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Mainstream tax planning or abusive tax avoidance?

As the weeks count down towards the introduction of a General Anti-Abuse Rule (GAAR), a number of prominent tax professionals, industry bodies and the House of Lords have savaged various aspects of the proposals as they are currently drafted. Designed to effectively bring an end to abusive tax avoidance structures, phrases such as “utterly confusing” and “dangerous chaos” do not represent the type of feedback the government had hoped to receive from learned experts.

The GAAR is set to arrive on the statute book once the 2013 Finance Bill receives Royal Assent – most likely, in July. However, the Daily Telegraph reports that various experts have recommended a delay in its introduction to allow further time for clarifying its scope and purpose. Of chief concern is the way it has been drafted, which runs the risk of penalising what most people, perhaps even HMRC itself on occasion, would regard as mainstream tax planning. The GAAR was intended to be a targeted rule aimed solely at abusive schemes (although who defines even that is unclear), and no doubt the more cynically minded among us will take the view that the widely drafted proposals confirm a long-held suspicion that HMRC would like a situation where it had scope to basically tax at will and then relieve by concession. And who can blame them, if we look at the recent behaviour of both HMRC and government in this respect?

Although our own view on this matter tends towards the cynical, it must be of concern to everyone including HMRC that HMRC’s own guidance on the GAAR will not be binding. As was rightly pointed out by a tax partner in a prominent accounting firm in the Telegraph’s story, this will bring about great uncertainty in terms of what will be targeted by HMRC. Another makes the quite reasonable observation that, if one is to have a general anti abuse rule, it follows that it is crucial that ‘abuse’ is properly defined! It cannot be right that a taxpayer, personal or corporate, may take actions based on, and compliant with, official guidelines, only to find that different interpretation of the planning once done leads to denial of relief and another lengthy dispute.

Lord MacGregor, chairman of the House of Lords committee on the Finance Bill, makes the point that the GAAR is “narrowly focused” and “will only impact on the most abusive of tax avoidance”. His comments are particularly interesting, precisely because he speaks of the legislation being so narrowly defined. This is completely counter to other critical voices mentioned above, who complain about it being too widely drafted. This, of course, is ever the problem with this type of legislation that has plagued successive governments, which is that something that is supposed to be finely focused ends up being less so in order to catch as much as possible, which was not the original stated intention.

What is usually left is an unhappy compromise that suits no one, with the feeling that it was never the intention to focus finely at all, but it was an expedient excuse to offer in order to take everyone along on the ground swell of opinion that something needed to be done to stem the tide of abuse in the UK tax system. Inevitably, on the one hand is the risk of things being caught unintentionally, and on the other hand, wide drafting allows larger entities to drive a coach and horses through the holes!

As a boutique tax consultancy that focuses on the type of planning that government and HMRC seek to limit, you might expect us to be critical of the GAAR. However, this is not the case. We are critical of any badly drafted legislation that is not fit for purpose and that will further complicate our already overly-complicated tax system. It is therefore welcome to see voices from the ‘mainstream’ of the tax industry making public their feelings about the extent of deviation from what was promised. What is perhaps more significant is that these voices are prominent senior and respected figures, whose views on a wide range of tax issues are sought regularly.

Additionally, the Institute of Chartered Accountants in England and Wales (ICAEW) has entered the debate, calling for implementation of the legislation to be deferred. Failing that, they urge the government to produce clear guidance and examples as to when the GAAR will be applicable and when it will not.

We will not have long to wait to find out if Government takes any of the advice on offer and uses the remaining time to delay and redraft, or whether it introduces the legislation as currently drafted. Everyone else in the meantime should plan for the worst while hoping for the best. Experience might tell us that if the government refuses to take advice from the IMF on the current economic crisis, we might expect that little notice or advice will be taken on this.

We can but hope.

My thanks go to Craig Herbert of C3 Tax for his views on GAAR, which have informed this article.

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