General tax avoidance prohibition should be introduced, report says

However the Treasury-commissioned report (77-page / 244KB PDF), by Graham Aaronson QC, warns against making the scope of any general anti-avoidance rule too broad.

Aaronson's report recommends that a GAAR should initially apply to the main direct taxes including income tax, capital gains tax, corporation tax and petroleum revenue tax, as well as to national insurance contributions (NICs).

The report includes a draft rule, as well as safeguards to protect reasonable tax planning from being caught within its operation.

"Artificial and abusive tax avoidance schemes are widely regarded as an intolerable assault on the integrity of the tax regime, A general anti-abuse rule narrowly targeted to deter such schemes, while not affecting responsible tax planning, should lead to a fairer, more principled and ultimately simpler tax system; and I strongly recommend that such a rule should be introduced into our tax laws," Aaronson said.

However a broad spectrum GAAR would risk "undermining the ability of business and individuals to carry out sensible and responsible tax planning", which is "an entirely appropriate response to the complexities of a tax system such as the UK's", the report said.

It recommended a series of safeguards, including an explicit protection for reasonable tax planning and arrangements which are entered into without any intent to reduce tax.

It also said that HM Revenue and Customs (HMRC) would have the responsibility of proving that an arrangement should be caught by the legislation.

HMRC currently catches tax avoidance arrangements through anti-avoidance legislation and disclosure rules. However, this system requires specific action as new schemes appear.

Tax law expert John Christian of Pinsent Masons, the law firm behind Out-Law.com, said that the report's recommendation was expected and would likely be taken up by the Government.

"The report decides against a clearance system, which HMRC could not have resourced in any case, so the real challenge will be to convince businesses investing in the UK that they will have certainty in their tax affairs," he said. "Businesses know that abusive tax planning is not acceptable, but it would also be unacceptable if the regime has the effect of creating tax uncertainty around normal business activities."

The report said that the introduction of a "moderate" GAAR, targeted at "abusive arrangements", would deter or counteract "contrived and artificial" tax avoidance schemes which "make a mockery of the will of Parliament".

It would also lead to a more level playing field for business, as "enterprises which conduct responsible tax planning would no longer have their competitiveness undermined by others which seek to reduce their tax burden" by using such schemes, the report said.

The new rule would also make the tax system more certain, as judges would no longer be "faced with the temptation to stretch the interpretation" of existing laws to achieve sensible results, it said.

Once a GAAR was operating fairly and effectively, it could be extended to other taxes such as stamp duty land tax, the report said. However, it recommended against including VAT which "has its own anti-abuse rules derived from EU law".

David Gauke, Exchequer Secretary to the Treasury, said that the Government had asked Aaronson to consider the possibility of a GAAR as part of its commitment to tackling tax avoidance.

"We welcome the completion of his study and will carefully consider its recommendations alongside the feedback from businesses and tax professionals that we look forward to receiving," he said.

He said that the Government would consider the report in detail and respond fully at Budget 2012. However, he stressed that a GAAR would not be introduced without further formal public consultation.