Tax avoidance, though technically legal, is coming under increasing political pressure. This has reignited ideas of a general anti-avoidance rule. This sounds seductive but it can be fiendishly difficult to draw the line between unreasonable avoidance and legitimate tax planning. However, there may be a middle way.
In December 2010, the government set Graham Aaronson QC the task of investigating a General Anti Avoidance Rule (pdf). Together with a team including a small group comprising academic lawyers, judges and the Group Head of Tax at BP, he considered the following objectives:
- Providing the Government with an effective means of deterring and countering tax avoidance.
- Ensuring that the rules work fairly and would not erode the UK tax regime's attractiveness to business.
- Ensuring that certainty about the tax treatment of transactions could be provided without undue compliance costs for businesses and individuals.
- Keeping any increase in resource costs for HMRC to an acceptable level and ensuring that there would be a minimal need for resource to be diverted from other priorities.
Anti-abuse, not anti-avoidance
A year later, he has published his final report (pdf). Last mooted in 1998, this controversial idea is often conceived of as a blanket ban on tax avoidance. This definition, however, has been rejected by Aaronson and his team in favour of an anti-abuse rule. In Aaronson's own words, a “broad spectrum anti-avoidance rule would not be beneficial to the UK tax system” and he instead proposes “a moderate [GAAR] rule which does not apply to responsible tax planning, and is instead targeted at abusive arrangements”.
Safeguards for business
The report is very mindful of the second objective it had to consider – that it maintain a competitive tax environment to attract businesses. As such, four “safeguards” have been recommended:
- An explicit protection for reasonable tax planning.
- An explicit protection for arrangements which are entered into without any intent to reduce tax.
- Placing upon HMRC the burden of proving that an arrangement is not reasonable tax planning.
- Having an Advisory Panel, with relevant expertise and a majority of non-HMRC members, to advise whether HMRC would be justified in seeking counteraction under the GAAR.
Safeguard 3 is noteworthy, as previous notions of anti-avoidance rules have often included a clearance process requiring tax avoidance schemes to be pre-approved. The proposed rule will not give substantial power to HMRC, and the report notes that the “GAAR should be a shield for the tax system and not a weapon for HMRC”.
The letter of the law, no more
It represents a shift in focus from the letter to the spirit of the law. Arrangements that “make a mockery of the will of Parliament”, although technically legal, would be deemed abusive and blocked by the rule. Aaronson believes this could also help improve the quality of legislation by “encourag[ing] legislators, and drafters, to consider more carefully the principles behind proposed legislation.”
The rule would not replace existing statue, but would instead be an extra layer above it. It is envisaged, though, that it would allow for existing anti-avoidance provisions to be simplified and their number reduced.
Aaronson hopes that the proposed legislation would create greater certainty in tax avoidance cases that go before the courts. Judges have increasingly tried “to stretch the [normal principles of statutory] interpretation… to achieve a sensible result” which has produced “considerable uncertainty in predicting the outcome of such disputes.” By formalising this purposive attitude towards the law by emphasising the principle behind legislation, judges should be more consistent.
The spirit of the times
All-in-all, this is a much subtler piece of legislation than many would have hoped or feared. Attitudes towards tax avoidance have been moving in this direction over the last decade. More purposive interpretations by the courts, increasing numbers of anti-avoidance provisions and the 2004 introduction of compulsory disclosure for schemes with the hallmarks of avoidance, have found their culmination in this report.
As announced in the 2012 Budget, the GAAR (now rebranded the general anti-abuse rule) will be introduced in the 2013 Finance Bill.