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Aaronson’s GAAR plan takes shape

21st Nov 2011
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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.

Replies (9)

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John Stokdyk, AccountingWEB head of insight
By John Stokdyk
21st Nov 2011 15:41

Lots of comments coming in.

This from Baker Tilly, which "broadly welcomed" Aaronson's proposals:

David Heaton commented: “We are pleased that it is an anti-abuse rule instead of a general anti-avoidance rule, as that reduces uncertainty and limits the power of HMRC to label any schemes as ‘avoidance’.  It will target specifically abusive schemes and act as both a deterrent and a block on schemes that few people would see as reasonable planning. Furthermore, the need to show that an arrangement is abusive lies with HMRC, alleviating the burden on tax payers to prove their innocence, and an independent review panel will ensure transparency.”

The proposal for a review panel which puts the onus on HMRC to prove that a particular scheme should act as a useful discipline for both HMRC and advisers that should prevent trivial cases being taken in a way which creates uncertainty in the tax system. "Such a panel would also help achieve consistency in the application of the general anti-abuse rule throughout the UK," added George Bull.

"Some of the recent tax schemes which have had to be considered by the Courts have required the judges to strain the English language beyond what is intended in order to reach the ‘right’ decision. The GAAR is good for the constitution as it edges the UK away from the precipice of judge-made law. Legislation should be principles-led and Mr Aaronson’s proposals should make it easier for judges to arrive at the right decision in these cases, without having to butcher the English language.

"It is vitally important that the general anti-abuse rule is applied in a way which creates certainty of tax treatment, rather than uncertainty, because the rule could potentially be applied disruptively by HMRC to innocent transactions entered into by businesses or individuals."

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By johnjenkins
22nd Nov 2011 12:24

There already is a rule

Its called the law of the land. When these laws are abandoned for the purposes of raising money for the government then we are in a bad way.

It really is very simple and there are no grey areas. Tax Avoidance is LEGAL. Tax Evasion is ILLEGAL. What part of that doesn't the government understand.

John,  you know what will happen if this is implemented. HMRC will apply it to everything THEY don't like. The OTS can't even decide on what to do about IR35.

Don't get me wrong it's a good idea but good ideas and HMRC don't mix.

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Mark Lee headshot 2023
By Mark Lee
22nd Nov 2011 21:58

Have you read the report?

I had similar reservations and doubts. However The paper is pragmatic, commercial and sensible. Remember too who was involved in the study group. The report was written by Graham Aaronson QC. Neither he nor the members of his group accept your simplistic analysis of legal avoidance. None of the group are MPs, civil servants or from HMRC.

Old style views are outdated now. The world (of tax) is changing.


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John Stokdyk, AccountingWEB head of insight
By John Stokdyk
23rd Nov 2011 09:32

Comments from CIOT president Anthony Thomas

In an offiical press release, CIOT President Anthony Thomas CIOT said: “If the government takes the GAAR report forward, it must do so as the balanced package that the Aaronson report sets out. The proposals contain important safeguards, including especially the review panel. This is not a pick and mix package.

“The acid test will be whether a GAAR can really focus on the egregious tax schemes that Graham Aaronson rightly has in mind, whilst not worrying those businesses and advisers that undertake routine transactions. The report rightly talks about an anti-abuse rule, not just anti-avoidance. A very significant risk, as Graham recognises, is that the UK adopts something that increases uncertainty and damages the reputation of the UK internationally as a location where the tax law is clear.”

Lobbying for a proper consultation process, he concluded: “Let us not lose sight of the fact that the key to good tax law is carefully evolved proposals, properly consulted on, which are translated into clear and practical law. If a GAAR is to be introduced, it needs to pass fairly simple tests, such as whether it simplifies the overall tax code, whether it will promote growth in the UK, whether it will improve the UK’s competitive position and increase the perception of fairness in our tax system, as well as targeting abuses.”


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John Stokdyk, AccountingWEB head of insight
By John Stokdyk
23rd Nov 2011 09:34

ICAS response

Comments from Elspeth Orcharton, assistant director of tax at ICAS:

“These are innovative proposals for a problem that has previously been put in the too difficult pile, not yet dealt with by HMRC and previous governments. It carefully considers the hybrid of the current complexities in the UK tax system, tax avoidance behaviours, economic competitiveness and a public call for a fairer spread of the tax burden.

