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AN ARTICLE by Peter Scrafton FIRRV, FCIArb, MRSA(Hon) Solicitor (Non-Practising)

August 2012.

As made by Parliament and interpreted by the judges? Or as you, yourself, would like to see it applied? Views from the latter standpoint seem to vary between “What I have I hold”, on the one hand, and “All property (except mine, of course) is theft”.

The conventional view has been that Parliament makes the law and the judges say how it should be applied. So we were supposed to know what was within the law, and what was not; and for centuries the maxim “Ignorance of the Law is no excuse” has been applied. Thus we knew, broadly, what was legal and what was not.

For present purposes, this understanding developed into what constituted tax avoidance (legal) and what was tax evasion (illegal). Articles have appeared in these pages (and those of “Valuer”) explaining the difference between the two which difference, in the eyes of the law, is absolutely clear.

Certain politicians, commentators and tax (and rating) practitioners, however, started to blur the distinction, particularly by naming as “evasion” something which was clearly no more than avoidance. Thus, to some, “avoidance” is non-payment of the maximum possible assessable sum, no matter whether legal or illegal. Non-payment became “avoision”, as the Moral Police became involved, no doubt with the tacit approval of HMRC and certain billing authorities, and it is now perceived, by some, to be morally indefensible (and therefore almost criminal) so to arrange one’s affairs as to mitigate the amount of tax one has to pay. There is a mounting cry of :”Repent of your sins, and Pay!” Thus, people like Ken Livingstone and Jimmy Carr have been pilloried for mitigating their respective personal tax liabilities in perfectly lawful and well-known ways.

Never wanting to miss a trick (and the chance of some more money) the Treasury commissioned a study on anti-abuse by a leading Silk; and, in the Budget speech this year, the Chancellor of the Exchequer announced that he accepted:-

“…… the recommendation of the Aaronson Report that a General Anti-Abuse Rule (GAAR) targeted at artificial and abusive tax avoidance schemes would improve the UK’s ability to tackle tax avoidance while maintaining the attractiveness of the UK as a location for genuine business investment. The Government will consult with a view to bringing forward legislation in Finance Bill 2013.”

Then there follows a lengthy explanation, by the Chancellor, which it is worth quoting at length, as it puts the general statement into a context In broad terms the purpose of the study was to consider whether the introduction of some type of general anti-avoidance rule would be beneficial for the UK tax system.

Beneficial does not mean simply providing another weapon in the armoury to challenge unappealing tax avoidance schemes. The issue is more complex, and a number of important factors have to be taken into account to determine whether, looked at overall, introducing a GAAR today would be a positive step. Most critical among these factors is whether such a step might erode the attractiveness of the UK’s tax regime to business. The continuing turbulence in financial markets and the fragility of the UK economy has kept this issue in the forefront of the Study Group’s discussions.

I have concluded that introducing a broad spectrum general anti- avoidance rule would not be beneficial for the UK tax system. 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.

To reduce the risk of this consequence a broad spectrum rule would have to be accompanied by a comprehensive system for obtaining advance clearance for tax planning transactions. But an effective clearance system would impose very substantial resource burdens on taxpayers and HMRC alike. It would also inevitably in practice give discretionary power to HMRC who would effectively become the arbiter of the limits of responsible tax planning.

However, introducing a moderate rule which does not apply to responsible tax planning, and is instead targeted at abusive arrangements, would be beneficial for the UK tax system. Such a rule could bring a number of significant benefits -

