We asked tax professionals for their views on the proposed general anti-abuse rule, the subject of a consultation that runs until 14 September, and last week we published 18 responses in the magazine and online. We received a further 18 responses and these are set out below.
Andrew Goodall, News Editor
Peter Jackson, Head of Tax, Taylor Wessing
The proposed extension of the GAAR beyond the main direct taxes and NICs to other taxes (including a new annual charge for ‘enveloped’ high value residential property) will do little to promote certainty as to how the GAAR will impact on taxpayers.
Graham Aaronson QC in his report recommended that the ambit of the GAAR should be restricted (at least initially) to the main direct taxes and NICs which reflects the fact that these taxes represent significantly the largest contribution to the Exchequer and have been most vigorously litigated in the Courts where tax avoidance has been identified. Further, given the proposal that the operation of the GAAR should, as far as possible, be aligned with existing tax administration procedures then application of the GAAR to direct taxes (to which taxpayer self-assessment applies) and to NICs which require periodic payments and returns on the part of the taxpayer is sensible.
The Chancellor announced in his 2012 Budget that stamp duty land tax (SDLT) would be included within the scope of the GAAR. It is not clear that inclusion of SDLT in the GAAR is necessary as regards protecting the public revenue given the wide-ranging anti-avoidance provisions already available to HMRC (eg FA 2003 s 75A) and it may introduce uncertainty as to how the GAAR will operate for transactions which, currently, are specifically excluded from these anti-avoidance provisions.
In their consultation document on the GAAR published on 12 June 2012 HMRC express an intention to further extend the ambit of the GAAR to taxes linked to corporation tax (e.g. Bank Levy) as well as other taxes being IHT and the prospective annual tax charge for high value enveloped residential property.
It is odd that the GAAR should extend to the annual charge which is prospective legislation still under consultation and where the administrative framework for collection of the tax is still to be identified. It will also not be possible to identify what may be regarded as ‘centre ground’ tax planning in relation to such an annual charge given it will be an entirely new tax.
In relation to IHT it is difficult to see how the GAAR can operate satisfactorily in terms of taxpayer certainty given the existing administrative framework is events driven and frequently significantly distanced in time from the planning structures and arrangements which will require to be considered. There is also the issue for existing IHT planning as to what represents fully complete arrangements such that those arrangements may fall outside the GAAR when it is introduced.
Stephen Herring, Senior Tax Partner, BDO
It would be very disappointing if the responses to the GAAR proposals were to focus exclusively upon the minutiae or to assert some sort of HM Treasury conspiracy involving thin ends of wedges and the like.
We should accept, and indeed welcome, the underlying theme of placing another obstacle in the way of the marketing of clearly abusive tax schemes with no basis in genuinely commercial drivers.
The consultative document is right to reject a broad spectrum anti-avoidance rule which would hurt the competitiveness of UK economy; attacking abusive marketed products will not. In my opinion, one of the main beneficiaries of the introduction of a UK GAAR will be taxpayers who, perhaps understandably because tax is unfortunately a complex subject, become confused between commercially supportable tax planning and abusive cookie-cutter tax products as marketed by certain outliers in the world of tax advice. In recent years, taxpayers who have entered into such schemes have, almost invariably, seen the abusive products overturned by the courts and have suffered financial loss from both the tax penalties levied and the, often substantial, fees paid to the companies which have sold the schemes. What we need to do as tax advisers is to cast out the abusive and contrived product and be much more vocal in defending a taxpayer’s right not to select the structure or the route for a transaction which provides the Exchequer with the maximum tax take. Hopefully, commentators will be mindful that defending the indefensible is not the best approach to holding the line in its rightful place.
I was surprised that clause 3.26 on page 17 (and also in clause 5.11 on page 25) of the consultation document which states that ‘the abusive tax advantage would be counteracted on a just and reasonable basis’ did not continue to explore whether an additional fixed or percentage penalty might be appropriate given that we are only concerned with abusive arrangements. This might encourage the promoters of such schemes to be wary of selling the abusive product on the basis that, ignoring interest, the taxpayer could be no worse off if the scheme ultimately failed in the courts. A specific GAAR penalty might deter an abusive scheme promoter as the victim may well consider seeking recompense from them.
There are a number of other aspects of the consultation document which require comment.
Firstly, I consider that the reference in the Consequential Adjustments referred to on page 18 that they ‘may affect any person (whether or not a party to the arrangements)’ is counter-intuitive and requires a much more explicit description of the circumstances for which this is intended to apply. Which parties ought to be affected that have not been a party to the arrangements and in what circumstances should they be affected?
