IT HAS BEEN a rather uncertain time for taxpayers in recent months, with changes and new rules seemingly introduced without warning. The crackdown on tax planning structures used by Barclays earlier this year saw tax legislation retrospectively redrawn; however, until the Budget, many in the business world hoped this retrospective approach was a one-off.
The Budget earlier this year confirmed that this is not the case, however. In the chancellor's speech the word "retrospective" came up again, this time as part of the government's overall mission statement on tax avoidance.
Unsurprisingly this has generated no small amount of concern, both among businesses and individuals. The issue boils down to one of ‘certainty' and ‘the rule of law'. In the short term it may be attractive to governments to change the law to counteract unintended tax consequences but over the medium term this may undermine confidence in the system and could lead to tensions between HMRC and taxpayers.
HMRC has been quite successful in persuading the UK courts that if a strict application of the letter of the law would give taxpayers the intended result then courts should side with the HMRC on its claims that tax planning contravenes the intended purpose of the law instead. This means taxpayers who try to rely on the legislation to plan their affairs often then discover the courts are placing innovative interpretations on it.
However, there are limits to how far this approach of ‘purposive construction' can be applied, particularly where the legislation is lengthy and the draftsman has tried to cater for all possibilities in the written text. In such circumstances the need of taxpayers to have certainty in the law is paramount - particularly where, as in the Barclays case, legislation was equally applicable to indebted companies seeking to restructure their debts, and therefore unexpected tax changes could put jobs at stake.
Many commentators hope that the proposed general anti-avoidance rule (GAAR) will provide a solution that will satisfy all parties and remove the need for any retrospective action. At a very basic level, a GAAR should provide clearer guidance for businesses and individuals on what constitutes reasonable tax planning, as opposed to aggressive tax avoidance.
It may sound surprising that many companies have expressed, albeit qualified, support for a blanket law against extensive tax planning; however, most are simply relieved at the prospect of making decisions on their future tax liabilities with a reasonable degree of certainty.
GAARs have been implemented elsewhere in the world to significant effect. Canada has had such a rule in place since the early 1980s and a key component of its model is a committee of tax experts who decide on a case-by-case basis whether particular schemes fall foul of the rules. This type of committee should provide an important constraint on a "trigger happy" resort to the GAAR by HMRC to challenge tax reduction arrangements that "go with the grain of business" but with which it may be unfamiliar and so prone to challenge.
Having such a committee in the UK would provide an ‘umpire' for businesses and individuals to call on before HMRC and they embark on litigation. If tax structures are ever called into question, the verdict of this panel of specialists should be sought in order to provide a realistic perspective on whether the taxpayer should be challenged under the GAAR. In theory this will remove the need for the Government to take retrospective action.
Without this independent expert committee, it will be very difficult for businesses and HMRC to agree on how a GAAR should be interpreted, raising the prospect of lengthy disputes and possibly an even greater level of uncertainty than is currently the case.
The Government has already explored the idea of a GAAR, commissioning the Aaronson report, which was published last November. A committee was highlighted as an essential feature of any GAAR by Aaronson; however, there are fears that this crucial aspect may be dropped. The Government needs to be very mindful of Aaronson's recommendations to avoid creating a damaging level of business uncertainty. After all, it was the uncertainty arising from some of the ideas espoused early on in the reform of the Controlled Foreign Company regime that caused significant numbers of companies to relocate their holding companies, and it has taken several years to coax them back.
A predictable tax regime is a vital part of attracting and retaining businesses, as well as making the UK attractive to investors and high-flying individuals. Whether or not a GAAR provides the perfect solution to this issue, one thing is certain: the Government must think long and hard before having recourse to retrospective action.
Gary Richards is a partner at Berwin Leighton Paisner
You may also like
AccountancyAgeInsight is a frequently updated resource centre for finance professionals, offering a free and easy-to-use digital library of briefings, white papers and other information resources.