It’s nearly ten years since the government proposed a general anti-avoidance
rule – but largely backed off. This was probably because the then Inland Revenue
did not want the cost of providing the clearance mechanism that business and
professional bodies argued they would need to cope with the uncertainty.
Since then, the number of detailed rules designed to counter specific
avoidance schemes has increased greatly, fuelled in particular by the 2004 rules
requiring disclosure of tax avoidance.
Whatever one may think of these, as a matter of plain English construction
they are ‘targeted’ at the specific avoidance schemes they are designed to
counter. Students of official-ese will therefore not be surprised to learn that
the term ‘TAAR’ (targeted anti-avoidance rule) has crept in to the language to
describe not these, but rules which, though specific to one area of the tax
system, are pretty much general in terms of their scope and effect.
The idea may have been sparked off with the unallowable purpose rules, which
have spread throughout the corporate tax system since 1996, and now apply in
areas such as debt, derivatives, intellectual property, management expenses and
now capital losses.
These rules restrict tax relief, where transactions have a main purpose of
securing a tax advantage (a very wide term). But the TAAR label crept in via the
2005 pre-Budget report to describe the raft of proposals restricting the use of
companies’ capital losses. Now in the 2006 PBR a capital losses TAAR is
introduced for individuals, trusts and partnerships as well.
The HMRC guidance says the capital gains tax TAAR will only affect those who
try to use capital losses that do not arise from ‘genuine losses on genuine
The guidance says, for example, that selling some shares before a tax year
end to realise a loss and to shelter a gain that is realised earlier is not
caught – but on the words of the draft legislation, it is not totally clear why
this escapes the TAAR.
The answer seems to be that the Sword of Damocles is kept in reserve to
counter schemes whose exact nature hasn’t yet been disclosed or even considered.
It’s about as targeted as a blunderbuss and about as likely to cause collateral
damage on the unwary.
John Cullinane is president of the Chartered Institute
of Taxation and partner at Deloitte LLP
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