Secondly, the consultation document invites on page 28 comments on the proposed time limits for referrals to the advisory panel. To accelerate the processes, I consider that all three stages should have fixed time limits of thirty days and, in particular, neither HMRC nor the advisory panel ought to have a longer time limit than the taxpayer. We welcome the proposal on page 30 to publish, in anonymised form, the key principles emerging from advisory panel opinions.
The consultation document refers to the introduction of a GAAR as an enabler to secure simplification and improve clarity in the UK’s tax legislation. This will be very easy for those with a ‘glass half empty’ viewpoint on tax legislation to challenge but, in my view, there will be scope for the removal of targeted anti-avoidance rules after some time has elapsed after the GAAR’s introduction. Indeed, if it is not, we will all have an authentic reason to lobby both HM Treasury and Exchequer Ministers about why it has not happened!
Paul Davison, Partner, Freshfields Bauhaus Deringer
The draft GAAR is much more concisely drafted than the Aaronson illustrative GAAR. Nonetheless, we are a long way from ensuring ‘sufficient certainty’ without undue cost.
Instead of [Aaronson’s] multiple ‘safeguards’, there are just two conditions for the [draft] GAAR to apply to a set of ‘arrangements’: they must be relevantly tax-motivated, and they must be ‘abusive’. It was apparent anyway that the ‘reasonable tax planning’ safeguard was central to the Aaronson illustrative GAAR, and the drafting simplification is not in itself a bad thing.
The concept of an ‘abusive’ arrangement is the innovation here (at least in the UK: many civil law jurisdictions have long had ‘anti-abuse’ rules). But we should not skip too quickly over the other concepts, just because they seem familiar.
There will be many cases (often in what might be thought of as ‘centre ground’ territory) where it is critical to establish the scope of the ‘arrangement’. If a multi-faceted commercial transaction is structured in a tax-efficient way, with steps taken in a carefully-designed order, or with carefully-selected entities chosen to perform particular roles, is the ‘arrangement’ the transaction as a whole or the tax structuring within it? The Aaronson illustrative GAAR was expressed so as potentially to apply to tax-motivated ‘features’ within a wider commercial transaction; and whilst less clear, it seems to be intended that the draft GAAR could too.
As regards the other main concept, tax motivation, it is striking that whilst the draft GAAR now adopts the usual ‘main purpose’ test, it follows the Aaronson illustrative GAAR in requiring only that it should be ‘reasonable to conclude’ that tax is a main purpose.
The meaning of ‘abusive’ is clearly critical. Here we find the ‘double reasonableness’ test – a suitably confusing name-tag for a highly uncertain test. The core question is whether a course of action is ‘reasonable’; the test is whether it can ‘reasonably’ be viewed as such. The legal-sounding terminology disguises a value judgement: any tax planning will be reasonable in the sense of being ‘founded in reason’ and ‘not irrational’; views will differ on what is reasonable in the sense of being ‘moderate’ (these are all listed within the Oxford English Dictionary meaning). It is not obvious that it helps then to ask whether a view on such a question can ‘reasonably’ be held – particularly not if, as seems to be proposed, the GAAR could apply even though one or more members of the Advisory Panel considered the planning to be reasonable.
Taking all this together (and noting also that despite what the consultation document says, there is no separate requirement in the draft GAAR that an arrangement should be ‘artificial’), we seem to be a long way from ensuring ‘sufficient certainty’ without undue cost.
Michael Cant, Partner, Nabarro
It is dispiriting to see that the draft GAAR that is the subject of the current consultation has moved so far from where Aaronson had suggested we should begin.
How different is the draft GAAR proposed by the Consultation from the illustrative GAAR envisaged by the Aaronson Report? Have HMRC embraced the idea of a ‘specifically targeted anti-abuse rule’ or have they proposed a ‘broad spectrum general anti-avoidance rule’ which Aaronson concluded ‘would not be beneficial for the UK tax system’?
The depressing answer is that the draft GAAR is a broad, intentionally vague, piece of draft legislation that if enacted would be unpopular, create uncertainty for the masses but fail to dissuade the hardcore tax avoider.
Down to the details. The taxes covered by the draft GAAR are expanded to include IHT and SDLT. This is despite the stated reservation of Aaronson that it would be ‘sensible to restrict the operation of the GAAR’ to direct taxes and NICs to begin with.
Perhaps most damagingly, the draft GAAR rejects a specific exclusion for both reasonable tax planning and any arrangement entered into entirely for non-tax reasons. Why? These two elements were safeguards 1 and 2 in the illustrative GAAR. Apparently it is ‘unnecessary’ as such arrangements would ‘automatically be excluded from the GAAR’ because of the need for there to be abusive tax arrangements present to trigger the provisions.
