GAAR proposals could be unconstitutional

A NUMBER of serious constitutional objections are being overlooked in the debate about HMRC’s proposed general anti-abuse rule (GAAR), aimed to deter businesses from using abusive tax schemes, which is due to come into force in April next year.

At its heart, the GAAR is a test of what tax planning is “reasonable”. By itself, this test would be unworkable, being inherently unpredictable and leading to inconsistent results. The GAAR will, therefore, be supplemented with HM Revenue & Customs guidance and the opinions of an advisory panel. It is the role of this HMRC guidance and panel that causes major constitutional problems.

What is currently proposed is this: when the courts are asked to decide whether the GAAR catches a particular form of tax planning, they will be required to take into account both HMRC guidance and the opinions of the advisory panel. The guidance and these opinions will, therefore, have a quasi-legislative status.

In our legal system, the government proposes legislation, parliament enacts it, and the courts, where necessary, enforce and interpret it. The distinction between these roles is at the heart of the separation of powers between judiciary, executive and legislative. It is this fundamental constitutional principle which will be violated by the proposed GAAR.

It is true that parliament frequently (and often controversially) delegates limited powers to the executive, but this is done within clearly defined parameters that limit the discretion being given to the government.

The proposed GAAR is very different. It essentially gives the government a carte blanche to legislate in vague terms and have permanent control over the meaning and application of those terms through the guidance. HMRC guidance should never be used as a method of determining, and changing, the meaning of the basic concepts of legislation. That is parliament’s job.

For that very reason, the courts will not allow government departments to use post-enactment guidance as a way of trying to turn what they did enact in the legislation into what they wish they had enacted.

Allowing the government to bring its own intentions into the construction of legislation is no more permissible than allowing it to interfere in the construction of legal contracts – something the Court of Appeal made clear in the Evans vs. Amicus Healthcare case back in 2004.

By demanding judicial deference to HMRC’s guidance, the GAAR offends against established principles, and essentially allows public bodies to put a particular gloss or spin on legislation after its enactment.

The requirement that the guidance be approved by the advisory panel is not a satisfactory safeguard and does not soften the constitutional objections. Even leaving aside the fact that HMRC will sit on the advisory panel, so will have a hand in approving its own guidance, the constitutional objection to the role of the advisory panel and its opinions is even stronger.

The consultation paper is light on detail about how the panel is to be constructed, but it is likely to include private professionals. So power to determine the meaning of legislation, or at least to influence it strongly, is to be delegated to an unelected and unaccountable group of private individuals. Some of these may have a professional interest in the general approach of the application of the GAAR.

A predictable government response to these objections is that the courts are not required to give effect to HMRC guidance or advisory panel opinions, but only to take them into account. But while it falls short of a strict duty to comply, the duty would be nugatory if it did not imply at least some degree of deference.

This is essentially the same as a duty to “have regard to” guidance which, as the government has itself stated, is a powerful one in law. A court departing from the GAAR guidance will need to have a clear and case-specific reason for the departure: a general disagreement with the tenor of guidance would probably not be sufficient for a court to not follow it.

These constitutional shortcomings are not merely academic. HMRC’s duty is to collect the tax that parliament has decided we should pay. However, under the proposed GAAR, taxpayers’ tax liability will in part be decided by HMRC and the other members of the advisory panel rather than parliament.

Despite all the reassuring noises being made about the GAAR not catching “middle ground” tax planning, the scope of the GAAR could, therefore, easily be expanded by HMRC without scrutiny by parliament.

Daniel Greenberg is parliamentary counsel for Berwin Leighton Paisner, while Morgan James is associate director of corporate tax for Berwin Leighton Paisner.

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