Peter Wyman on GAAR – The birth of a white elephant?

The long-awaited consultative document on a general anti-avoidance rule was published last week, after a gestation period of near elephantine proportions.

A GAAR should be judged on its fairness, effectiveness and proportionality, and the ability not to create unintended side effects or additional uncertainty. The proposals fail all five tests.

The inevitable failure to define tax avoidance effectively for the GAAR creates equally inevitable uncertainty. The definition used appears so broad as to catch everything, while the inability to define what would be outside it creates considerable doubt.

The statement that the GAAR will not apply if the ‘transaction’ can be regarded as ‘acceptable tax planning’ only adds to this. Businesses will find that neither they nor their advisors are able to say how the tax system will apply to them.

The proposals are unfair not least because the burden of proof is placed on the taxpayer to show that a transaction will not be caught as a result of meeting the ‘acceptable tax planning’ exemption. Furthermore, where the GAAR is held to apply, the transaction will be recharacterised for tax purposes as if it had been a ‘corresponding normal transaction’.

Even assuming that such a corresponding transaction might exist, the recharacterisation will apply only to the tax treatment. All other underlying commercial and financial consequences will remain unaltered. Nor will other parties to the transaction have their tax treatment recharacterised. There is no equity here.

Most so-called tax avoidance is so immersed in real commercial activity that it will defy the simplistic test of tax avoidance. Until tax avoidance is properly defined, a GAAR will not work.

The courts will be reluctant to apply the GAAR and less likely to extend and adapt the ‘Ramsey’ doctrine used against tax avoidance in the past, thus producing the opposite effect of the government’s intentions.

Potentially more damaging still, will be the creation of a tax climate which business will see as hostile. This will drive a great deal of inward investment away, as without a tax system offering certainty, the UK will not be seen as a favourable place to base business.

The proposed clearance system will be hugely expensive. Those concerned about compliance costs have argued that the cost should be proportionate to the revenue collected, but the tax collected is likely to be too small.

Peter Wyman is tax partner at PricewaterhouseCoopers.

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