Tax barrister Graham Aaronson this week set out the case for a limited General Anti-Avoidance Rule in a Treasury-commissioned study.
First floated in last year’s Budget Press Notice 3, the feasibility study was set in motion in December 2010 when Treasury minister David Gauke asked Aaronson to lead a small team to examine whether a general anti-avoidance rule would be beneficial for the UK tax system. The group’s 77-page report (243kb PDF), dated 11 November, appeared on the Treasury website this morning.
The study group kept in mind the impact of the continuing turbulence in financial markets and considered the impact their advice might have on the attractiveness of the UK’s tax regime to business.
“I have concluded that introducing a broad spectrum general anti-avoidance rule would not be beneficial for the UK tax system,” wrote Aaronson in the report’s summary.
“However, introducing a moderate rule which does not apply to responsible tax planning, and is instead targeted at abusive arrangements, would be beneficial for the UK tax system.”
Enacting a limited anti-abuse rule would introduce a number of benefits, the report argued, by moving the UK tax code towards a simpler framework that did not require specific anti-avoidance sub-rules to be drafted to rule out known dodges.
“Also, fewer schemes would be enacted and so there will be less call for specific remedial legislation,” it added.
The objective would be to target “contrived and artificial schemes” without touching the centre ground of responsible tax planning, the report continued, and would save resources by doing away with the need for a comprehensive system of clearances.
Many accountants have argued that a GAAR would give too much discretionary power to HMRC, but the Aaronson report proposed an independent advisory panel or similar to help taxpayers and HMRC identify the limits of the rules application. Not only would this limit HMRC’s reach, it would establish a degree of certainty without having to await the results of tax tribunals.
The abusive arrangements that would be placed out of bounds are set out on page 47 of the Aaronson study and include:
- arrangements where receipts being taken into account for tax purposes are significantly less than the true economic income, profit or gain
- arrangements resulting in tax deductions that are significantly greater than the true economic cost or loss
- transactions concluded at a value significantly different from market value, or on other non-commercial terms
- arrangements that are inconsistent with the legal duties of the parties involved
- arrangements including “a person, a transaction, a document or significant terms in a document, which would not be included if the arrangement were not designed to achieve an abusive tax result”
- arrangements that omit a person, a transaction, a document or significant terms in a document, which would not be omitted if the arrangement were not designed to achieve an abusive tax result; and
- arrangements that include the location of an asset or a transaction, or of the place of residence of a person, which would not be so located if the arrangement were not designed to achieve an abusive tax result.
Aaronson’s conclusions will raise the hackles of many accountants involved in legal tax planning and given the timetable to which his group worked, there is a strong possibility that following a period of consultation the proposals could find their way into legislation in the near future. ICAS assistant tax director Elspeth Orcharton suggested the proposals were unlikely to make the next Finance Bill, “but could be included in the 2013 Bill”.
Tax campaigner Richard Murphy, who advised the Liberal Democrats to adopt an anti-abuse policy before they joined the coalition government, welcomed the Aaronson report, particularly the last point that appeared to take aim at tax havens.
This definition and all the others cover arrangements that are currently legal and would work but for the new GAAR. “The idea that tax avoidance can be made illegal has been established,” he noted.
In a further analysis, he wrote: “Many appropriate checks and balances are built in to the drafting. HMRC cannot use this willy nilly, and that’s right. This should be a tool of last resort and not a battering ram for widespread use. Appropriate defences for action are built in…
“The result is that the rule will be used against egregious cases, and not be aimed at all tax planning. That’s right: where the law provides for choice planning is inevitable and right and I for one have never denied that fact.”
Two members of the advisory committee were serving judges - Sir Launcelot Henderson and Howard Nowlan - who refrained from publicly backing the report’s conclusions to maintain their neutrality on whether or not a GAAR should be introduced. They did, however, agree that if a GAAR was introduced, the model recommended in the report would be suitable for adoption in the UK, Aaronson said.
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