Tax legislation in the UK lacks a general anti-avoidance rule (GAAR) of the type found, for example, in sections 80A to 80L of the Income Tax Act, No 58 of 1962.
Laws imposing taxes were earlier regarded by the English courts as having a penal character. This fuelled a pro-taxpayer perspective on the part of the English courts. As one writer put it: "...in English law, depriving a man of his property has been seen as next in seriousness to depriving him of his liberty". That discouraged the development of an anti-avoidance doctrine in the UK. Reliance was therefore always on the "sniper approach" (ie specific anti-avoidance rules) to curb tax avoidance.
All of that might be about to change: Graham Aaronson QC's report (Report) for Her Majesty's Treasury on the desirability of a GAAR for the UK was published on 21 November 2011. In the final report of the 11 month review of the feasibility for the UK tax system of a GAAR, the recommendation is for the introduction of a "narrowly focused GAAR".
It is foreseen that such a narrowly-focussed GAAR would:
- Deter abusive tax avoidance schemes, especially those that "... make a mockery of the will of Parliament";
- Contribute to provide a more level playing field for business - tax aggression must no longer yield a competitive advantage;
- Reduce legal uncertainty around tax avoidance schemes, ie Judges will no longer have "... to stretch the interpretation ... to achieve a sensible result";
- Help build trust between taxpayers and Her Majesty's Revenue and Customs (HMRC); and
- Offer opportunities to simplify the tax system by, for example, reducing and simplifying the existing body of detailed anti-avoidance rules.
The Report specifically warns against a broad spectrum general anti-avoidance rule because it would:
- Undermine the ability of business and individuals to carry out sensible and responsible tax planning. According to the Report such tax planning is an entirely appropriate response to the complexities of the UK tax system; and
- Have to be accompanied by a comprehensive advance ruling system for tax planning transactions. This, the Report says, would impose resource burdens and, in practice, give discretionary power to HMRC who would effectively become the arbiter of the limits of responsible tax planning.
The narrowly focussed GAAR is therefore going to be aimed at "abnormal arrangements" such as:
- Arrangements that would result in receipts being taken into account for tax purposes which are significantly less than the true economic income, profit or gain;
- Arrangements that would result in deductions being taken into account for tax purposes which are significantly greater than the true economic cost or loss;
- Arrangements that include a transaction at a value significantly different from market value, or otherwise on non-commercial terms;
- Arrangements, or any element of it, inconsistent with the legal duties of the parties to it;
- Arrangements including a person, a transaction, a document or significant terms in a document, which would not be included if the arrangement were not designed to achieve an abusive tax result; and
- Arrangements that include a location of an asset or transaction, or a place of residence of a person, which would not be so located if the arrangement were not designed to achieve an abusive tax result.
The Report argues for a "... moderate rule which does not apply to responsible tax planning, and is instead targeted at abusive arrangements." The GAAR, as recommended, is therefore to deter and counteract "... contrived and artificial schemes that are widely regarded as an intolerable attack on the integrity of the UK's tax regime."
Certain safeguards are proposed "... to ensure that the centre ground of responsible tax planning is effectively protected", such as:
- An explicit protection for reasonable tax planning;
- An explicit protection for arrangements entered into without any intent to reduce tax;
- Placing upon HMRC the onus of proving that an arrangement is not reasonable tax planning;
- Having an Advisory Panel (with expertise and a majority of non-HMRC members) to advise whether the application of the GAAR would be justified;
- Giving taxpayers and HMRC the right to refer to publicly-available material / information when the tax planning arrangement was carried out; and
- Requiring that the potential application of the GAAR has to be authorised by senior officials within HMRC.
The 1929 UK Ayrshire Pullman Motor Service case held: "No man in this country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel into his stores." Unbridled tax planning under the banner of the Ayrshire Pullman and Duke of Westminster cases has probably come and gone in the UK.
At least the newly recommended UK GAAR still leaves space for "the centre ground of responsible tax planning."
Johan van der Walt