Next is the refusal on the part of HMRC to accept that for a GAAR to operate smoothly, TAARs need to be removed. All the consultation says on this point is that ‘the need for further targeted anti-avoidance rules may be reduced’. The use of the words ‘further’ and ‘may’ does not encourage great hope for the imminent involvement of the OTS once the GAAR is enacted.
Finally the consultation rejects both the need for independent, rather than HMRC generated, guidance and anonymised digests of the Advisory Panels advice on previous transactions. This retreat from the policies advocated by Aaronson can only create suspicion and uncertainty as to what is actually covered by the GAAR and how it is operated in practice. Such opacity allows both the over-zealous HMRC officer and the unscrupulous advisor free reign.
The report concluded its summary section by highlighting two particular concerns that had been expressed by representative bodies. The first was ‘mission creep’ and the second was the fear that the removal of TAARs would not be fulfilled. Although the consultation is just a starting point it is dispiriting to see that it has moved so far from where Aaronson had suggested we should begin.
Adam Craggs, Partner, RPC
The consultation document suggests that HMRC’s lack of resources is the reason why a clearance system is not being proposed.
The government's proposed GAAR, if implemented in its present form, may well generate a considerable amount of uncertainty for taxpayers and their advisers.
To this uncertainty must be added the day to day difficulties which beset both taxpayers and their advisers in navigating their way around one of the most complex tax codes in the world, as well as factoring in the political debate around the topic of what is, and what is not, ‘acceptable’ tax planning.
Many tax practitioners had hoped, therefore, that the government's proposals would include a clearance procedure that would, to adopt the wording used in the key terms of reference for the GAAR study group: ‘Ensure that sufficient certainty about the tax treatment of transactions could be provided without undue compliance costs for businesses and individuals.’
That such a clearance system is not included in the proposals is disappointing and may be due to a lack of resources at HMRC, rather than for any principled reason. An indication that lack of resources is the reason why a clearance system is not being proposed, can be found in the consultation document itself, where it is stated:
‘The report suggested that existing statutory clearance procedures could be expanded to enable confirmation to be sought regarding application of the GAAR. The government's view is that a partial clearance system would not be beneficial as it would only operate in specific circumstances, and there is a significant risk that HMRC's costs would increase considerable if additional clearances were sought under existing statutory provisions in order to obtain a clearance for the GAAR.’
This statement illustrates a fundamental problem. On the one hand, HMRC is expected to take on an ever more proactive role in tackling tax avoidance and tax evasion and close the elusive ‘tax gap’ and on the other, HMRC is expected to deliver an ever more efficient customer service to large and small taxpayers alike with ever diminishing resources. HM Treasury has, in recent years, cut the resources available to HMRC, whilst at the same time it has expected the department to take on greater responsibility for the administration of the UK fiscal system. More resources for HMRC (or at the very least a reduction in the level of budgetary cuts) would enable HMRC to provide an effective GAAR clearance system, which in turn would reduce the uncertainty which may otherwise arise should the government's GAAR proposals be implemented.
Ray McCann, Director, Pinsent Masons
One of the most significant issues facing taxpayers on introduction of the GAAR will inevitably be the question of where HMRC would invoke the GAAR.
The GAAR review team changed the approach away from ‘is it tax avoidance?’ to ‘is it abusive?’ At a practical level this subjective approach could cause more difficulty for both taxpayers and HMRC in deciding where the line should be drawn. Inevitably a much wider range of transactions should be expected to look abusive to the general body of taxpayers (and to Ministers) than to HMRC and the professions.
This is particularly important given recent media exposure where tax planning, many would consider ‘old technology’, was condemned as egregious by Ministers in response to widespread media criticism. This is not new but inevitably HMRC is under pressure to act and tighten up on what is acceptable. It seems clear that K2 or, ‘doing a Jimmy’, has been known to HMRC for years. There is little to suggest HMRC regarded K2 as beyond the pale. So to with the Barclays loan relationship planning where, leaving aside the merits of that planning (which appears similar to the example given in HMRC's consultation document), there can be little doubt that other banks used the same or broadly similar arrangements in the past. It would seem reasonable to conclude that the combination of DOTAS and the Banking Code of Practice meant that it was well known to HMRC.
It is entirely proper for the Government to conclude that a particular tax position is not (or is no longer acceptable) and to change the law. HMRC must also be able to start an investigation into past tax planning that has somehow slipped under the radar. The danger for taxpayers is that where tax planning that has been around for some years (and seemingly accepted by HMRC) is suddenly declared as abusive what protection and certainty do those taxpayers who have used the same planning in the past then have? More importantly if HMRC drop an abuse stone in the pond, how far will the ripples extend?
