The general anti-abuse rule and the tax advice industry

29th August 2012

The following article is provided by C3 Tax. C3 Tax is boutique tax consultancy which develops and implements innovative tax planning and mitigation strategies. Although they are based in Leeds and C3 offer UK-Wide Tax Advice.

The media coverage of tax avoidance has recently died down somewhat, at least until another advisor thinks it's wise to name-drop a celebrity anyway! Now might be a good time to revisit the consultation under which HM Revenue & Customs (HMRC) are inviting comments and questions concerning the introduction of a General Anti-Abuse Rule (GAAR), and the proposed draft legislation. A consultation which has received surprisingly little attention, during what has been quite a turbulent period, but suffice to say, this is a far weightier matter for the tax profession.

The limited attention the GAAR did receive in the media was generally a mish-mash of confusion as to what it was actually called. Clearly the fact that avoidance and abuse both begin with ‘A' was enough to confuse those journalists with the unenviable task of reporting on it!

Talk of a general rule to counteract avoidance has spanned the best part of a decade, originally conceived as a General Anti-Avoidance Rule (as opposed to Abuse), the concept arose as a response to the relative failure of both directly targeted measures against specific arrangements, and the DOTAS regime to put a stop to what HMRC regard as aggressive and artificial avoidance measures. 

Graham Aaronson QC, a leading tax barrister, was asked in December 2010, to lead a study into the desirability of introducing a GAAR in the UK.  The report that followed, published in November 2011, has formed the basis of the consultation document and process.

Over 30 countries have adopted similar rules with great effect, but it was still widely considered that an introduction in the UK would be problematic.  And when the much anticipated Aaronson report was published in November 2011, Aaronson's conclusion seemed to uphold those concerns.

In his opinion, a broadly drafted ‘avoidance' rule would not benefit the UK.  Amongst the reasons given were that it may make the UK less attractive to overseas business, undermine the ability of taxpayers to undertake "sensible and responsible" tax planning, and award substantial discretionary powers to HMRC in terms of their deciding, subjectively, what is and is not acceptable.

His proposal was instead for a far more targeted General Anti-Abuse rule, which would allow the continued use of "responsible tax planning" but target "highly abusive arrangements".

Additional elements were proposed to prevent the free reign of HMRC, including the setup of an independent advisory panel to give their opinion on the application of the GAAR, and ensuring the burden of proof lies with HMRC.  The Consultation Document has largely taken these findings on board.

In our view the narrower focus on clearly abusive schemes is to be welcomed, but is there not already sufficient case law and precedent to allow the authorities to counter such arrangements?  The Schofield case recently heard at the Court of Appeal, where HMRC successfully invoked Ramsay, would seem to back up this view. 

Although the GAAR, as now proposed, is clearly an improvement upon the all encompassing anti-avoidance rule, concerns remain, particularly the subjective definitions seen in the draft legislation and the ability for the taxpayer to self assess. It's likely that the effect of these rules will come down to how they are applied in court, something that seems inconsistent with the persistently stated aim of simplifying the UK taxation system.

Come April 2013 it will be interesting to see these proposals in force as they certainly wouldn't be the first government proposals to work in theory, but fail in practice.  

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