THE LONG-AWAITED report from Graham Aaronson QC on the merits of a general anti avoidance rule was published on Monday. Aaronson had given hints to what it would include. It was not expected to rule out the possibility of a GAAR altogether, but it was also unlikely to be too wide-ranging.
What we saw was a narrowly focussed rule that would, as Aaronson promised, target the most “egregious” tax avoidance schemes, but would err on the side of the taxpayer.
The report has been broadly welcomed. But the obvious concerns still prevail – in practice, does it sufficiently limit HM Revenue & Customs’ power to shut down tax schemes? And perhaps more importantly, was the whole effort worthwhile?
The structure and aims of the GAAR
The legislation will apply only to “abnormal” arrangements. It is targeted at those “highly abusive contrived and artificial schemes which are widely regarded as intolerable”.
Because of this provision, taxpayers are well protected. They will simply have to show that decisions made were reasonable in a commercial (non-tax) sense, even if they were ultimately to make a tax saving. Therefore, the parents who leave inheritance to their children early will be safe – this is not an abnormal decision, and it is reasonable, as parents normally leave inheritance to children at some point.
Many of Aaronson’s aims are listed: leveling the playing field for the businesses and advisors who do not use such schemes; simplify the tax system; and help create certainty in the tax system.
The GAAR will originally apply to income tax, capital gains tax, corporation tax, and petrol tax and should also cover national insurance contributions. If successful, the report recommends rolling it out to stamp duty land tax. VAT is excluded altogether because of the complications with European Law.
In his summing up of the representative body’s submissions to the study, Aaronson said there were “without exception” concerns about potential abuse by HMRC. In particular, he said, there was a fear that the use of the GAAR might be threatened as a means of applying pressure in non-abusive tax planning cases.
Aaronson recommends statutory safeguards. An independent advisory panel should be set up to decide whether schemes fall under the GAAR. Crucially, it will review schemes submitted by HMRC and a senior HMRC official would be required to authorise this referral. The panel will be made up of a majority of non-HMRC personnel, including the chairman.
The panel would include experts in the area, which would mean that even if HMRC does not understand the scheme, the panel would. The decisions of the panel would be published so other people could see whether their schemes were likely to fall under the GAAR.
The independent panel would produce the guidance on the GAAR – therefore, it won’t be reflecting HMRC’s interpretation.
For many advisors, however, the proposals will hinder businesses. Only a clearance system would prevent uncertainty, says Adam Craggs, tax partner at RPC.
A clearance system would be used by individuals and businesses to remove doubt about whether their tax planning is legitimate before they put plans into place. However, it was ruled out immediately by Aaronson.
But without it, the taxman could use the GAAR to put pressure on businesses with reasonable tax planning structures. The subsequent dispute will harm the business in the short to medium term.
The advisory panel, though welcome, will not provide enough of a safeguard against HMRC heavy-handedness. The taxman could use the threat of the GAAR to close down the schemes before it reaches the advisory panel stage. In many cases, businesses will be concerned enough to change their plans.
Mary Monfries, a partner at PwC, goes further and says the “extra layer of uncertainty” could restrict UK investment and economic growth.
Many people have pointed out that the GAAR was estimated to bring in £2.1bn. If this is the case, then businesses have every right to be worried. But the £2.1bn figure seems a bit misleading – these estimates were based on a more robust GAAR that could incorporate any scheme, not just the abusive, abnormal ones.
The rule proposed by Aaronson will capture far fewer schemes. If the final legislation resembles the draft devised by the study group then it will be unlikely to restrict growth and investment.
The schemes it will cover are not the type that encourage growth. As Bill Dodwell, senior tax partner at Deloitte, says: “If your economic case for investment is solely based around achieving a tax advantage, you have to ask whether your economic case is sufficiently robust.”
There is always a danger that the GAAR will “migrate into the centre ground”, Dodwell adds, and capture sensible tax planning. But if it resembles the one proposed by Aaronson, the “abnormal” provision should provide protection.
The real test will come when there are changes to the tax system, says Dodwell. Tax planning around newly announced reliefs is by its very nature abnormal.
Is it necessary?
Although many of the warnings around uncertainty are likely to prove unfounded, it is still worth asking whether this GAAR is actually necessary.
As the report points out, the landscape in the UK is very different to that of Canada and Australia before they introduced their own general rules. A series of decisions, stemming from the 1981 House of Lords “Ramsey” ruling, looked at the purposive nature of transactions – that is, if the transaction was artificial or not. Schemes such as Tower McCashback have lost in the courts because of their obvious artificial nature.
As well as the Ramsey principle, the Disclosure of Tax Avoidance Schemes requires businesses to inform HMRC of any new tax schemes they have developed. This has allowed the government to introduce targeted legislation and recent figures have shown the initiative works.
Aaronson still believes that a rule is needed, however. Despite having a more developed anti-avoidance strategy than Canada and Australia at the time, “it is clear that purposive interpretation, specific anti-avoidance rules and DOTAS are not capable of dealing with some of the most egregious tax avoidance schemes,” the report says.
It repeatedly cites the SHIPS2 decision in HMRC v Mayes. The seven-step scheme required clients to pay into life assurance policies, which they would surrender, thereby incurring a tax loss without actually paying out. The judges in all the courts expressed their dislike for the scheme, but were reluctantly powerless to find in favour of the taxman.
Aaronson has spoken in the past of his dislike of the rulings, despite agreeing that the judges were tied. But the need for the anti-abuse rule seems to be based on this one case.
Dan Neidle, partner at Clifford Chance, points out that there is not a single example of where this GAAR would apply. “Was this a worthwhile exercise?” he asks.
It was highly unlikely that the study group would fail to recommend any form of GAAR. There was political momentum, mainly generated by the Liberal Democrats, for such a rule, and the study group had spent the best part of a year looking into its feasibility.
What came out was the most narrow definition of an anti-avoidance/abuse rule possible. This is not necessarily a bad thing – advisors have welcomed the safeguards against greater HMRC power.
But Parliament in recent years has become more savvy when drafting legislation. The SHIPS2 scheme succeeded because it was able to stick to the letter of tightly written legislation. Since then, the legislation drafted as a result of the DOTAS disclosures has tended to include their own “mini GAARs”.
These have advantages over a wide-ranging GAAR or even the narrow anti-abuse rule in the report: they reduce uncertainty for the majority of businesses as only those that are operating a scheme related to the legislation need to be aware; yet they do not allow the more innovative (and abusive) scheme producers to stick tightly to the legislation as they know they can still be caught.
There will be uncertainty, even if it won’t be enough to slow growth – the proof will be in the testing. The more important question is whether it will capture any schemes at all.