Government publishes proposals for anti tax abuse rule

The rule will not be a 'broad spectrum' anti avoidance rule but will be a narrowly focused anti abuse rule.

In December 2010 the Exchequer Secretary to the Treasury, David Gauke, asked Graham Aaronson QC to lead a study that would consider whether a general anti-avoidance rule for the UK could deter and counter tax avoidance. The study group report was published on 21 November 2011 and recommended the introduction into the UK tax system of a narrowly focused General Anti- Abuse Rule (GAAR).

The Government has confirmed that it accepts Graham Aaronson’s conclusion and agrees that a 'broad spectrum' anti-avoidance rule would not be beneficial for the UK tax system. "Such a rule would risk compromising the certainty that is vital to provide the confidence to do business in the UK," said Gauke.

"The GAAR aims to target artificial and abusive tax avoidance schemes which, because they are often complex and/or novel, could not have been contemplated directly when formulating the tax legislation." says the consultation document.  

The consultation document states that the rule should not affect 'the centre ground of tax planning', but Heather Self, a tax expert at Pinsent Masons, the law firm behind Out-Law.com, said: "as things stand there is a risk that legitimate tax planning will be caught by this rule, especially once things eventually reach the courts".

Although the Government intends that the GAAR will deter artificial and abusive tax avoidance, the consultation document states that targeted anti avoidance rules (TAARs) will need to be retained, "although the existence of a GAAR may obviate the need for some TAARs and enable others to be simpler and more clearly focused."

"The GAAR proposals don't seem to envisage any existing tax measures being repealed. Not removing existing legislation as well as imposing the GAAR would just add more complexity and length to the UK's already long and complicated tax legislation." comments Heather Self.

The GAAR will apply where both a “tax arrangements” test and an “abusiveness” test are met. The tax advantage will then be counteracted on a just and reasonable basis.

The Government proposes that the GAAR should initially apply to income tax; corporation tax capital gains tax; petroleum revenue tax; inheritance tax; and stamp duty land tax and the new enveloped property annual charge. The GAAR will also apply to National Insurance contributions, but this will require separate legislation and this is likely to be enacted after the GAAR has been introduced.

"One of the big pieces of news is the inclusion of inheritance tax as covered by the GAAR. Inheritance tax wasn't in the Aaronson Report's version of the GAAR and HMRC's proposals don't look fully thought through" says Heather Self.

"A GAAR will strengthen the Government’s anti-avoidance strategy and complement the existing tools HMRC has at its disposal to tackle avoidance. It will act as a deterrent to those engaging in artificial and abusive avoidance schemes and where such schemes persist the GAAR will improve HMRC’s ability to tackle them effectively", states the consultation document.

The Government agrees with the recommendation of the Report that there should not be a formal statutory clearance process in relation to the GAAR.

"The Government's proposals for the GAAR achieve nowhere near the level of clarity that we might have expected", said Self. "As they stand, the proposals will inevitably lead to uncertainty in commercial transactions."

One of the taxpayer safeguards suggested by Aaronson's Report and adopted by the Government was the proposal for an Advisory Panel, to help taxpayers and HMRC to identify the borderline of where the GAAR applies. This would be comprised of HMRC and non-HMRC members. Ideally at least one of the non-HMRC members should, wherever possible, have experience relevant to the arrangement. It is proposed that the role of the panel would be purely advisory and its decisions would not be biding on either HMRC or the taxpayer.

The procedure for applying the GAAR would be a written notification to a taxpayer that a designated HMRC officer considers that the GAAR may apply (with reasons and proposed counteraction), inviting a written response. The taxpayer could than provide a written response.

If the taxpayer provided a written response, the designated HMRC officer would have to consider the response. If the officer was still of the view that the GAAR may apply, he or she would have to refer the matter to the Advisory Panel. The Advisory Panel would give its opinion to HMRC and to the taxpayer. There would be no formal hearings and all representations would be dealt with in writing.

"It's not entirely clear how it's supposed to work," said Self in relation to the proposals for the advisory panel, "Is it intended to be a safeguard, or will it just add another level of review and bureaucracy?"