Do we still need a GAAR?

Heather Self

Speed read

Last year, HMRC won 23 out of 26 avoidance cases in the courts. In the recent Court of Appeal decision in Chappell, Patten LJ summarised the history of the so-called Ramsay principle, including the recent Supreme Court decision in UBS and Deutsche Bank, and again found for HMRC. In the light of these recent case law developments, do we still need the general anti-abuse rule?

In his original GAAR study report of 2011(www.bit.ly/2bdMLsd), Graham Aaronson QC said: ‘First and foremost, [the GAAR] would deter (and, where deterrence fails, counteract) contrived and artificial schemes which are widely regarded as an intolerable attack on the integrity of the UK’s tax regime.’

He went on to say: ‘Judges inevitably are faced with the temptation to stretch the interpretation, so far as possible, to achieve a sensible result; and this is widely regarded as producing considerable uncertainty in predicting the outcome of such disputes.’

The current GAAR guidance (www.bit.ly/1bHwM3a) says, at para B6.1: ‘It is important to appreciate that the GAAR is designed to counteract the tax advantage which the abusive arrangements would otherwise (i.e. in the absence of the GAAR) achieve.’

In the light of recent court decisions in avoidance cases, do we still need a GAAR to achieve these objectives?

HMRC regularly claims to win over 80% of avoidance cases. In its summary of avoidance cases for 2015/16 (www.bit.ly/2abDPCn), it lists 26 cases, of which it won 23, lost two and had a mixed result in one. The odds against the taxpayer have clearly lengthened in recent years, as noted in a number of articles I have written for Tax Journal over the last 12 months.

One of the most recent tax avoidance decisions by the Court of Appeal was Chappell v HMRC [2016] EWCA Civ 809, in which Mr Chappell claimed that a complex series of transactions, structured with the intention of falling within the manufactured overseas dividends (MODs) rules, should give rise to a tax deduction from his total income of some £300,000. The case is interesting for providing an updated analysis of the line of cases beginning with Ramsay [1981] STC 174, including in particular comments following the 2016 Supreme Court decisions in UBS and Deutsche Bank [2016] UKSC 13.

Patten LJ commends the ‘useful and extremely interesting description’ of the case law developments found in the judgment of Lord Millett NPJ in Arrowtown Assets [2003] 6 ITLR 454. He also notes that the original approach in Furniss v Dawson [1984] STC 153 had given way to a broader, less formalistic approach by the time of BMBF [2005] STC 1, in which Lord Nicholls approved the statement of Ribeiro PJ in Arrowtown that: ‘The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically.’

After summarising the judgment of Lord Reed in UBS and Deutsche Bank, Patten LJ considers the application of the Ramsay principle to the facts in Chappell. Counsel for the taxpayer, David Ewart QC, had argued that the decision in MacNiven [2001] STC 237 supported the taxpayer’s position; he also said that the legislation relating to MODs had provided a ‘complete code’. Patten LJ said that this was giving the relevant legislation an ‘essentially literal construction’, and distinguished MacNiven by noting that the tax losses suffered by Westmoreland in that case were ‘real liabilities arising from real commercial transactions’. He therefore found in favour of HMRC.

With hindsight, the two cases which mark the boundary of Ramsay are MacNiven and BMBF. In MacNiven, there was a real commercial loss, but a circular set of transactions to ensure payment was made. In BMBF, there was real expenditure on a pipeline, for which allowances were due despite the complexities of the financing arrangements. In both cases, the taxpayer won.

Ewart QC’s invoking of the phrase a ‘complete code’ appears to be an attempt to remind the court of a rare taxpayer victory in a pure avoidance case: the Mayes case [2011] STC 1269. In that case, the court found that the taxpayer had complied with the detailed requirements of a complex code, and that a purposive interpretation could not defeat the scheme. Indeed, this case is quoted as an example, showing the need for a GAAR, in the GAAR guidance (example D15).

It is debatable whether a case such as Mayes would succeed before today’s courts. At all levels, from the FTT to the Supreme Court, judges appear to be more and more confident in striking down schemes, particularly where the tax result does not appear to be in line with economic reality.

I therefore question whether the GAAR is really necessary, and indeed whether it will ever be relied on in a tax avoidance case. It is notable that the transactions in Chappell took place in 2005, just a few months after the judgment in BMBF was published. Indeed, many recent decisions have been given ten years or more after the transactions to which they relate: we may have to wait until the mid-2020s before the true impact of the GAAR can be measured. My view is that it will be less than many expected when it was introduced in 2013.