploitation of tax loopholes have ebbed and flowed over the years. Right-thinking people know, and have always known, that tax evasion is plain wrong. Most right-thinking people are, and have always been, comfortable with the idea that taking advantage of a tax break explicitly offered by the Government, such as tax relief on pension contributions, is acceptable. But the view of taxpayers who reduce their tax bills by relying on overly technical, and often artificial, arrangements, has not been consistent over the decades.
The atmosphere in the United Kingdom – not just among the Government, HMRC and the general public, but increasingly among tax professionals and the courts – is that this sort of behaviour has had its day and we would all be better off without it.
In this light, an Advisory Committee, led by the formidable tax QC Graham Aaronson, was tasked by the Government with considering whether the UK tax system would benefit from a general anti-avoidance rule (GAAR). Aaronson’s report on the views of the Advising Committee (the Report) was published on 21 November 2011. A GAAR means different things to different people in different jurisdictions. The Report takes the approach that it is an overriding statutory principle that can be used to strike down egregious tax schemes even if they work within the technical wording of the relevant taxing statute.
The Report concludes that the current system of dealing with tax avoidance is not adequate. First, the courts have at times pushed statutory interpretation to its limits to defeat tax avoidance schemes that they felt shouldn’t succeed. This has created uncertainty as to how judges apply tax law. Secondly, there are now estimated to be over 300 targeted anti-avoidance rules on the UK statute book. Thirdly, the disclosure of tax avoidance schemes places an added burden on taxpayers, and often then results in further targeted anti-avoidance legislation. These measures have often been ineffective in successfully defeating certain highly aggressive and artificial tax avoidance schemes.
The Report concludes that introducing a moderate GAAR, which does not apply to normal tax planning, but is targeted at “abusive arrangements”, would bring “substantial and valuable” benefits to the UK tax system, including:
- deterring and providing a way of counteracting contrived and artificial tax avoidance schemes;
- creating a more level playing field for businesses and tax professionals by preventing those who use or advise on aggressive schemes from gaining a competitive advantage;
- reducing the risk of the courts having to stretch their interpretation of tax legislation to defeat schemes, and the uncertainty this creates;
- creating an opportunity to simplify the UK tax legislation, as many specific anti-avoidance rules will no longer be needed and, if fewer schemes go ahead, less specific anti-avoidance legislation will be needed in the future;
- creating greater certainty for those carrying out normal, responsible tax planning that the anti-avoidance rules will not apply to them, thus reducing the need for a comprehensive system of clearances; and
- clarifying the boundary between what HMRC considers acceptable, and what is not, which will build trust between HMRC and taxpayers.
It would work by identifying arrangements which are abnormal arrangements included for the purposes of achieving an “abusive tax result” and cannot be regarded as a reasonable exercise of choices afforded by the relevant legislation. An “abusive tax result” is an advantageous tax result which would be achieved by an arrangement that is neither reasonable tax planning nor an arrangement without tax intent. The Report states that the thresholds of “abnormal arrangements” and “abusive tax results” are intended to be set high, so as not to catch “responsible” tax planning.
It would be for HMRC to prove that it is more likely than not that:
- the arrangement is an abnormal arrangement; and
- the advantageous tax result of the arrangement would be an abusive tax result (so it is not reasonable tax planning).
Where HMRC succeeds in proving such arrangements exist, it would be able to counteract them under the GAAR. Depending on the circumstances, the counteraction may be done by:
- adjusting computations or assessments as is reasonable and just; or
- adjusting them by reference to a hypothetical arrangement which would achieve the same non-tax result as the actual arrangement, without the abusive tax result which the actual arrangement sought to achieve.
The interaction between the GAAR and the system of tax administration and tax appeals is not presently clear, and will need to be clarified.
To ensure that “responsible tax planning” would not be caught by the GAAR, the Report proposes a series of safeguards. These would consist of clear protections:
- for “reasonable tax planning” and for arrangements which are entered into without any intent to reduce tax;
- requiring HMRC to prove that an arrangement was not reasonable tax planning (rather than placing the burden of proof on the taxpayer to show that it was); and
- putting in place a new Advisory Panel, with a majority of non-HMRC members to advise HMRC on whether it was justified in seeking to apply the GAAR.
The Report suggests that the Advisory Panel should publish its decisions to build up a body of thinking on the correct application of the GAAR which could be used by taxpayers and their advisers. Given that there is no proposal to allow taxpayers to seek advance clearance from HMRC (which is likely to be one of the more controversial elements of the Report) about the application of the GAAR to particular transactions, the role of the Advisory Panel, and its published decisions, will be important. However, in the early days of the GAAR, there may be a lack of certainty.
The Report expresses the hope of many industry and tax specialists that an effective GAAR could create an opportunity to simplify the existing tax legislation. It’s not clear that this is likely to be the case; most complex regimes, such as controlled foreign company rules, will have to remain. As the GAAR is only to be used in exceptional circumstances, it is unlikely that we have seen the final limits of specific anti-avoidance rules and taxpayer disclosure.
The next step is that the Government will consider the Report and respond in the 2012 Budget. It will consult informally with business and tax practitioners, and there may be a further formal consultation.
Ultimately, the proposed GAAR, with its narrow scope and focus on “highly abusive contrived and artificial schemes which are widely regarded as intolerable” is perhaps not technically a GAAR, and may thus not suffer the problems suffered by GAARs in other jurisdictions. In practice, the GAAR may finally dissuade taxpayers from structuring artificial and purely tax-driven arrangements, if they haven’t already been dissuaded by the recent general lack of success of such arrangements in the courts.
The concern is that, notwithstanding the existence of safeguards, evidence suggests that, given additional statutory powers, government departments find the temptation to use them excessively too great. It is to be hoped that HMRC proves to be a rare and admirable exception to this rule.
Jeremy Cape is a partner and Helen Dayananda is an associate at SNR Denton UK LLP.