(i) First and foremost, it would deter (and, where deterrence fails, counteract) contrived and artificial schemes which are widely regarded as an intolerable attack on the integrity of the UK’s tax regime. Such schemes make a mockery of the will of Parliament. In discussions with various representative bodies of the tax profession there has been unanimity of view that such schemes are wholly unacceptable.
(ii) Introducing such a targeted rule should contribute to providing a more level playing field for business: enterprises which conduct responsible tax planning would no longer have their competitiveness undermined by others which seek to reduce their tax burden by contrived and artificial schemes. Likewise tax professionals who are not willing to recommend or implement such schemes will not have their client base eroded by those who are prepared to do so.
(iii) At the moment, in the absence of any such anti-abuse rule, the task of judges in the Tax Tribunals and the Courts in dealing with abusive schemes is confined to deciding whether such schemes succeed or fail by applying the normal principles of statutory interpretation to the tax provisions concerned. Judges inevitably are faced with the temptation to stretch the interpretation, so far as possible, to achieve a sensible result; and this is widely regarded as producing considerable uncertainty in predicting the outcome of such disputes. In practice this uncertainty spreads from the highly abusive cases into the centre ground of responsible tax planning. A GAAR specifically targeted at abusive schemes would help reduce the risk of stretched interpretation and the uncertainty which this entails.
(iv) The UK’s tax legislation is notoriously long and complex. In many places it is virtually impenetrable. A significant contributing factor to the length and complexity is the need for the drafting of any given set of rules to anticipate attempts by some taxpayers to avoid the application of those rules, or exploit their application, in a way that Parliament could not rationally have contemplated. Enacting an anti-abuse rule should make it possible, by eliminating the need for a battery of specific anti- avoidance sub-rules, to draft future tax rules more simply and clearly. Also, fewer schemes would be enacted and so there will be less call for specific remedial legislation.

It should be possible to draft such a rule so that it would operate effectively and fairly. Appended to (the Aaronson Report – JPS) Report (are - JPS) an illustrative draft of a general anti-abuse rule and an accompanying Guidance Note which must be read with it. These incorporate principles which should enable abusive schemes to be specifically targeted and appropriately counteracted. The draft GAAR includes a series of important safeguards to ensure that the centre ground of responsible tax planning is effectively protected. These safeguards are –

(i) an explicit protection for reasonable tax planning (“safeguard 1”);
(ii) an explicit protection for arrangements which are entered into without any intent to reduce tax (“safeguard 2”);
(iii) placing upon HMRC the burden of proving that an arrangement is not reasonable tax planning (“safeguard 3”);
(iv) having an Advisory Panel, with relevant expertise and a majority of non-HMRC members, to advise whether HMRC would be justified in seeking counteraction under the GAAR (“safeguard 4”). This Advisory Panel should publish (appropriately anonymised) digests of its advice.
(v) giving taxpayers and HMRC the right to refer to material or information which was publicly available when the tax planning arrangement was carried out. This could provide valuable help in determining whether an arrangement should be regarded as reasonable tax planning: This material should be available as evidence even if it would not otherwise be admissible as a matter of law.
(vi) requiring that potential application of the GAAR has to be authorised by senior officials within HMRC. This is to ensure consistency and responsibility in its application by HMRC.

It must be emphasised that the general anti-abuse rule appended to (the Aaronson Report – JPS) has been drafted as an illustration to demonstrate that it is possible to incorporate in the form of legislation the principles which I consider must govern a general anti-abuse rule if it is to be beneficial for the UK. The key principles are the safeguards summarised in the sub-paragraphs (i)-(vi) above. Those key safeguards, and the other principles incorporated into the draft, are discussed in greater depth later in (the Aaronson – JPS) Report.

While recommending the enactment of such a specifically targeted anti-abuse rule, Mr Aaronson notes two particular concerns which have been frequently expressed during discussions with representative bodies.

. (i) The first is a fear of “mission creep”: that the essential safeguards to protect the centre ground of responsible tax planning may be eroded by subsequent amendment.
. (ii) The second is that the prospect of reducing the volume and complexity of specific anti-avoidance rules, which an anti-abuse rule should facilitate, will not be fulfilled.

If the Government decides to introduce a GAAR of the sort recommended, then Mr Aaronson trusts that it will take these concerns into account. Provision for a regular, say five yearly, review of progress would instil confidence that the benefits which the GAAR should bring will be delivered.

So, there we have a statement of intent, at least. We must wait to see whether this GAAR (if it emerges) will apply to matters of tax only, or to the rates and Council Tax. In later pieces, I will look at various anti-avoidance schemes currently in use, and you can decide whether they constitute avoidance, avoision or evasion.

Peter Scrafton

©J.P. Scrafton, 2012

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