World according to GAAR

THE TEAM TO REVIEW whether the UK needs a general rule against tax avoidance is now in place. Headed by tax barrister Graham Aaronson QC, its conclusions could change the face of tax planning.

What’s happened?

The change in government has brought new impetus to beating tax avoidance. HM Revenue & Customs had already ramped up its aggression, but the Budget last year identified a pot of £900m to tackle the issue and open up a new front in the battle against avoidance by reviving prospects for a general anti-avoidance rule, or GAAR.

The man now in charge of looking at this controversial proposal and coming up with recommendations is Graham Aaronson QC, of Pump Court Tax Chambers.
He is described by the Legal 500 as “one of the go to silks” and “the best there is in terms of advocacy”.

He had been involved in major cases, including the notorious group litigation orders in Europe, chaired the respected Tax Law Review Committee at the Institute of Fiscal Studies and even advised the Israeli government on tax reform. If there was a big hitter in the world of tax, then it is Aaronson.

What happens next?

Aaronson has assembled his panel of experts, and the big question is whether they will advise the govern­ment to push ahead with a GAAR.

In principle, there should be little to stop it. Australia, New Zealand and Canada have all operated GAARs for some time – for decades in Australia’s case. A GAAR certainly has plenty of political backing. The Lib Dems made beating tax avoidance part of their election campaign agenda and the fact that Aaronson’s review is underway is largely down to them.

They’ll have their fingers crossed that he comes back with a way forward, if only to show that some Lib Dem ideas do make it all the way through to implementation rather than remaining on the coalition’s drawing board.

But there have been misgivings in the past and there will be worries this time around about a GAAR. And they are well documented. In fact, Aaronson’s old haunt, the Tax Law Review Committee (TLRC), has done a good deal of the leg work already. The TLRC has had several looks at a GAAR, most recently in 2009, when it reiterated what a general rule might look like and what the problems were.

The basic rule comes in two parts, the most important being: “Where a person carries out a tax driven transaction, he shall be taxed as if he had carried out the normal transaction.”

To put it another way, the rule prohibits transactions that are formulated solely for their ability to generate a tax benefit.

If Aaronson is to back this he will probably have to buy into several points the TLRC makes along the way – the critical one being that a GAAR is not the answer to all things in tax avoidance and that it will only ever be one weapon in the armoury used to fight avoidance. Politicians will need to be convinced of this which makes Aaronson’s job a little more difficult. Technicians are much easier to deal with by comparison.

Aaronson will need to be mindful of two other issues that are also well documented.

Firstly, some transactions are driven by tax because that’s what was intended when parliament created the law – a tax benefit. How will that sit with a general anti-avoidance rule? The TLRC was worried that they will clash. It was also concerned that some avoidance that the GAAR should stop will be let through because the purpose of the transaction can be obscure.

Lastly, and perhaps the biggest problem, is that bringing in a GAAR, most people agree, will need the taxman to run pre-implementation checks on tax schemes to see if they clash with the law.

That’s a costly exercise and has caused officials to block the introduction of a GAAR in the past. The answer, many see, is for HMRC to simply charge a commercial price for a clearance procedure – possibly a deterrent in its own right to exotic tax schemes.

For tax advisers, though, the clearance has its own dangers aside from the cost. And that is the somewhat flexible definition that HMRC places on avoidance. What may be acceptable now might not be next year, depending on attitudes and the staff in charge. How could a clearance process ensure consistency over time?

Aaronson certainly has a job on his hands.

Related reading

aidan-brennan kpmg
The Practitioner