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Draft GAAR focuses on ‘flagrant’ tax avoidance schemes

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There is public outrage at ‘flagrant’ tax avoidance schemes, the barrister leading the GAAR study group has told Tax Journal, but any proposed general anti-avoidance rule ‘must not have any significant detrimental effect to the attractiveness of the tax regime’.

Graham Aaronson QC described the issue of a GAAR as a ‘particularly sensitive’ one for the UK, which needs a tax regime ‘regarded as appropriate and fair and as certain as possible’ in order to attract business.

In an exclusive interview with Tax Journal Editor Paul Stainforth, Aaronson said he was ‘not just talking about public outrage, but also distaste within the profession over the fact that a scheme like “Ships 2” in the Mayes case, for example, is being promoted’.


He added: ‘It’s outrageous that someone should say, I’ve got an income of £1.7 million, how do I get a loss of £1.7 million? Many of us have seen these schemes, we’re asked to advise on them. I think we’re all pretty disgusted and it is also a waste of brain power that is being used to generate these abusive schemes.’

Any GAAR would cover ‘flagrant’ avoidance schemes, he said. ‘As many judges have said, it’s perfectly proper to try to minimise your tax as long as you’re doing it in compliance with the intent of Parliament. What is not proper is to exploit provisions of the tax code that were never intended to be used in that way to achieve a tax result that no-one could possibly think Parliament intended to be achieved.’

Aaronson said his team has a five-page working draft of a GAAR ‘for the purpose of seeing whether it is possible to capture and to delineate the principles with sufficient certainty’.

Tax gap

He suggested that a GAAR ‘has little to do with the closing of the perceived tax gap’, adding that he did not think that ‘increasing the tax take is a sufficient reason for having a GAAR’.

The GAAR study group includes Professor Judith Freedman, Professor of Taxation Law and a Director at Oxford University’s Centre for Business Taxation, who gave evidence to the Commons Treasury Committeeon 29 June.

‘I feel as strongly as anyone that avoidance and evasion should be tackled, but I don’t think that the tax gap is a concept that is a very useful tool in that war against avoidance and evasion because I don’t think it is a conceptually sensible thing to try to work out,’ Freedman told the committee.

‘In particular, I cannot agree with the definition in [HMRC's publication Measuring Tax Gaps 2010] that the theoretical tax liability represents the tax that would be paid if all individuals and companies complied with both the letter of the law and the spirit of the law.’ she said.

‘I really take issue with the spirit of the law part, because either you have law or you don’t have law and the law has to state what it is.’

HMRC defined the ‘spirit of the law’ in that publication as ‘HMRC’s interpretation of the intention of Parliament in setting law’. But Freedman told the Treasury Committee: ‘With respect, it is not for HMRC to decide what the law is. It is for the courts ultimately.’

She added: ‘I do think avoidance has to be tackled because in the end avoidance, on my definition, is showing where there is a problem with the law and then the law has to be changed.’

The study group will report to the Exchequer Secretary by the end of October.

Read the full interview here