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Experts doubt impact of new GAAR legislation

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19th Jul 2013
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A new general anti-abuse rule (GAAR) will probably reduce extreme forms of tax avoidance but critics say that the legislation may be hard to apply and won’t deal with the controversial tax arrangements of big business.

Although there is broad support for a GAAR among tax professionals there are concerns about whether the new body can remain independent from the taxman.

Partners at Big Four firms have been excluded from the final GAAR advisory panel, which will advise HMRC about whether a scheme falls foul of the GAAR, in order to avoid the perception of a “conflict of interest”, according to a person familiar with the recruitment process.

Politicians have recently accused Big Four firms of using knowledge gained from seconding staff to HMRC to help their clients avoid tax. The firms have denied this.

Richard Mears, a former tax lawyer who was appointed chair of the GAAR advisory panel in April, could not be reached for comment about its recruitment policy. HMRC declined to comment.

The advisory panel will give an opinion on whether an avoidance scheme is “abusive” under the terms of the GAAR, part of the Finance Bill 2013 which received royal assent earlier this week.

HMRC will appoint the other members of the GAAR panel shortly. An HMRC spokesperson said it expects to appoint six people, replacing an interim panel of accountants, lawyers and tax campaigners.

Abusive arrangements

The GAAR is intended to stop taxpayers from reducing their tax bill by unlawful means.

HMRC said that will apply to “abusive” tax arrangements - defined as “any arrangement which, viewed objectively, has the obtaining of a tax advantage as its main purpose or one of its main purposes”.

The GAAR will apply to most taxes including income tax, corporation tax, capital gains tax, inheritance tax and stamp duty land tax.

The key test is whether a tax arrangement is “reasonable”.

Tax arrangements will be judged unreasonable – or “abusive” - if they have certainty: they were not what the law intended when it was made; they’re exploiting a loophole in the law; or have no commercial reason other than to reduce a tax bill and are likely to be caught by the GAAR.

Tax advisers will need to read HMRC’s 35-page guidance on the GAAR, which is fairly complex, and assess whether any clients’ tax arrangements could be challenged under the GAAR.

HMRC isn’t obliged to follow the recommendations of the GAAR advisory panel, although it will look strange if it doesn’t.

The GAAR guidance says it rejects the old approach taken by the courts in some tax cases that “taxpayers are free to use their ingenuity to reduce their tax bills by any lawful means, however contrived those means might be and however far the tax consequences might diverge from the real economic position.”

Tax deterrent

Will GAAR have a big effect on the tax system?

Experts reckon that the GAAR’s main purpose will be as a deterrent. The boutique tax advisory firms (often based offshore) that design and promote many of the riskiest forms of tax scheme will either stop doing so or their schemes will be voted down by the GAAR advisory panel. After that the chances of winning a case in the tax tribunal of court would be slim.

Some boutique firms may go bust.

Things get more complicated, though, if the GAAR vote is not unanimous. If one member votes that a tax arrangement is legitimate – or at least, not “abusive” – HMRC’s case would be weakened, experts reckon.

John Barnett, a partner at law firm Burges Salmon, who was on the interim GAAR advisory panel, told AccountingWEB that he thinks the GAAR will only be used a handful of times a year. “I think [HMRC] sees it as a nuclear option:  something which works much better as a deterrent rather than through actual use”.

Barnett estimates that only about a very small percentage of tax arrangements will get as far as the GAAR panel and that even fewer will progress past that. “I think it’s unlikely that we will see any [GAAR-related] tribunal or court cases in the next four or five years,” he said.

The GAAR panel has an unusual quasi-judicial role and function, according to another tax expert. “The GAAR panel is an odd entity,” says Nigel May, tax partner at MHA MacIntyre Hudson. “They are judges that no one has to listen to. It creates a bit of an Orwellian system with procedures to follow through that just add cost and complexity to the [tax system].”

Overall, the principle of a GAAR is supported by accountants and campaigners for tax justice. But people disagree on how the GAAR will work in practice, it’s shortcomings and how it could be improved.

