Budget 2010: Govt may resurrect "draconian" GAAR tax law

The Government could rescue the tax General Anti-Avoidance Rule (GAAR), which was dismissed by Labour as "unworkable".

The rule would help close tax avoidance loopholes by giving HM Revenue & Customs (HMRC) more extensive and widely-drafted powers to judge tax liabilities.

Capital gains tax (CGT), inheritance tax, corporation tax and income tax would all come under closer scrutiny under the rule.

Proposals to "work with interested parties on the case" for developing a GAAR are hidden in emergency Budget discussion document ‘Tax policy making: a new approach'.

It states the Government will "take a more strategic approach to the risk of avoidance to prevent increasing complexity and reduce the need for frequent legislative change".

"Against the background of developing more sustainable defences", the Treasury will consider "whether a GAAR should form one element of strengthened defences".

It continues: "Recognising the range of views on the implications of a GAAR, HMRC will engage informally with interested parties over the summer to explore whether there is a case for developing a UK GAAR, taking into account other planned changes, such as corporate tax reform."

However, the plans have provoked outrage from tax professionals.

Legal & General (L&G) head of tax Mark Green says: "It is a draconian over-reaction, using the proverbial sledgehammer to crack a nut.

"It would mean any tax planning, signing a trust deed, moving money into shares, transferring assets, anything which isn't something simple like putting money into an ISA, could come under GAAR."

He says Britain could end up in a situation where people only find out if they have a tax liability when they submit returns at the end of the year and HMRC produces a bill.

"Labour brought this idea forward in 1997 but after a huge lobby by the accountancy and tax sector they dropped it because they realised it was unworkable."

The Institute for Fiscal Studies, at the time of the last consultation on imposing a GAAR in 1999, also heavily criticised the plans.

It said: "The proposed rule places no significant burden on the Revenue to justify its use, fails to secure a proper balance of interests between Revenue and taxpayers and would be intrusive on ordinary commercial and private transactions."