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Tony Wickenden: Judging the Government’s mood on GAAR

The Government’s GAAR proposals are part of its war on tax avoidance

Tony Wickenden Tax Planning Technical Area

The General Anti-Abuse legislation (we now have the legislation in the 2013 Finance [No 2] Bill and the guidance notes) will take effect from the date of Royal Assent being given to the 2013 Finance (No 2) Bill. I have been writing about it a bit lately. Apologies for “going on” but it is pretty important.

It will represent a significant step forward in the Government’s committed and relentless battle against what it considers to be unacceptable (and abnormal and aggressive and egregious) tax avoidance.

Margaret Hodge, chair of the Public Accounts Committee, summed up the official (and increasingly public) mood when she said, of Starbucks, “We are not saying what you have done (in relation to their tax affairs) is illegal — we are saying that it’s immoral” — or words to that effect. She then ordered a grande wet, cappuccino to go with her castigation.

Experience with tax avoiders has taught the Government that the tax legislation as it stands (including many legislative, targeted anti-avoidance/abuse provisions of which we got a bunch more in the recent Budget) is arguably “over-engineered” and, as such and given the well-known principle in the Duke of Westminster case, that, broadly speaking, individuals and businesses are not obliged to strain to pay as much tax as they possibly can, there have been many opportunities for avoidance. And, most important, avoidance that would not have been contemplated and approved or accepted by the legislators if they had known, when drafting the legislation, that particular tax avoidance strategies could work to defeat the purpose of the legislation.

To date (since the 1982 Ramsay case actually) HMRC has relied (in addition to a seemingly never ending procession of targeted anti-avoidance provisions to shore up deficient core legislation) on purposive rulings in the Tribunals and Courts to enforce the intention of the legislation.

The essence of purposive rulings is that the steps inserted for no commercial purpose and purely to avoid tax can be ignored and the transaction(s) interpreted on this basis so as to enforce the principles and purpose of the legislation as opposed to the mere “letter of the law”.

And the Government has had some success in this of late with the Tax Tribunals seemingly willing to adopt this basis of interpretation to enforce the will or intent of Parliament.

But relying on the Tribunals and Courts is essentially unreliable – hence the advent of the General Anti-Abuse Rule (GAAR).

In effect, the GAAR will deliver a statutory means of applying purposive interpretation. It is, however, reiterated that the GAAR is to operate as well as the targeted anti-avoidance rules (TAARS) and the ability of the Tribunals and Courts to interpret purposively.

The GAAR applies to tax arrangements that deliver a tax advantage and which are abusive. A tax arrangement is any arrangement that has, as its main purpose or one of its main purposes, the avoidance of tax (including deferment). Pretty wide. But “abusiveness” also has to be present for the GAAR to apply.

Essentially, abusiveness will be present if a transaction

  • is inconsistent with the principles of the legislation
  • contains one or more contrived or abnormal steps
  • is designed to exploit shortcomings in the legislation, and
  • delivers a tax result that defies economic reality

You get the picture.

Importantly, though, even if those stated indications of abusiveness are present, the GAAR won’t be applied if the outcome was clearly contemplated by the legislation or if the transactions and the results have been accepted by HMRC.

Reassuring. But it could be more so.

We would all like even greater clarity. Some form of a “DOTAS” style, regularly – reviewed “white list” of acceptable “non-GAAR threatened” arrangements would be well received. We all like certainty. This seems unlikely, though, as does any form of clearance mechanism.

We do, however, have the Advisory Panel and the commitment to regularly expanding guidance in the light of experience. But the views of the Panel, whilst valuable in relation to potential cases to which the GAAR can be applied and to expanding the guidance, are not binding. It also seems clear that the process for applying the GAAR is pretty “clunky” and is not built for scale.

The main purpose of the GAAR, together with the constant negative and forceful publicity given to unacceptable tax avoidance under the “lifting the lid on tax avoidance” campaign, appears to be to primarily stop people going anywhere near these schemes in the first place. In other words, changing the culture of and attitude towards tax avoidance in the UK. Much easier and cheaper than applying the legislation and litigating.

Tony Wickenden is joint managing director at Technical Connection

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