A Lords Committee report published in March, said that the GAAR was “narrow” and will not deal with “controversial tax planning techniques used by big business.” It recommended that the GAAR be reviewed in five years.

Out of court

Richard Murphy, director of Tax Research UK who was on the GAAR interim panel, has blogged that the GAAR was a step in the right direction, but also said that there was a “long way to go” to beat tax avoidance”.

HMRC has said that the GAAR will make the tax system fairer and make the tax system clearer for individuals and business.

It could also save the taxman time and money if more tax disputes are resolved before court. “It means people won’t even try [abusive tax schemes] which saves HMRC the expense of spending years trying to litigate,” said Bill Dodwell, head of tax policy at Deloitte, and member of the interim GAAR advisory panel. “We are all hoping that [GAAR] will mean that we see a reduction in the marketing of silly [tax] schemes.”

Things move slowly in tax law. It will take at least a few years for the effects of the GAAR to become clear.

In the meantime, accountants need to ensure that that their clients’ tax affairs are “reasonable” enough for the taxman and the new GAAR adjudicators.

Replies (7)

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By ShirleyM
22nd Jul 2013 07:59

It's better than nothing

It should catch the artificial avoidance schemes where the only purpose of the convoluted arrangement is to avoid tax. Time will tell if GAAR makes it quicker & cheaper than present methods of closing these schemes.

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By mikefleming3028
22nd Jul 2013 10:38

Anne Isabella Ritchie, daughter of William Makepeace Thackeray

 

Give HMRC a fish and you feed it for a day, give HMRC a GAAR and they will fish to their hearts content.

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By Ian McTernan CTA
22nd Jul 2013 12:22

I'd apply...

to be on the advisory panel but I'm pretty sure they wouldn't want me on it.  I'm too direct and forthright in my opinions, never a good thing on a committee...

Good to be having the GAAR, which I think is a step in the right direction, along with the recent 'we will co operate to ensure businesses pay tax where they earn their profits' announcement from the G20.

Of course, the devil is in the detail, and we shall wait to see what comes from all of this.

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By chEEK
22nd Jul 2013 12:59

Poor

This seems a very weak attempt at such legislation.

I expected to see something along the lines of a rule applied to each person's tax return, such that the minimum tax bill is X% of declared income from all sources. Not entirely unlike the benefits cap on welfare.

Things like charitable donations can still be exempt, but with a "sensibility check" so that you don't give all income to charity and then try to live on £5k.

I'm sure the tax dodges described previously (such as donating to a charity of which you are the president and only worker) could be dealt with in other legislation as being simply tax evasion, or fraud, but some kind of sensibility check would have been useful.

What they have done seems silly - trying to address the schemes when it's easier to go for the individual tax returns. That would be a catch-all solution in that you can join any scheme you like, but if your total tax falls below, say, 18% of income after personal allowances then you're caught, and you pay enough to make it up to 18%.

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By pauljohnston
22nd Jul 2013 13:39

@cHEEK

I am not sure what you want.  Our current system is built by parliment who then complain that people legally avoid tax.  There are really only two systems that you can employ.  Fixed rate ie all income is taxed at 20% or our current system that is time and time again tampered by Parliment.  Any other scheme will be exploited

The easiest is the fixed rate.

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Replying to ongwright:
ghm
By TaxTeddy
23rd Jul 2013 13:37

...yes but....

OK, 20% - fine. But how do you measure "income"? This is how CGT came about in 1965, because there were too many 'gains' and too little 'income'.

So that's your first layer of complexity - and before you know it we're back to sqare one.

Have to agree though, it's a bit rich if those who make the law complain when we apply it to our advantage? Shurely shome mishtake?

 

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By Carl B
22nd Jul 2013 17:14

Foolishness

This is all very well, but the problem that HMRC must surely want to address is the creation of artificial losses, whereby participators in these schemes receive the benefit of losses they do not economically incur.  I don't think that targeted legislation to cover this was too much to ask, was it?

What we now have is a system which will restrict to £50,000 all losses, including perfectly genuine losses, and a vague rule which purports to attack all arrangements which a "reasonable person" might "reasonably expect" to be motivated by tax avoidance. Farcical.

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