Pat Dugdale, Consultant, Olswang
Chapter 5 of the Consultation Document states that the GAAR should, as far as possible, operate within existing Self Assessment regimes. It is unclear how this will operate in practice.
It is stated in draft clause 4 (1) that procedural requirements must have been complied with before tax advantages can be counteracted under the GAAR. While the procedures have not yet been published, they will presumably include the four stages described in paragraphs 6.8 to 6.10 of the document, namely, written notification to the taxpayer that a designated HMRC officer considers that the GAAR may apply, written response from the taxpayer, reference to the Advisory Panel and the Advisory Panel's opinion. The GAAR counteraction provisions bear some resemblance to those which apply in the case of artificial transactions in securities with the additional involvement of the Advisory Panel.
As these procedures take place after submission of the taxpayer's self assessment tax return, how is self assessment expected to operate? Realistically, would a taxpayer who has participated in an aggressive tax avoidance scheme self assess on the basis that it does not work? Unlikely, except perhaps for high profile individuals who fear reputational damage following recent publicity and regret their involvement in such schemes. It may be that the self assessment requirement provides a basis for the imposition of penalties in suitable cases where the GAAR is subsequently applied and to encourage protective disclosures which enable HMRC to identify which taxpayers to investigate. It is to be hoped that detailed guidance from HMRC will be issued, reflecting consultation concerns, which will enable taxpayers to consider the double reasonableness test and hence decide, in a self-assessment context, whether arrangements are ’abusive’. But there will be difficult cases and it will take time for case law to develop, some taxpayers will have difficult self-assessment choices.
Nigel Eastaway OBE, Tax Partner, BDO
What is reasonable?
In my opinion the key to whether the proposed GAAR would be effective hinges on the interpretation of the ‘double reasonableness’ test in draft clause 2(2), ie, tax arrangements are ‘abusive’ if they are arrangements the entering into or carrying out of which cannot reasonably be regarded as a reasonable course of action. I think it is reasonable to structure my affairs to pay the least amount of tax in accordance with my understanding of the law, but I think it unreasonable to claim tax relief for expenditure I have not in reality incurred, because I have borrowed from the promoter’s bank to increase the claim and the promoter has deposited most of my subscription with another helpful bank which has guaranteed my loan.
I think it is reasonable for a non-domiciliary to settle an offshore trust prior to becoming UK resident but I think it unreasonable to enter into an employment contract with an offshore employer which has no control over what I do but which lends me money I have arranged for it to receive and which I do not intend to repay. Is it reasonable for me to think that this can reasonably be regarded as a reasonable interpretation of the proposed GAAR?
Andrew Hubbard, Chairman of Tax Practice, RSM Tenon
Reasonableness is not an abstract proposition: context is everything.
Imagine the reaction of the audience on Question Time when you are the only member of the panel trying to say yes to the question ‘Is it reasonable that banks which have lost money though reckless behaviours should be able to benefit from that very same behaviour to get a subsidy against tax on their future profits?’ …
There has been much controversy over the double reasonableness test: people worry about double. I worry about reasonable! The proposal sets out issues to be considered when determining what is reasonable but to me it leaves one key point wide open – from whose perspective is reasonableness to be judged? What may be reasonable to an experienced business woman, an entrepreneur or high risk investor may seem completely unreasonable to a teacher, a union official or a member of UK uncut.
Think back to the furore over MPs who ‘flipped’ their PPRs. Some ended up almost as social outcasts for doing something which almost every reader of this journal would have regarded as perfectly reasonable. But I suspect that if you conducted a vox pop on the issue the reaction would be that it was unfair that some rich people owned more than one home and that it was absolutely outrageous that they could chose which one they didn’t pay tax on.
I see a big problem here – and one which is as much for HMRC as it is for tax agents. There is almost certainly a broader consensus between tax professionals inside and outside HMRC than is generally admitted about the sorts of cases which should be subject to the GAAR and I am sure HMRC will not be interested in challenging sensible mainstream tax planning such as managing PPR elections. In other words, HMRC will be assessing reasonableness from the perspective of the experienced tax professional.
But is this what parliament and the public expect it the law to do: is in fact what the draft actually says? Without a clear marker would a tribunal assess reasonableness from the perspective of the experienced tax professional or will it decide, perhaps after taking account of the very strongly worded attacks on avoidance by politicians that led to the introduction of the GAAR , that without clear language to direct it otherwise that the test should be applied from the perspective of the man in the street. That would lead us all into very different territory.
If a marker is not put down in the legislation I believe that HMRC could come under very severe attack for not applying the GAAR properly (it will be HMRC and not the courts which is attacked) and in a few years we could be going through the whole thing again, this time with a much more draconian set of measures.
