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The ongoing consultation on the General Anti-Abuse Rule should not be overlooked by the profession, warns C3Tax.

Introduction

Amongst the recent lurid headlines and welter of publicity concerning the morality or otherwise of tax avoidance (or sensible financial planning, depending on your point of view), it has almost escaped attention that we are currently in the midst of a consultation period during which HM Revenue & Customs (HMRC) are inviting comments and questions concerning the introduction of a General Anti-Abuse Rule (GAAR), and the proposed draft legislation.

Suffice to say, that although the consultation document and process has not impacted on the public consciousness to anything like the extent of the stories concerning Glasgow Rangers FC and Jimmy Carr this is a far weightier matter for the tax profession.

Anti-Abuse or Anti-Avoidance

The idea of a general rule to counteract perceived aggressive tax avoidance was first mooted over a decade ago.  Originally conceived as a General Anti-Avoidance Rule (as opposed to Abuse), the concept arose as a response to the relative failure of both directly targeted measures against specific arrangements, and the DOTAS regime to put a stop to what HMRC regard as aggressive and artificial avoidance measures.  To that end, in December 2010 the Government asked Graham Aaranson QC, a leading tax barrister, to lead a study into the desirability of introducing a GAAR in the UK.  It is the resulting report, published in November 2011, which has formed the basis of the consultation document and process.

Although a GAAR rule has been adopted by over 30 countries, it was still widely considered that an introduction in the UK would be problematic.  When the much anticipated Aaronson report was issued in November 2011, the conclusion was that a broadly drafted ‘avoidance’ rule would not benefit the UK.  Amongst the reasons given were that it may make the UK less attractive to overseas business, undermine the ability of taxpayers to undertake “sensible and responsible” tax planning, and award substantial discretionary powers to HMRC in terms of their deciding, subjectively, what is and is not acceptable.

Instead, the proposal was for a General Anti-Abuse rule (so still a GAAR!), which attempts to leave intact “responsible tax planning, and is instead targeted at highly abusive arrangements”.  Various safeguards were proposed, including both the setup of an independent advisory panel and ensuring the burden of proof lies with HMRC.  The Consultation Document has largely taken on board the report's findings.

Although the narrower focus of the GAAR as now proposed is clearly an improvement upon what was initially envisaged, concerns remain regarding definitions of, for example, ‘abusive’, and concerns have been expressed within the tax profession that a lack of certainty will remain concerning what will and will not be caught.

Our View on the GAAR

Our own view is that, although the narrower focus on clearly abusive schemes is to be welcomed, there is already sufficient case law and precedent to allow the authorities to counter such arrangements.  With the long established ‘Ramsey’ principle, a broad spectrum of targeted anti-avoidance provisions aimed at specific arrangements and the DOTAS (Disclosure of Tax Avoidance Schemes) regime already in place, it is difficult to see the need for further legislation.  It would also appear to be completely inconsistent with the persistently stated aim of simplifying the UK taxation system, which is, one of the most complex in the developed world.

The message arising from the proposals, which we must assume will become law, is that even greater care needs to be taken before enacting any form of tax planning. 

The above contribution is a guest post by the advisors at C3 Tax, a boutique tax consultancy in Leeds.