Rachael Griffin, head of product law and commercial development at Skandia International:
On 12 June 2012, HM Revenue & Customs issued the consultation document (which can be viewed here) on “A General Anti-Abuse Rule” (GAAR). The consultation period is 14 weeks, with responses required by 14 September 2012. This follows the Budget 2012 announcement that such a rule will be introduced in 2013.
The Government is introducing the GAAR following an independent review led by Graham Aaronson QC. The review concluded that a “broad spectrum” anti-avoidance rule would not be beneficial for the UK tax system.
The draft legislation follows the recommendation of the review and is targeted at artificial and abusive tax avoidance schemes which, because they are often complex and/or novel, could not have been contemplated when formulating tax legislation. The GAAR will apply to counteract, on a just and reasonable basis, the tax advantage that would otherwise be obtained.
The consultation paper confirms that the GAAR should not affect what the review described as “the centre ground of tax planning”. Some examples are included in Annex B of the consultation document of the type of schemes that should fall within the GAAR.
The taxes that the GAAR will initially apply to include income tax, corporation tax, capital gains tax, inheritance tax and stamp duty land tax. The intention is also to extend the GAAR to national insurance but, as this will require separate legislation, this will be introduced at a later date.
The draft legislation introduces three concepts that are key to the operation of the GAAR: “tax arrangements”, “abusive” and “tax advantage”.
In summary, “tax arrangements” is defined as an arrangement that, having regard to all the circumstances, it would be reasonable to conclude that the obtaining of a tax advantage was the main purpose, or one of the main purposes, of the arrangements.
While it is accepted that the main purpose of an arrangement is a question of fact, and in itself would be broad enough to target arrangements beyond the scope of the GAAR, the Government believes its interaction with the other key concepts such as “abusive” ensures the narrowing of the application.
The document states that: “Tax arrangements are “abusive” if they are arrangements the entering into or carrying out of which cannot reasonably be regarded as a reasonable course of action….”
The section goes on to describe circumstances which need to be considered – for example “the relevant tax provisions” and “their policy objectives”. Clause 2(4) also gives some examples of tax arrangements which may be abusive – “the arrangements result in an amount of income, profits or gains for tax purposes that is significantly less than the amount for economic purposes”. The question is posed in the consultation document regarding whether these two concepts sufficiently limit the scope of the GARR to counteract only artificial and abusive schemes.
The third concept is “tax advantage” and is common in UK tax legislation. The definition is intentionally wide to cover any form of tax benefit, but it is clear that the tax is limited to that which the GAAR applies.
The draft legislation also places the onus upon HMRC to show that an arrangement falls within the scope of the GAAR.
It is intended that the GAAR will, where possible, operate within the existing self assessment arrangements.
One of the taxpayer safeguards, as suggested by the review, was the proposal for an Advisory Panel to provide a quick and cost-effective way of helping both taxpayers and HMRC identify the borderline where the GAAR applies.
The purpose of the advisory panel would be to reduce areas of uncertainty by having an independent member with expertise in the relevant area – therefore reducing the risk of HMRC invoking the GAAR as a result of misinterpreting the nature or purpose of the transaction. Part of its remit would also include publishing opinions from the panel and providing a mechanism for updating and expanding the guidance on the GAAR.
The Government accepts that the GAAR represents a significant new approach to tackling tax avoidance in the UK, and warrants additional taxpayer safeguards which would not be appropriate elsewhere in the tax code.
The consultation poses 15 questions, in relation to the introduction of the GAAR. Over the coming weeks interested parties will need to work through the detail to ensure the new legislation and guidance provides clarity and supports the taxpayers’ ability to continue to plan their tax affairs appropriately.
Mark Green, head of tax & estate planning at Legal & General:
For some time the Government has been looking to introduce a ‘general anti avoidance rule’ (GAAR) to add to existing provisions in countering what it regards as abusive and unacceptable tax avoidance.
In broad terms a GAAR has been described as a principle-based approach to taxation rather than a rules based approach. But the prospect of HM Revenue & Customs being able to exercise a discretionary power over what is or is not taxable, which is implied by a general anti avoidance rule, creates concern and uncertainty in many quarters.
However, following the conclusion of an independent report commissioned by the Treasury under the leadership of Graham Aaronson QC, the Government agreed that a blanket approach would not be beneficial to the UK tax system nor conducive in promoting the UK as a place where business can thrive.
Aaronson’s suggestion was to introduce a more targeted approach with a ‘general anti abuse rule’ (same acronym…) focussing specifically on those engaging in artificial or abusive avoidance schemes.
To this end the Government has announced it is launching a consultation process to gather views on how such legislation might work.
Originally it was intended that GAAR would apply to income tax, corporation tax, CGT, petroleum revenue tax and NICs and that inheritance tax would be excluded because of the fundamentally different manner by which it operates.
Nevertheless that approach appears to have changed (as, indeed, it did with DOTAS previously) and IHT is now included.
Given that IHT mitigation is an important aspect of the advice process when dealing with high net worth clients, what are the implications for financial planners? To consider this we need to firstly consider the categories of tax mitigation. Using a traffic light analogy these may be described as;
Red – tax evasion – illegal and ultimately rewarded with a prison sentence
Amber – tax avoidance – highly immoral (according to the government) but not illegal
Green – legitimate tax planning – e.g. use of ISAs, exemptions and allowances
IHT planning by advisers consists, in the main, of making gifts or loans of capital held upon trust – whether discretionary or absolute in nature. Such arrangements have been in use for many decades and while HMRC does not offer ‘approval’ to mitigation schemes, it is known they are not considered to be artificial, abusive or in any way unacceptable.
Such planning falls clearly within the ‘green’ light area and advisers should not be concerned it would become the target of any future anti abuse legislation.
What do you think of the proposals? Is the introduction of a GAAR in any form a good idea? Are you worried about legislative creep? Tell us in in the comment box below