"The key is maintaining business certainty for the vast majority and this drafting is intended to achieve that.  However, any developments would need to be coupled with a simplification of a number of complex anti-abuse provisions currently in legislation, with a  complete review carried out by HM Treasury and HMRC.  It remains to be seen how HMRC and HMT respond. To be effective it is vital that HMRC do not over apply the abuse provision, which would bring uncertainty on how businesses are taxed and reduce the competitiveness of the UK as a place to do business.

“Proposals are unlikely to make the next Finance Bill but could be included in the 2013 Bill.  We look forward to the continuing debate and possible future approach.”

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John Stokdyk, AccountingWEB head of insight
By John Stokdyk
23rd Nov 2011 09:37

McGrigors disagrees

Where the professional bodies gave a cautious welcome to the Aaronson report, lawyers and tax investigation specialists at PRC (Reynolds Porter Chamberlain LLP) were more critical. Tax partner Adam Craggs, Tax commented:

“It is difficult to see the value for taxpayers in yet more anti-avoidance legislation, particularly if it does not apply universally to all tax disputes.  Our concern is that these proposals, if implemented, will generate more disputes between taxpayers and HMRC about whether or not the GAAR applies to their circumstances.

“The report suggests setting up a new independent advisory panel to decide whether the GAAR applies in any particular case, but that begs the question of who would staff such a panel and given the number of disputes which arise with HMRC one wonders how such a panel would cope with the sheer volume of disputes it would be asked to consider.

“Businesses and individuals that are trying to plan their tax affairs will also be very disappointed that a measure intended to provide clarity on which transactions are acceptable to HMRC may well instead increase the likelihood of tax disputes and their associated costs.”

“HMRC does not have the resources to clear proposed transactions in advance of implementation if a GAAR is introduced. But an advance clearance system is the only sure way to prevent tax disputes. As that’s not going to happen, we are likely to see a significant rise in such disputes.”

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By johnjenkins
23rd Nov 2011 11:00


No doubt you were expecting this. Yes I have and as previously posted I think it is a good idea and it would have to be taken as a package and not piecemeal. However the point I was making is that when you start bypassing the Law of the land (for whatever reason) abuse will follow. Tax avoidance cannot be regarded as abusing the tax system as it is legal. Unfortunately, Mark, the world of tax isn't changing it justs gets more and more complex.

I think Adam Craggs comments sums it up quite nicely.

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David Kirk profile image
By David Kirk
23rd Nov 2011 12:05

Good ideas - we need more safeguards

I think that a cautious welcome is due to the Aaronson report.  But there simply must be a clearance procedure, whatever the other safeguards, otherwise the increase in uncertainty will be significant.  However it is dressed up, this is an anti-avoidance rule that he is proposing; calling it an anti-abuse rule is simply drawing attention to the fact that it is more restrictive than it might be.  Having a clearance procedure with his proposals will put significant pressure on HMRC to simplify the tax system, which must be a quid pro quo for having this sort of rule.

The 'abnormal feature' requirement needs a good look at.  To take an example of disguised remuneration, the interposition of an offshore structure would certainly be an abnormal feature in the case of someone who was resident, ordinarily resident and domiciled in this country and whose business interests were all here too.  Take away one of these background features and an objective view might well be that it is not.

Another thing that needs a good look is the replacement structure where a structure is found to be abusive.  For example, if someone is found to be using a disguised remuneration scheme, does one calculate his tax bill on the basis that he took salary out of his company, or dividends, or was self-employed and did not operate through a company at all, all of which are normal structures?  Does the taxpayer have a choice in the matter, or does HMRC (or the judge) choose the alternative for him?

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By Trevor Scott
24th Nov 2011 23:23

I agree with Mr Craggs too

We need statute law to be objective and clear, not subjective and fuddled by HMRC.

Fortunately HMRC have not yet been able to change the Oxford English definitions of avoidance and evasion, which is obviously of major hindrance to them.

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