WHEN the GAAR rule was launched it was one of the government’s first and biggest moves in its battle against tax avoidance, but since its introduction in 2013 the body tasked with enforcing the rule has been distinctly quiet despite claims that companies and their accountants are perpetrating tax avoidance on an ‘industrial scale’.
According to Patrick Mears, the former partner and head of tax at law firm Allen & Overy who chairs the GAAR panel, HMRC’s key weapon against tax avoidance, “may well not get a case this year”.
“We’re not looking at any at the moment and we haven’t been alerted that one is in the post to us,” he tells Accountancy Age.
Two years on from the body’s formation – introduced to help enforce the General Anti-Abuse Rule against the most egregious legal tax schemes – Mears and his five-strong team have spent a lot of their time setting up internal processes and establishing what information they need from HMRC when considering cases.
The panel had to put a basic internal code of conduct in place and build case procedures guidance for HMRC and taxpayers, which it has tested by considering historic and dummy cases.
“There was nothing in the legislation about the workings of the panel at all,” Mears explains. “There’s a bit about what we do when cases come along, but other than that there’s nothing in the legislation or preparatory papers and the GAAR study didn’t go into any detail as to how procedures would work for the panel.”
Although there has been a distinct absence of public activity by the GAAR panel, Mears feels the rule is having an effect, but that the threat to avoiders is functioning on a conceptual, Damoclean level ahead of the more active deterrents to come.
“Until you get cases, it’s the Sword of Damocles hanging over people – when’s it going to fall? How’s it going to fall? – the anecdotal evidence is that it’s having a material effect, and that a lot of the activity that was previously there has stopped,” he explains.
In the current political climate following accusations that HSBC helped thousands of wealthy clients cheat HMRC of millions in tax and separate claims by the Public Accounts Committee that PwC is at the centre of industrial scale tax avoidance – proof of the GAAR’s success has got to be by reference to its cases, despite suggestions that “it would prove a deterrent effect if there were no cases”.
Mears, though, leans toward the former argument.
“Today you need to demonstrate a piece of legislation working by reference to demonstrable positive action,” he says. “Rather than simply by reference to more nebulous behavioural change, so it may be necessary to have cases and the panel in effect say ‘this is abusive and unreasonable’ to demonstrate the GAAR legislation is working.”
But the public pressure for GAAR to have some kind of impact on the affairs of multinationals is misplaced, he explains, as they fall outside the rule’s scope.
Mears is, though, pleased that the onus is not solely on the GAAR as it once was. HMRC can now – somewhat controversially – count accelerated payment notices, naming and shaming high-risk promoters, and additional reporting requirements for persistent avoiders among is ever-increasing arsenal.
“The things that might go some way to stop that sort of activity [where people test the rules] are the various bits and pieces hanging off the GAAR, which should give it more teeth. I think in this case – as with a lot of economic policies – we’re looking at three years minimum to deduce really whether it’s been successful.”
That being the case, Mears is keen to impress upon the profession and the wider public what the GAAR is for, particularly given after HSBC’s Swiss scandal questions were asked over whether GAAR could have affected fraudulent customers’ activity.
“It’s very much on a spectrum. The GAAR is aimed at the most egregious tax avoidance schemes,” he says. “If you move on from that, it becomes evasion and criminal activity. If you move in from that, there may be morally unpalatable cases, but not abusive ones as these are covered by the GAAR.”
Since its launch, members of initial interim panel have needed to be completely replaced by the permament panel, something that was a very deliberate decision for Mears. It was, he felt, important the panel be one focused on implementing the legislation which was there, rather than being involved in policy.
“The interim panel were to quite a large extent involved in policy and I wanted to draw that distinction,” he says, noting the panel’s role is to implement the legislation effectively and efficiently. “I didn’t want anyone from the interim panel to come onto the main panel and think they were marking their own homework in some way, so I made it clear to them that I wouldn’t be considering anybody from the interim panel.”
The recruitment process was stringent, impressing upon candidates the importance of reputation and public persona – although he is glad his current panel are “below the radar screen”. As such, Mears says, he asked each hopeful if there were any “skeletons in the cupboard” that should be taken into account.
What he didn’t anticipate, however, was almost immediately having to replace a member after Baker Tilly tax partner David Heaton was secretly filmed by BBC Panorama journalists talking through a rather niche tax avoidance scheme centring on maternity leave, known as the Bump Plan.
He was recorded speaking at the 101 ideas for personal tax planning conference in London in the July of 2013, little more than two months before the panel was due have its first meeting.
“90% of what you pay out ends up with the employee. You can’t really knock that one,” Heaton was heard to say in the footage.
Cue the inevitable furore, and even George Osborne was said to be “very annoyed” by the comments, and “instructed tough action to be taken”.
“Interestingly, David gave his talk after he was interviewed for the panel,” Mears recalls. “So he came with clean hands at that point, and when he gave his talk, he hadn’t been notified he had been chosen to join the panel – it was in a window period between interview and appointment.
“But he said things that shouldn’t be said by a panel member and I think had he known he was going to be on the panel he wouldn’t have said them. It was unfortunate and it was right he resigned.”
The one blessing for Mears and the panel was that the first substantive meeting did not take place until October, and so no work had yet been done.
Although HMRC’s statement suggested a replacement for Heaton would be found “shortly” afterward, Mears felt doing so would be “inappropriate” and he now hopes to announce an appointment in the coming weeks.
“He was there because he had significant experience in employee taxes, and that is an area we ought to have somebody on the panel with experience in,” he explains. “I decided at that point I wouldn’t be interviewing for a replacement because I thought it was too close to his resignation and NICs were not yet within the scope of the GAAR so timing was not critical.”
As such, he told the commissioners an appointment could wait until the end of 2014, and in fact an advert was placed in late November and a recommendation has been made. He hopes a hire will be made in March.
The panel’s case load might seem glacial in its progress, but it is in a “better position to tackle cases” than it was a year ago.
“We knew there weren’t going to be any cases in the first couple of years anyway, so it wasn’t as if we were desperately worried at the outset,” Mears explains. “I think we would not be uncomfortable taking on a case now, whereas this time last year I wouldn’t have particularly liked to.”
Mears is quite happy with the current progress, although he doesn’t hold any targets in mind for the panel. Instead, his only concerns are potential “tsunami” of cases once they’ve ruled on one and keeping his panel occupied between cases.
“Other than being able to handle cases when they come through, we don’t have any targets,” he explains. “I’m quite happy with things now. One of the great challenges we have is once we get cases, will we get a flood? We don’t want a tsunami of cases we can’t handle. We don’t know what the flow of cases will be like. That’s tomorrow’s problem.”
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