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The law on GAAR

The recent HMRC consultation on the General Anti Abuse Rule (GAAR) would have far reaching implications for tax avoidance planning opportunities.

The ability to do whatever you possibly can ‘legally’ to minimize your exposure to taxes is an inherent part of a capitalist society. Lord Tomlin in the 1936 case of IRC v Duke of Westminster was eloquently quoted as saying the following:


“Every man is entitled if he can to arrange his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure that result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.”


However, this is no longer the view of the UK Government or indeed the Courts.


In March 2011 HM Treasury published its ‘Tackling Tax Avoidance’ strategy paper. This led to the formation of a study group headed by Graham Aaronson QC to explore the case for a General Anti-Avoidance Rule (GAAR) in the UK.


In November 2011, Aaronson produced a report which favoured such a rule; however, the word ‘Avoidance’ had been replaced by ‘Abuse’ due to the former being deemed to be ‘too wide reaching’ and concerns it could make the UK uncompetitive.


Since the report was published, the UK press have had a field day naming and shaming high profile UK residents who have taken advantage of certain planning opportunities. So much so that even David Cameron felt obliged to voice his disdain where he said:


“Those who have fancy corporate lawyers and the rest of it will be subject to a tougher approach so that very wealthy individuals and bigger companies pay their fair share by being denied access to loopholes.”


Now, this is all well and good, but the reality is that UK tax legislation is so long and complicated, that loopholes will naturally appear. It is very difficult for those drafting the annual raft of anti-avoidance provisions in the Finance Bill to ensure that they have taken into account every possible ramification of the new legislation. Usually new opportunities arise or legitimate non-aggressive planning is closed down using a scatter gun approach.


We last saw the scatter gun approach in 2006 where trust planning was significantly affected. You have to ask yourself whether it would be better to simply state what taxes will apply on certain transactions rather than trying to create legislation to stop them happening in the first place.


The concepts of avoidance and evasion are frequently muddled by the press but there is a distinction between the two. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax bill and includes, in particular, dishonest tax reporting (such as under-declaring income, profits or gains or overstating deductions). Tax avoidance involves compliance with the letter but not the spirit of the law, and this is what the Government is seeking to minimize. Legitimate tax planning, on the other hand, is a case of acting within both the letter and spirit of the law, but there will naturally be occasions where the lines are blurred.


HMRC have recently been quite successful in dealing with three schemes where the lines really were very blurred and have saved the UK Treasury £200m in lost revenue.


The first case involved a Howard Schofield, concerning capital gains on a £10 million gain in 2003/2004.


Schofield entered into a scheme that contrived to create an artificial loss and therefore, avoid paying tax on the profit. The Court of Appeal ruled the scheme had no commercial purpose.


The second case saw directors at international investment firm put money into companies which rewarded investors when the companies got liquidated.


The First Tier Tribunal ruled that the money was employment bonuses and, therefore, subject to tax, saving around £13 million.


The third involved a scheme containing government bonds generating interest coupons, which were then borrowed for one single day when a coupon was made to the lender, allowing tax relief to be claimed.

The first tier tribunal called the scheme “a designed and marketed tax avoidance scheme”. Jim Harra, HMRC’s director general of business tax, said that the taxman would “relentlessly pursue” anyone engaged in tax avoidance.


He said: “These schemes don’t come cheap; you carry a serious risk that you’ll end up paying the tax and interest on top of a set-up charge which can run into the hundreds of thousands of pounds. So you have to ask yourself whether it’s really worth it”.


Now, at this point it is very important to stress that things such as Discounted Gift Trusts or Loan Trusts are not under the microscope. HMRC fully understand these types of schemes and, as I understand it, have no intentions of restricting their use.


They are interested in far more esoteric planning ideas but, unfortunately, they don’t always get to hear about them until it is too late. The Disclosure of Tax Avoidance Schemes legislation introduced in August 2004 (and subsequently extended since then) has gone some way to curtail the activity of all but the most adventurous tax planners. However, with new schemes being designed all the time, HMRC needed a way to be able to simply say “Sorry old chap, that type of planning isn’t permitted”.


As such, this is how we have arrived at the recent consultation reviewing the need for the General Anti-Abuse Rule (the deadline for comments was 14 September).


So, how does the consultation seek to address tax abuse?


There is a ‘double reasonableness’ test:


  • First, that an arrangement could not ‘reasonably be regarded as a reasonable course of action’ with regard to the relevant tax provisions and the results of the arrangement, and;
  • Second, that in the assessment of what a ‘reasonable course of action is’ certain factors must be taken into consideration.

It then goes on to give a number of circumstances, the first of which is as follows:


Tax arrangements are abusive if they are arrangements the entering into or carrying out of which cannot reasonably be regarded as a reasonable course of action, having regard to all the circumstances including –


  1. The relevant tax provisions
  2. The substantive results of the arrangements and
  3. Any other arrangements of which the arrangements form part

Now this is supposed to enable the taxpayer to undertake an objective test to determine whether they feel it is the right or wrong thing to do. However, one taxpayer’s view of what might be a reasonable course of action to save tax is going to be quite different to another.


The Exchequer Secretary David Gauke in a speech on 23 July tried to add clarity by suggesting a ‘smell test’!


He said: “Where the tax consequences of an arrangement are so clearly contrary to the intentions of Parliament, where the nature of the arrangements so clearly lack a commercial, non-tax rationale and where the result looks ‘too good to be true’, most reputable advisers would say that the arrangements stink – and stay well clear”.


But back to my earlier point, we all have different senses of smell and as such, a definitive test for unacceptable avoidance clearly drawing a line in the sand, which must not be crossed, is something which has to happen for such a test to work.


Aaronson’s report suggested a number of safeguards to protect taxpayers who had questionable views over what is reasonable and who were devoid of a sense of smell.


One of the safeguards was the creation of an advisory panel to whom the taxpayer could approach for an independent view. However, there is little detail as of yet as to whom (in addition to HMRC) is going to sit on the panel. HMRC’s presence is apparently required to ‘bring knowledge and experience of developing tax and applying tax law’.


The decision of the panel will not be binding and the burden of proof will be on the tax payer to demonstrate that the GAAR should not apply. HMRC can, however, elect to ignore the view of the panel whereby the taxpayer would have to await a judicial decision in much the same way as they do now.


The consultation does propose that HMRC should draft all guidance and that this

should be subject to the oversight of the advisory panel.


Since the coalition Government came to power, it has been usual practice that draft legislation and guidance usually follows within four to eight weeks of a consultation closing.


Going forward, if you are presented with a scheme which is going to save your client vast amounts of tax and you are told that HMRC do not know about it, then irrespective of the number of ‘Counsel’s Opinions’ which are provided to support the planning, if HMRC can demonstrate abuse or misinterpretation of the law, they will usually win should the case go to court.


Assuming the UK does have a GAAR post April 2013, then more so than ever, it really is a case of ‘Buyer Beware’.