Mark Simpson, Taxation & Benefits Partner, Squire Sanders
Does double lock mean double trouble?
A key feature of the proposed GAAR is the ‘double reasonableness’ test. HMRC has asked if we agree that it works only to counteract artificial and abusive schemes.
The draft GAAR defines an abusive arrangement as one which ‘cannot reasonably be regarded as a reasonable course of action’ – a double reasonableness test. This is quite different from the Aaronson Committee’s proposal which focussed on ‘abusive tax results’ arising from arrangements that do not constitute ‘reasonable tax planning’.
In other fields of English law, ‘reasonable’ has a long history. For example, the Wednesbury test stops public authorities from acting unreasonably or arbitrarily, that is in a way which no reasonable person would have done. In negligence cases, actions are tested against the standards of a hypothetical reasonable man who (in essence) takes care and keeps his nose out of trouble. Are these to be the new standards by which taxpayers are judged?
One could argue (quite reasonably) that any lawful course of action taken to reduce tax liabilities is reasonable – a rational choice made to reduce expenditure. To determine that it is unreasonable requires the application of some kind of external test and this is, apparently, what HMRC intend.
The linguistic gymnastics performed by judges over the years in the long line of tax cases shows the difficulty in trying to block unacceptable tax avoidance without catching what is acceptable or fits squarely within legislative provisions. What is a ‘reasonable course of action’ in relation to tax planning? To the man on the Clapham omnibus some things may be entirely reasonable (perhaps paying cash to tradesmen who offer a VAT free discount). On the other hand, he may say that avoidance by a bank (or comedian) is never reasonable.
Looked at in isolation, it is arguable that it is always reasonable to take steps to avoid taxes. At what point does tax planning cross the boundary and become unreasonable? It now looks as if they will be asked to arbitrate on the relative reasonableness of different types of tax avoidance but reasonableness is a mutable concept that changes over time and is influenced by and reflects public opinion. Words may mean what you want them to mean (as Humpty Dumpty said) and reasonableness is a mutable concept, even to lawyers. But one must be concerned at the risk of the courts straining to stretch the meaning to catch schemes that are regarded as unacceptable but which do not amount to perverse or even uncommercial behaviour.
A cynic might conclude that the intention is to keep the ambit of the GAAR unclear, to act as a deterrent to taxpayers. But if, as HMRC claim, the aim is to give certainty and clarity to taxpayers and their advisers, there must surely be a better way to describe this key element of the anti-abuse rule.
Ashley Greenbank, Partner, Macfarlanes
Abusive reasonableness.
The definition of arrangements that potentially fall within the scope of the draft GAAR is wide. So the exceptions and safeguards assume a greater importance in ensuring that it remains targeted at egregious schemes and does not stray into ‘the centre ground of reasonable tax planning’.
The main safeguard in the Illustrative GAAR was the exclusion for ‘reasonable tax planning’ (Illustrative GAAR, section 4). It provided that an arrangement was not to be regarded as abusive ‘if it could reasonably be regarded as a reasonable exercise of choices afforded by the legislation’. This test is rejected by the government on the grounds that taxing Acts tend not to afford choices of conduct to taxpayers; they attach tax outcomes to the choices of conduct made by taxpayers (consultation document para 3.12).
In the draft GAAR, this safeguard has been recast. The ‘double reasonableness’ formula is retained, but a tax arrangement will now be regarded as abusive if ‘it cannot reasonably be regarded as reasonable having regard to all the circumstances’ (Draft GAAR, section 2(2)).
What is this supposed to mean? Lawyers are familiar with concepts of reasonableness in other spheres. But is this the place for one, never mind two? Despite the appearance of objectivity, reasonableness in the tax context will inevitably be subjective. It takes only one look at the papers to see that one person’s acceptable tax planning is another’s egregious avoidance. The effect will be an uncertain test which hands a wide degree of discretion to HMRC.
There is more. One of the factors which the draft GAAR requires to be taken into account is any shortcomings in the relevant tax provisions. The intention is that the GAAR will apply to arrangements whose tax advantages would have been nullified by Parliament if it had foreseen them (consultation document para 3.15). The principle that ‘a subject is only to be taxed on the clear words, not on the intendment or equity, of an Act’ is now clearly dead. The taxpayer will not only have divine the intention of Parliament but what Parliament’s intention would have been if it had thought about it.
Pete Miller, Partner, The Miller Partnership
Should the panel’s decisions be binding on HMRC?
