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Draft GAAR is ‘disappointingly narrow’, says Labour

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The government’s proposed general anti-abuse rule is unlikely to take forward the battle against tax avoidance, and the draft legislation provides neither clarity nor armour for HMRC, according to a shadow Treasury minister.

HMRC’s consultation on a general anti-abuse rule (GAAR) closes today. As MPs prepared to debate tax avoidance and evasion yesterday, the Chartered Institute of Taxation said it remained unconvinced of the need for a GAAR. ‘We think the great majority of [abusive, artificial avoidance] schemes are in any event being defeated, and more could be,’ it said in a formal response to the consultation.

During a two hour House of Commons debate Catherine McKinnell, Shadow Exchequer Secretary, said the proposed GAAR was ‘disappointingly narrow’. It was ‘designed by its own admission to tackle only the most egregiously abusive tax avoidance schemes, whatever that means’.

McKinnell noted that the Association of Revenue and Customs, representing senior HMRC officials, had suggested that the draft GAAR could encourage avoidance by ‘implying that anything outside its scope is legitimate tax planning and immune to scrutiny’.

She added: ‘In its draft legislation, the Treasury defines non-abusive schemes as anything that is “reasonably regarded as reasonable”. I am paraphrasing for brevity. That provides neither clarity on the matter, nor armour for HMRC, which is more concerning.’

The backbench business committee debate was secured by Labour MP Michael Meacher, whose General Anti Tax-Avoidance Principle Bill (‘GANTIP’) was set to be debated today.

However, today’s discussion was brought to a halt soon after Meacher introduced to the Bill to an almost empty House of Commons. Any further consideration of the Bill was scheduled for 19 October.

Meacher claimed yesterday that the Prime Minister’s ‘boast’ that he was cracking down on aggressive tax avoidance had turned out to be ‘nothing more than a paper aeroplane job devised in the certain knowledge that it will never fly’.

Richard Murphy, Director of Tax Research UK, wrote the Bill. It has the support of Mark Serwotka, General Secretary of the Public and Commercial Services Union which represents most HMRC staff.

David Gauke, the Exchequer Secretary, said HMRC was making progress in tackling tax avoidance. It had ‘closed down seven schemes in the past year alone and, since 2010, litigated about 30 direct avoidance cases, with a high success rate’.

Gauke added: ‘Anyone reading the papers recently might well think that avoidance is rampant. I want to reassure [MPs] that that is not the case, and the vast majority pay their taxes without trying to get around the system. Nevertheless, where we and HMRC see people trying to exploit the system, we will take swift action.

‘Currently, there are a minority of cowboy tax advisers – small niche firms selling crude avoidance schemes unlikely to be successful under challenge from HMRC. Many of those who sell those schemes use tactics that border on mis-selling, and their clients can end up shocked when they are later pursued by HMRC over their involvement.’

Meacher asked Gauke why, given ‘the unacceptable narrowness’ of GAAR the government was not prepared to accept his ‘GANTIP’ Bill.

Gauke said the GAAR would specifically target the most aggressive and persistent forms of avoidance without undermining taxpayer certainty or adding undue compliance costs to the tax system.

‘I am confident that, unlike other suggested approaches, the government’s approach strikes the right balance between protection against avoidance and clarity for taxpayers,’ he said.

Gauke was encouraged by the response of the professional bodies to a recent consultation titled ‘Lifting the lid on tax avoidance schemes’, setting out ways to improve the information on avoidance available to the public and ‘making it easier for taxpayers to see whether their adviser has promoted failed avoidance schemes in the past’.

Professional bodies shared the aim of addressing the ‘small fringe of cowboy advisers’ who promote aggressive schemes, he said.

‘Some of the criticism of the tax profession as a whole has been unfair, but there is an issue with some aspects of it, which is why we are consulting on what we can do to address the problem and also to expand the regime covered by [the disclosure of tax avoidance schemes (DOTAS) regime].’

Between its introduction in 2004 and March 2012, DOTAS had resulted in 2,289 avoidance schemes being disclosed to HMRC. ‘That, in turn, has led to more than 60 changes in tax law to stop avoidance, he said.

The CIOT said in its formal submission that it recognised the problems that the government was trying to tackle – ‘abusive, artificial schemes, over complex (and constantly expanding) legislation, public concern, etc’. Accepting that a GAAR would be introduced, the tax body suggested that the current draft needed to be changed in a number of areas.

John Overs, Head of Corporate Tax at the City law firm Berwin Leighton Paisner, warned yesterday that there were ‘serious constitutional problems’ with the government’s proposal. ‘The intention is to catch only “abusive” or “egregious” tax planning but at its heart what is proposed is just a test of what is reasonable tax planning. Asking taxpayers to assess their tax on the basis of what is “reasonable” behaviour will be inherently unpredictable and inconsistent – exactly the opposite of what our tax system needs,’ he said.

‘The proposals accept this uncertainty by relying upon guidance and the opinions of a panel to make the GAAR work as intended. However, well written laws should function properly without the need to be supplemented by the opinions of an extra-judicial body such as the advisory panel and guidance that is not approved by parliament.’