THE HIGHLY ANTICIPATED general anti-abuse rule consultation began yesterday, with tax advisors broadly welcoming the proposed legislation.
In particular, the use of the word ‘abuse' instead of ‘avoidance' has soothed many anxious nerves, removing the potential for a blunderbuss effect discouraging legitimate business transactions.
In doing this, the government appears to have borne the attractiveness of the UK to investors and entrepreneurs very much in mind, much to the approval of many tax experts.
The proposal was largely true to Graham Aaronson's original recommendations, although concerns have been expressed that it may have deviated slightly and become marginally broader in its targeting of artificial schemes in the re-wording.
Words, though, appear to be the crux of most issues generated by the consultation. Specifically, the continued use of the word ‘reasonable' has engendered doubts among some experts of the due to the subjective nature of the word, especially given its pivotal role in the legislation, conceivably leaving it open to much interpretation.
It is that uncertainty which seems to be the biggest issue. The government was at pains to stress it wanted a clear line drawn, but while ambiguous terms remain in the proposals, the potential for a chilling effect on reasonable tax planning and other such transactions remains. For many tax advisors, hours of valuable time could well be wasted fretting over whether a transaction is within the rules or not.
There is disappointment, too, that Exchequer secretary David Gauke expects GAAR will effectively form an extra layer of legislation over existing rules, rather than superseding the ones with which it crosses over. That, in turn, could create further complexity, particularly if the new law interacts badly with existing ones.
Reference cases will, of course, emerge over time and could eventually provide clarity in this area, but until those cases arrive and build a clearer picture of the law in action, ambiguity will remain.
In the detail, there are suggestions further adjustments may be necessary. Clauses 4.1 and 4.2 deal with counteracting tax advantages, which for some – BDO's Stephen Herring in particular – surprisingly omits the threat of a minor fine, whether fixed or proportional.
For Herring, this plays into the way in which aggressive tax schemes are marketed, often advising prospective clients that they cannot be worse off for engaging in such practices. A fine, he says, would impinge on that.
Additionally, the subsequent clauses 4.3 and 4.4 apportion liability to people "whether or not they are party to the arrangements" which is a further cause for concern for many, with clarification desired.
The concern for some is where the momentum is taking the consultation, with some fearful it could become broader still.
A clearance system is one device which has been mooted, whereby the taxpayer would agree in advance with HM Revenue & Customs whether their scheme is acceptable or not, eliminating the potential for costly proceedings and hours spent agonising over the legitimacy of the scheme in question.
Broadly, though, support for the measure is there, albeit tentative. That, however, is what consultation periods are for and there is plenty of time for fine-tuning.
"Reasonable" is popular with legislative draftsmen because it is a lazy alternative to precise wording, and can be relied upon to keep the Courts busy for years.
What is needed is a root and branch simplification of the tax system. Far too much time is wasted fretting over the peripheral tax consequences of commercial transactions when the time could be better spent on the business.
Posted by: Chris, 13 Jun 2012 | 12:22
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