Chapter 6 looks at the proposed role of the advisory panel in considering whether the GAAR applies to any particular arrangement. Mr Aaronson's original report suggested that the panel should act in an advisory capacity, so that HMRC, taxpayers, the Tribunals and the Courts might be guided by the view of the panel but none of them would be bound by it. This means that, even if the panel advised that the GAAR did not apply to particular arrangements, HMRC would be entitled to argue for its application to the arrangements, so the final decision would be for the judiciary.
Many commentators have suggested that the decisions of the advisory panel should be binding on HMRC but this suggestion is given short shrift in the condoc (para 6.7), on the basis that judicial decisions about the application of tax law should be made by the Tribunals and the Courts and not by an advisory panel set up outside those bodies. This appears to be a done deal, as there is no specific question asking for respondents views on this point (although question 13 does ask generally for comments relating to the proposals in chapter 6).
I would prefer to see the advisory panel's decisions being binding, with the role of the advisory panel being similar to that of the First-tier Tribunal when HMRC is considering counteraction under the transactions in securities rules. When HMRC tells the taxpayer that they are thinking of raising a counteraction notice, the taxpayer provides a counter statement and the First-tier Tribunal decides whether or not HMRC has a prima facie case for counteraction. If the Tribunal decides there is no case, HMRC is not permitted to continue with the proposed counter-action (ITA 2007 s 697(5)). I see no reason why similar arrangements should not apply to the GAAR advisory panel, so if it decides that the GAAR cannot apply to particular arrangements, HMRC is barred from using the GAAR in further proceedings. None of this stops HMRC using technical arguments or a Ramsay argument against the arrangements.
One final thought: para 6.20 suggests some restriction on the publication of anonymised decisions, on the basis of confidentiality. While taxpayer confidentiality is important, the GAAR is directed at abusive tax avoidance schemes and I see no reason why the Panel should not publish its views on specific tax planning arrangements. There is no promise of confidentiality to promoters of tax schemes and, in any case, the taxpayer confidentiality issue effectively falls away as soon as the taxpayer is named published Tribunal decisions.
Simon Letherman, Counsel, Shearman & Sterling
The proposed GAAR would take priority over all double taxation agreements (DTAs). This goes considerably further than the proposals in Graham Aaronson's study. The consultation last year on general DTA override provisions was abandoned in the name of certainty for taxpayers, but HMRC seem determined to have a second bite at the cherry.
DTAs are international treaties and, as with any international treaty, contracting states must perform their DTA obligations in good faith. Domestic legislation which purports to override the terms of a DTA is therefore a prickly subject, raising questions about international obligations and the rule of law.
HMRC's proposal last year to introduce general DTA anti-avoidance provisions provoked significant concern. The proposal was abandoned by ministers even before the consultation period had closed, David Gauke's statement noting the Government's commitment to provide certainty for taxpayers, while continuing to challenge specific abusive arrangements.
UK domestic law has provided for DTA overrides only in very particular situations. But otherwise DTA provisions are generally applied despite anything in any enactment. The UK has instead sought to agree specific anti‑avoidance provisions in particular DTAs. This follows the approach of, say, the US in agreeing Limitation of Benefits articles in its DTAs (although in addition the US often applies for instance its substance-over-form doctrine notwithstanding the terms of particular DTAs).
HMRC has tried again with the GAAR. The Aaronson study was relatively careful so far as DTAs were concerned. Its draft GAAR specifically stated that DTA provisions would be overruled only to the extent lawful. But in the currently proposed GAAR, the priority clause treats DTA provisions like any other – the GAAR sits on top.
The consultation document argues that Aaronson's safeguards were not necessary, pleading in support OECD commentary to the effect that DTA protections should not extend to arrangements that constitute an abuse of the DTA. The contrary observations from certain states noted in the OECD commentary go unremarked in the consultation document.
The proposed DTA override potentially goes even further than DTA abuse cases. If any tax advantage (DTA-related or not) fails the double reasonableness test, adjustments must be made to any tax (DTA-related or not) on a just and reasonable basis. To say the least, it is unclear that the OECD commentaries support a just and reasonable override absent DTA abuse.
No doubt responses to the consultation will express similar concerns over certainty and good practice under international law to those that had to be raised last year.
Eamon McNicholas, Barrister, Temple Tax Chambers
The ‘Yes Minister’ approach to tax and legislation still holds sway in Whitehall. Hope springs eternal, but judging from recent events the expectation from experience is the prospects for a workable and reasonable GAAR are poor.
The budget this year was a slow-motion car crash in several areas where Whitehall said it was consulting (decide first, PR later). But as events unravelled out of control the budget was perceived by the public as flawed and unfair. Just by way of example the ‘pasty tax’ was moderately thought through technically but an unmitigated self-inflicted political disaster at a time of national crisis. Even with the political equivalent of a part handbrake turn on that, and many other, mistakes the public impression was of an unfair budget badly handled.
