HM Treasury this week published its report on whether a general anti-avoidance rule (“GAAR”) should be introduced into the UK tax system (the “Report”). The Report, written by a committee chaired by Graham Aaronson QC, concluded that a GAAR would benefit the UK tax system, provided it was limited in its scope.
It is hard to argue with the tone and conclusions reached by Aaronson. He recommends a moderate rule targeted solely at purely abusive arrangements and is unequivocal that the GAAR should not be broad enough to deter or counteract what he calls the centre ground of sensible and responsible tax planning; with the onus of proving that any planning was not reasonable falling on HMRC. Aaronson’s proposed GAAR would look to identify and counteract tax planning with abnormal features specifically designed to achieve a tax advantageous result.
On the basis that reasonable tax planning would not be targeted by the GAAR, the Report reasons, it should not be necessary for a comprehensive system of clearances (and the burden that they would place on HMRC’s resources).
The Report optimistically claims that, if introduced, the GAAR should ultimately lead to the simplification of the UK tax system, reducing the need for the mass provisions of specifically targeted anti-avoidance provisions that currently exist. These, as Aaronson accurately states, create serious traps for tax payers to fall into, even when they carry out transactions to which such provisions were not intended to apply.
However, it is still unclear how any GAAR would be implemented in practice without providing the certainty that comes from a pre-transaction clearance regime. While Aaronson clearly envisages the extreme contrasting positions of the centre ground and the egregious tax avoidance schemes that the GAAR is intended to defeat, it does not appear to deal adequately with planning that might fall somewhere between the two and it is interesting to speculate how this gap might be filled.
The Report suggests that some certainty may be provided by the establishment of an advisory panel, independent from HMRC, which, it claims, could provide a quick and cost-effective way of helping tax-payers and HMRC identify the location of the outer-limit of this centre ground. The conclusions reached by this advisory panel could be published, offering a body of guidance helpful in determining where the line falls between acceptable and unacceptable tax planning. However, given that the Report suggests that the findings of the advisory panel will not be binding on the tax payer or HMRC, will its decisions really provide adequate piece of mind for the tax payer?
While the Report recommends that where there is any reasonable doubt as to which side of the line any arrangement falls on, then that doubt is to be resolved in favour of the tax payer, taxpayers are likely to be cautious to make assumptions as to how any GAAR will be applied, particularly in the earlier years of its implementation.
The biggest test for taxpayers, therefore, will be in achieving the certainty that they require as to tax treatment of any given transaction, prior to putting it into effect. Whether tax payers turn to professional advice, opinions of tax Counsel or the tax insurance market to provide comfort is yet to be seen, but it certainly appears that, in the short term at least, this may represent a necessary additional cost for the prudent taxpayer.
The Government plans to respond fully to the Report as part of the Budget 2012. A link to the report can be found here.
Aaron Fairhurst Partner – CMS Cameron McKenna
Richard Croker Partner – CMS Cameron McKenna