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Case Study: GAAR horizons

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The problem: A client is considering measures to reduce his tax liabilities but is concerned about Government plans to introduce a general anti-tax avoidance rule. How will the new measure work?

The solution:

The media recently seems to have been full of stories about tax avoidance but do they really mean avoidance or do they mean evasion?

It seems to me that the line is getting increasingly blurred. Dennis Healey, the former Chancellor of the Exchequer, famously said: “The difference between tax evasion and tax avoidance is the thickness of a prison wall.”s

In other words, tax evasion is illegal whereas tax avoidance is perfectly acceptable – a view given judicial credibility in the House of Lords case of IRC v Duke of Westminster (1936) in which Lord Tomlin stated: “Every man is entitled, if he can, to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be.”

I wonder if the outcome would be the same if the case was heard now?

One of the reasons that UK tax legislation is so complicated is that we have so much anti-avoidance legislation. Despite this, clever people keep finding ways around it and so more and more legislation is needed, thus creating a vicious circle.

Of course, we also have the disclosure of tax avoidance scheme rules which seek to provide HM Revenue & Customs with an early warning service of schemes that it might find objectionable. But even this seems not to be enough to solve the problem.

On 11 November 2011, Graham Aaronson QC published a report which considered whether a general anti-avoidance rule should be introduced into the UK tax system.

Aaronson recommended that introducing a broad spectrum GAAR would not be beneficial for the UK tax system. Any GAAR that is introduced should not apply to responsible tax planning but should instead be targeted at abusive arrangements.

A consultative document has now been published entitled: ‘A General Anti-Abuse Rule’ (so even anti-avoidance has now been changed to anti-abuse) with the idea that legislation should be on the statute books for the 2013/14 tax year.

The consultation document adopts Aaronson’s recommendation that there should be no formal statutory clearance process. It is targeted at “artificial and abusive” arrangements and poses two questions – is there a tax arrangement and, if so, is the tax arrangement abusive?

The first question seeks to discover whether obtaining a tax advantage was the main purpose or one of the main purposes of the arrangement and, if it is, then an arrangement will be said to be abusive if it cannot reasonably be regarded as a reasonable course of action.

It goes without saying that this must be a subjective test. The burden will be on HMRC to prove that arrangements are abusive in front of a tribunal but the consultation document does propose an advisory panel, which was also recommended by Aaronson, which will issue opinions on whether the GAAR should be applied in a particular case.

The opinions issued by the panel will not be binding but they will be taken into account by the tribunal.

The lack of a clearance system will, without doubt, lead to a lack of clarity in regard to what is acceptable and what is not and that is a far from ideal state of affairs.

It is also proposed that the GAAR will apply to inheritance tax, something that was not included in the Aaronson report, which could also prove problematic as action taken to mitigate IHT is generally not tested until the death of the individual concerned, which might be many years after the action was taken.

In any event, it would appear that advisers should have nothing to be concerned about provided they continue to recommend the use of “mainstream” financial planning techniques – what the consultation document describes as: “the centre ground of tax planning”.

We do need to keep an eye on this consultation though as it is likely that more changes will be made before 6 April 2013.

Brian Murphy is financial planning manager at Axa Wealth

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