More recently extreme tax avoidance plans have got into the national news. The problem, ironically, is the huge success Whitehall has had in deliberately confusing the electorate on the, old but solid, distinction between evasion and avoidance. Although this has led to a level of public antipathy for tax avoidance it has also opened the Pandora's box of a wider questioning of the tax system and fairness.
So, the Prime Minister criticising the tax affairs of a national figure using an avoidance scheme was initially a chance for some quick spin. But the debate quickly went off message as some people asked why Whitehall had made tax legislation so complex in the first place and what they really got in return for their tax. The State invoking morals in tax is fine up to a point. But it can unravel when people then query what they can subjectively see as the State's amoral position, whether over deficit management, spending cuts or whatever an individual or group may be concerned with.
So a GAAR may be not the solution to a problem but another symptom of it. After Budget-style consultations, real or otherwise, the nagging doubt may be left that Whitehall will once again decide what it wants to do regardless. Whether a GARR will itself be open to avoidance planning is still unknown. But Whitehall could be criticised by the public for not introducing a simple Buffet-style tax, or real minimum rate, in favour of more complications.
Kassim Meghjee, Tax Partner, Mishcon de Reya
The impact of a GAAR on existing and intended legislation is likely to complicate rather than simplify the UK legislative landscape for the foreseeable future. Simplification may come, but that is unlikely in the immediate future.
As Aaronson states in his independent report, ‘[t]he UK’s legislation is notoriously long and complex’. Indeed, in the last two years Tolley's Yellow Handbook has increased by over 25% to 14,477 pages in the current edition. Practitioners hardly require reminding that such length and complexity originates, in part, from successive government’s attempts to protect the Exchequer from abuse of the legislation with targeted anti-avoidance rules, the so called ‘TAARs’.
Logic dictates that the introduction of a ‘narrowly focussed’ GAAR, revealed in the consultation document published on 12 June 2012 (the ‘Consultation’), should assist in simplifying the government’s approach to legislating against perceived anti-avoidance. However, the Consultation makes it clear that the GAAR will be just one arrow in its bow in defending the Exchequer, stating that the GAAR ‘will not affect HMRC’s right or ability to challenge in the normal way arrangements which it considers ineffective in achieving a tax avoidance purposes…HMRC will challenge and, where it can, counteract all forms of tax avoidance using ... GAAR as an additional tool alongside existing anti-avoidance tools ... and using existing anti-avoidance tools where the GAAR does not apply’ (Clause 2.5 the Consultation). Whilst the Aaronson report suggested that the GAAR should lead to simplification and reduction of TAARs, the government is clear that TAARs will remain, although maybe in a simpler form (Clause 2.9 the Consultation). Other jurisdictions that already operate a GAAR (notably Australia and Canada) continue to apply such a dual approach indicating that, if anything, TAARs will be retained. Certainly the draft legislation issued recently which deals with the reform of the CFC regime to be introduced in January 2013 and the proposed reform of the income tax losses regime to combat ‘repeated attempts at tax avoidance’ has that approach (paragraph 2.205, Budget statement 2012).
It seems unrealistic to expect in an era of attempted infusion of morality into tax legislation when dealing with perceived tax avoidance (notably George Osborne’s announcement when delivering the Budget statement of 2012 as well as the more recent statement from the Prime Minister after the revelations stemming from the so called ‘K2 tax scheme’) that the legislation will be simplified in the short term. It may be many years until the GAAR shows its teeth (or not) considering the time it takes for the cases to come before the courts with the current backlog and years thereafter for the legislation to be rewritten (as those who observed the Tax Law Rewrite can bear witness).
Perhaps, instead, the correct question to consider is whether simplification is something to be desired. Objectively there is no question that the UK’s tax code is burdensome. However, if simplicity is achieved at a loss of certainty, for example via the introduction of a wider GAAR which in turn relies on interpretation of in case law, practitioners and taxpayers alike should approach a retraction of TAARs with caution and accept that UK’s notoriously long and complex legislation is here to stay.
Lakshmi Narain, Technical Director, Baker Tilly
The inclusion of a general anti-avoidance principle in addition to the GAAR would assist in facilitating a simpler tax system.
At the outset I must say that the anti-abuse rule is a considerable improvement over the general anti-avoidance rule that was proposed in 1999 and far, far better targeted than the misnamed ‘targeted anti-avoidance rules’ (TAAR). The latter, it will be recalled, were roundly condemned when they were first introduced due to the need for extensive guidance to focus the legislation on the intended target – a clear case of taxing by law and attempting to un-tax by concession. In view of the Wilkinson judgment this remains a matter of concern. Readers may recall that the 2006 pre-Budget report proposals regarding capital losses offered a neat solution to the problem by setting out the clear objective of the TAAR: to ensure that allowable capital losses are restricted to genuine commercial transactions. It is a pity that the legislation does not adequately reflect that simple objective.
