GAAR could be applied to wealthy tax avoiders

A GENERAL anti-avoidance rule could be applied to loopholes exploited by the country’s wealthiest individuals to cut down their income tax bills.

Chancellor George Osborne yesterday expressed shock that the UK’s 20 biggest tax avoiders had used three main loopholes to legally reduce their income tax bills by a total of £145m in a year.

The loopholes include writing off business losses against income tax, offsetting the cost of business mortgages against buy-to-let properties and donating to charities.

John Cairns, tax partner at BDO, said it would be a ‘great shame’ if charitable donations are hit by government caps but that “it is probably right the government goes after these schemes”.

In November last year, a report by Graham Aaronson QC recommended a “narrowly focussed” GAAR, which he said would deter “abusive” tax avoidance and reduce legal uncertainty surrounding schemes.

The GAAR would explain what types of avoidance schemes are “abusive” and covered by the rule. If HMRC can show that an avoidance scheme is covered by the GAAR it would, in theory, make tax disputes quicker to resolve, particularly if they go to court.

“If the GAAR isn’t intended to go after these schemes it could be modified to do so,” Cairns told Accountancy Age.

Cairns said that the government should clearly differentiate between legitimate tax planning and aggressive avoidance.

“If something looks like an elephant it probably is. I think you can tell when something is artificial when you see it,” he says.

“If you have an individual who genuinely makes a trading loss and has paid taxes for years they should be able to set that against their income tax.”