A General Anti-Avoidance Rule (GAAR) could well become one of the March 2012 Budget proposals.
Can the UK learn anything from experience in other jurisdictions?
Modelled on earlier Canadian provisions, the Republic of Ireland has had general anti-avoidance legislation for more than 20 years.
The application of this legislation was recently considered by the Irish Supreme Court [Revenue Commissioners v O’Flynn Construction (OFCL)].
From 1958 until 1992, the Republic of Ireland operated an Export Sales Relief Scheme (ESR) whereby profits from qualifying exports were exempted from corporation tax. Additionally, dividends from such profits were free of income tax in the hands of the shareholders.
Mitchelstown, an agri-business, made “export profits” but was unable to pay dividends for technical reasons, including a lack of ready cash. Mitchelstown entered into a series of more than 50 transactions to sell its ESR profits, amounting to IR£1.2m, to OFCL – a construction company which didn’t export but which had large amounts distributable cash. The consideration was IR£120,000. The ESR profits were distributed by OFCL to its shareholders, ostensibly tax free.
The Irish Revenue Commissioners wheeled out the general anti-avoidance legislation which provided that where “[a] transaction was undertaken or arranged for the purpose of obtaining the benefit of any relief, allowance or other abatement provided by any provision of the Acts…“ then “[if]… the opinion of the Revenue Commissioners that a transaction is a tax avoidance transaction becomes final and conclusive they may…make all such adjustments and do all such acts as are just and reasonable in order that the tax advantage resulting from a tax avoidance transaction shall be withdrawn from or denied to any person concerned.”
OFCL argued that it was only availing of a statutory relief (ESR), but the Supreme Court held that the way in which the transactions were carried out brought the anti-avoidance legislation into play. The Supreme Court found in favour of the Revenue Commissioners:
“The reason each party was able to become involved in this scheme, and why companies and advisors were able to devote time and considerable sums of money to the scheme, was that in effect, if successful it would be paid for by the tax avoided by the shareholders in OFCL.
"It is probably unnecessary to observe that the scheme is entirely artificial. It has no commercial logic. Its only purpose was to permit an ESR dividend to be paid to the shareholders in the company that supplied the original funds. The artificiality of the scheme is not in any way denied by the tax payers.”
The transactions under review took place in 1991 and 1992. The Supreme Court judgement was delivered in December 2011. If the UK is to have a GAAR, then “disputes” need to be settled quickly in the interests of both taxpayers and HMRC. Nineteen years is too long.
Gerry Brown is technical manager at Prudential