It is also a shame that the introduction of the extremely successful tax avoidance disclosure scheme (DOTAS) has not led to an improvement in the drafting of anti-avoidance legislation. A clear illustration of this is the SDLT anti-avoidance legislation in FA 2003 ss 75A–75C. The absence of a purpose test and the lack of a clearance facility, formal or informal, puts the onus on the under resourced HMRC to identify and challenge unacceptable arrangements based on taxpayer disclosures.
The Courts have played their part in attempting to make sense of poorly targeted legislation by increasingly taking a purposive interpretation of the legislation and a realistic view of the facts. It is understood that a number of arguments, based on taking a realistic view of the facts, could have been deployed in the Mayes case but for the mechanistic nature of the legislation.
The inclusion of a general anti-avoidance principle in addition to the GAAR would, I submit, assist in providing a solid base for determining the ‘purpose’ of both the relieving provisions and the anti-avoidance rules and facilitate the longer term objective of a simpler tax system.
Stephen Woodhouse, Tax Partner, Deloitte
How would the GAAR have affected the structure in PA Holdings, for instance?
The proposed GAAR builds on the proposals in Graham Aaronson’s original report. Its main objective is to counteract ‘egregious’ tax avoidance.
Although employment tax planning does not feature in HMRC’s list of objectionable schemes which the GAAR is designed to counter, the GAAR nonetheless seems apt to apply to some schemes. Would these have been rendered obsolete without litigation if the GAAR had been in place?
We could take the facts in PA Holdings as an example. The employer wanted to pay a bonus but preferred not to account for national insurance contribution and for their employees to pay tax at less than the prevailing rate for employment tax at the time of 40%.
To achieve this, shares were awarded to employees on a basis which was tax free and dividends paid on those shares. The structure failed in the Court of Appeal (subject to appeal) but if a GAAR was in place, would this litigation have been unnecessary?
The answer to that question is probably ‘yes’. The plan was established to deliver bonus amounts in a form reducing tax and NICs. It would seem reasonable to regard that as being an unreasonable course of action, taking into account the underlying legislation and its policy objectives. Further, if effective, they would have resulted in the ‘avoidance or reduction of a charge to tax’.
While the impact of disclosure requirements, increased HMRC scrutiny and challenge and political intervention in some areas (most notably banking) is already militating against this sort of planning, the GAAR will act as a further deterrent against many of the more aggressive plans and arrangements being offered in the market. Many organisations will welcome that provided that the legislation only used in cases where the tax planning is ‘egregious’ and not extended to ‘the centre ground of tax planning’ referred to in the consultation document.
Stephen Hoyle, UK Head of Tax, DLA Piper
A better target would have been the distributors of high risk schemes rather than the users.
The revised GAAR should be judged on the basis of the published draft clauses. Comforting words about preserving ‘the centre ground of tax planning’ read well in the commentary but count for little if they are not enshrined in the legislation. The proposed GAAR is even more clearly exposed in the revised draft than it was in Graham Aaronson's original proposal as a 'Code of Practice on Taxation for The People'.
Whether there is a better way to stop egregious tax planning depends upon how good we consider the GAAR to be and how successful so-called egregious tax planning actually is.
The new Code of Practice will require advisers to work out whether their planning achieves an objective which could plausibly have been a policy of the relevant legislation. As such, the GAAR could operate to fill gaps in the legislation, but of course in only one direction. This is an unreasonable burden to put on the general body of taxpayers.
Would this have prevented some of the recent stories in the news? It alone would not. I wonder whether what we have read recently will turn out to raise questions more about mis-selling than about the effectiveness of the UK tax system.
On 31 May, 2011 HMRC published a consultation document about discouraging the use of high risk tax avoidance schemes through the use of special disclosure and penalties. The immediate plan to legislate was abandoned at the end of 2011.
A better target would have been the distributors of high risk schemes rather than the users. Increased obligations upon those who market high risk schemes would be a better way of stopping them. The liability of promoters is currently being tested by plaintiff's law firms' arguing misrepresentation and challenging the effectiveness of buffers against the personal liability of the sellers. This is a better topic for legislation.
Instead of accepting that tax structured finance in the City has indeed been reduced and tackling high risk income tax schemes through the distributors, we have the GAAR. This will wrongly affect all the people.
The UK considers itself a developed legal system. However, the use of its tax law by the people is now to be subject to the requirement that it is reasonable. This is truly palm tree justice.
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