Abuse not avoidance: What you need to know about the GAAR

As the government considers a catch-all rule for tax abuse, the experts give us the lowdown...

In December 2010, the government announced its commitment to tackling tax avoidance, and commissioned tax lawyer Graham Aaronson to research the viability of a general anti-avoidance rule (GAAR).

A GAAR would enshrine in legislation the idea that any tax scheme which is not in the spirit of the law, even if it is technically legal, would be void. Last week, Aaronson reported back, sparking relief and yet some controversy in the tax world.

The report

Aaronson recommended a general anti-abuse rather than avoidance rule. This helps to circumvent the argument over whether efficiency is avoidance, and whether avoidance is evasion.

He recommended the GAAR should initially apply to income, capital gains, corporation and petroleum revenue tax and national insurance contributions (NICs).

This, Aaronson said, would deter tax abuse, create a level playing field for businesses, and reduce legal uncertainty around tax avoidance schemes.

Ending rule-by-judge

Creating a GAAR is beneficial because it creates one law to adhere to, rather than a situation where judges make inconsistent decisions on a case-by-case basis, George Bull, tax partner at Baker Tilly said.

“Legislation should be principles-led and Aaronson’s proposals should make it easier for judges to arrive at the right decision in these cases,” said Bull.

Overseas focus

Jeremy Cape, tax partner at SNR Denton, said the GAAR’s focus on locations as indicators of tax abuse points to a future crackdown on tax havens.

“The inclusion of the location of assets or transactions, or the place of residence of a person, as possible indicators of an ‘abnormal’ arrangement suggests current rules involving so-called tax havens may come under attack,” he said.

A legislation clash?

Whilst Aaronson’s report has been widely praised by the industry, experts said it must not be allowed to further complicate an already-vast tax code.

Cape said: “It appears the GAAR will sit above existing targeted anti-avoidance rules, and there will be limited scope for repeal of existing targeted anti-avoidance rules.

“Whilst this is because the GAAR and the targeted anti-avoidance rules are fulfilling different functions, it would be a shame if there were not some accompanying repeal of certain existing rules.”

Stifling business

The standard argument against any tax reform is that it will make the UK less competitive as a business environment and drive wealth creators away.

Michael Wistow, head of tax at Berwin Leighton Paisner, said the GAAR would be a “retrograde step” for businesses.

“HMRC may overlook the fact that many transactions are reasonable tax planning and are hence excluded from the GAAR,” he said.

“This could well be the case even where the taxpayer is seeking to obtain, say, a tax benefit introduced by Parliament that is designed to encourage investment, such as capital allowances.”