General Anti-Avoidance Rule ('GAAR') – will the 'centre ground' of tax planning be safe?
On 21 November the final report of the GAAR Study Group ('the Group'), a committee of the tax world's 'great and the good', chaired by Graham Aaronson QC, was published.
The GAAR study group
The Group was formed in December 2010 when the Government asked Mr Aaronson to consider whether a GAAR could, in the words of the Treasury:
"…deter and counter tax avoidance, whilst providing certainty, retaining a tax regime that is attractive to business, and minimising costs for business and HMRC."
The Group's recommendations
It is hard to argue with the sentiment and aims expressed in the report. The Group concluded that a GAAR would benefit the UK tax system, provided it was limited in its scope and targeted solely at "abusive arrangements". The Group was emphatic that a "broad spectrum general anti-avoidance rule" would not be beneficial for the UK tax system.
In the view of the Group:
"… This would carry a real risk of undermining the ability of business and individuals to carry out sensible and responsible tax planning. Such tax planning is an entirely appropriate response to the complexities of a tax system such as the UK's." (paragraph 1.5).
Instead, the Group recommend a limited form of GAAR targeted at abusive arrangements. The report goes on to conclude that:
"An anti abuse-rule which is targeted at contrived and artificial schemes will not apply to the centre ground of responsible tax planning. Consequently there will be no need for a comprehensive system of clearances, with the resource burdens which such a system would require." (paragraph 1.7(vi)).
In order to protect the centre ground, the report recommends a number of safeguards, including:
- an explicit protection for reasonable tax planning;
- an explicit protection for arrangements which are entered into without any intent to reduce tax;
- placing upon HMRC the burden of proving that an arrangement is not reasonable tax planning;
- an Advisory Panel with a majority of non HMRC members to advise whether HMRC would be justified in seeking counteraction under the GAAR;
- the right for both taxpayers and HMRC to refer to material or information which was publicly available when the tax planning arrangement was carried out;
- requiring that the potential application of the GAAR be authorised by senior officials within HMRC to ensure consistency and responsibility in its application.
Good, bad or ugly?
Although the publication of the Group's final report is to be welcomed as a useful contribution to the public debate on how best to deal with what the Government considers to be 'unacceptable' tax avoidance, there are real concerns about how the Group's recommendations, if implemented, might work in practice.
In particular, there is the distinct possibility that the proposed GAAR may introduce considerable uncertainty into what is already complex tax legislation. One of the main features of the proposed GAAR is that it will apply to "abnormal"' arrangements that are "contrived" to produce an "abusive" tax result and will not apply to the "centre ground of responsible tax planning". However, this begs the question of what constitutes the centre ground of responsible tax planning. One can anticipate considerable disagreement between HMRC and taxpayers as to which arrangements constitute responsible tax planning and which do not!
On the basis that reasonable tax planning will not be targeted by the GAAR, the Group are of the view that there is no need for a pre-transaction clearances system. It is unfortunate that there is to be no clearance system, but instead an Advisory Panel comprising two independent members and one HMRC member, with the intention that a dispute concerning the application of the GAAR could be referred to the Panel for an opinion. The concern must be that such a Panel would not be able to process in an expeditious manner a high volume of requests and this would inevitably result in delay and uncertainty.
While the Group envisage the extreme contrasting positions of the centre ground and the abusive tax avoidance schemes that the GAAR is intended to counter, the recommendations contained in the report do not deal adequately with the large volume of tax planning that will inevitably fall somewhere between the two. A major concern for taxpayers will be to achieve a reasonable degree of certainty as to the tax treatment of any given transaction prior to that transaction being implemented. Whether taxpayers turn in ever greater numbers to their professional advisers, or the tax insurance market, to provide the necessary assurance they need remains to be seen, but this may well represent a worthwhile additional cost for the prudent taxpayer.