The GAAR report: was it worth it?

THE LONG-awaited report from Graham Aaronson QC on the merits of a general anti-tax avoidance rule (GAAR) was published in November. Aaronson had given hints to what it would include. It was not expected to rule out the possibility of a GAAR altogether, but it was also unlikely to be too wide-ranging.

What we saw was a narrowly focused rule that would, as Aaronson promised, target the most egregious tax avoidance schemes, but err on the side of taxpayers.

The report was broadly welcomed, but the obvious concerns still prevail. In practice, does it sufficiently limit HM Revenue & Customs’ (HMRC) power to shut down tax schemes? And perhaps more importantly, was the whole effort worthwhile?

GAAR structure

The legislation will apply only to “abnormal” arrangements. It is targeted at those “highly abusive, contrived and artificial schemes that are widely regarded as intolerable”.

Many of Aaronson’s aims are listed: leveling the playing field for the businesses and advisers who do not use such schemes; simplifying the tax system; and helping to create certainty in the tax system.

The GAAR will originally apply to income tax, capital gains tax, corporation tax and petrol tax, and should also cover National Insurance Contributions. If successful, the report recommends rolling it out to stamp duty land tax. VAT is excluded altogether because of the complications with European law.

In his summary of the representative body’s submissions to the study, Aaronson said there were “without exception” concerns about potential abuse by HMRC. In particular, he said, there was a fear that the use of the GAAR might be threatened as a means of applying pressure in non-abusive tax planning cases.

Aaronson also recommended statutory safeguards. An independent advisory panel should be set up to decide whether schemes fall under the GAAR. Crucially, it will review schemes submitted by HMRC and a senior HMRC official would be required to authorise this referral. The panel will be made up of a majority of non-HMRC personnel, including the chairman.

The panel would include experts in the area, which would mean that even if HMRC does not understand the scheme, the panel would. The decisions of the panel would be published so other people could see whether their schemes were likely to fall under the GAAR.

The independent panel would produce the guidance on the GAAR; therefore, it won’t be reflecting HMRC’s interpretation.

Creating uncertainty

For many advisers, however, the proposals will hinder businesses. Only a clearance system would prevent uncertainty, said Adam Craggs, tax partner at RPC.

A clearance system would be used by individuals and businesses to remove doubt about whether their tax planning is legitimate before they make plans. However, it was ruled out by Aaronson.

But without it, HMRC could use the GAAR to put pressure on businesses with reasonable tax planning structures. The subsequent dispute could harm the business in the short to medium term.

The advisory panel, though welcome, will not provide enough of a safeguard against HMRC heavy-handedness. The taxman could use the threat of the GAAR to close down the schemes before it reaches the advisory panel stage. In many cases, businesses will be concerned enough to change their plans.

Mary Monfries, a partner at PwC, went further and said the “extra layer of uncertainty” could restrict UK investment and economic growth.

The rule proposed by Aaronson will capture far fewer schemes. If the final legislation resembles the draft devised by the study group, then it will be unlikely to restrict growth and investment.

The schemes it will cover are not the type that encourage growth. As Bill Dodwell, senior tax partner at Deloitte, said: “If your economic case for investment is solely based around achieving a tax advantage, you have to ask whether your economic case is sufficiently robust.”

There is always a danger that the GAAR will “migrate into the centre ground” and capture sensible tax planning, added Dodwell. But if it resembles the one proposed by Aaronson, the “abnormal” provision should provide protection.

Under scrutiny

The real test will come when there are changes to the tax system, said Dodwell. Tax planning based on newly announced reliefs is by its very nature abnormal.

It was highly unlikely that the study group would fail to recommend any form of GAAR. There was political momentum for such a rule, mainly generated by the Liberal Democrats, and the study group had spent the best part of a year looking into its feasibility.

What came out was the most narrow definition of an anti-avoidance/abuse rule possible. This is not necessarily a bad thing – advisers have welcomed the safeguards against greater HMRC power.

There will be uncertainty, even if it won’t be enough to slow growth, but the proof is in the testing. The key question is whether it will capture any schemes at all.