UK’s general anti-avoidance rule process on scheduleFebruary 7, 2013
The United Kingdom was one of a group of countries that have announced in 2012 they propose to either introduce or strengthen general anti-avoidance rules.
This article was first published in the Ernst & Young Global Tax Policy and Controversy Briefing, Issue 11, December 2012 (pdf, 4.26 MB)
At the time this article was published, responses to the Government’s consultation process had just been submitted, no doubt providing ample viewpoints for policymakers to assess.
On 12 June 2012, the Government launched a formal consultation on a new general anti-avoidance rule (GAAR) to tackle artificial and abusive tax avoidance schemes. This follows the Budget 2012 announcement that such a rule will be introduced in Finance Act 2013 (but with a commencement date of 1 April 2013) which, in turn, followed the publication of a report by an independent study group led by Graham Aaronson QC.
The purpose of the proposed GAAR is in line with the Aaronson Report’s recommendation to introduce a rule targeted only at artificial and abusive arrangements and not “the centre ground of tax planning.” In line with the report’s recommendations, the proposed GAAR will apply to the main direct taxes (including bank levy) and national insurance.
As announced at the Budget, it will be expanded to cover stamp duty land tax. The consultation also proposes an extension of the GAAR to inheritance tax and makes it clear that the Government will consider including further taxes if appropriate but not VAT due to complexities in its interaction with the abuse of law doctrine.
The consultation proposed the establishment of an Advisory Panel as recommended by Graham Aaronson. The Advisory Panel will advise on the application of the GAAR to a particular transaction and approve guidance produced by HMRC, which must be taken into account by a court in determining whether the GAAR applies in a particular scenario.
This panel has significant influence over how the GAAR will apply in practice, and the composition and operational mechanics of the panel is, therefore, critical in determining whether the GAAR achieves its intended objectives and its impact on UK competitiveness. That level of detail is not covered in the consultation document.
The Government has proposed that there will be a further consultation on the draft legislation in the autumn but only states that the guidance should be produced before the GAAR is enacted. It is suggested that HMRC would draft the guidance and the first act of the Panel will be to review and approve it.
There is no suggestion that the guidance will be part of the consultation, although we consider this to be critical especially given that guidance must be taken into account by a court. The consultation paper made it clear that HMRC believes that targeted anti-avoidance rules are still likely to be required, particularly until such time as the GAAR has proved effective in countering abusive schemes.
The Government acknowledges that the commencement rule for a GAAR will need careful consideration. A particular question is whether there should be a transitional rule dealing with arrangements straddling 1 April 2013. This means that the GAAR could potentially have an effect on transactions that began prior to the introduction of the legislation. The Government has invited representations on the issue.
The Government has proposed that the GAAR should apply to artificial and abusive arrangements where UK tax advantages have been obtained through rights or benefits under any double taxation agreements. Despite concerns that if the GAAR were to disapply the effect of DTAs this would conflict with the UK’s duty to abide by the terms of its agreement with other countries, the Government believes that the GAAR would be consistent with the OECD commentary on the Model Tax Convention which states that:
“States do not have to grant the benefits of a double tax convention where arrangement that constitute an abuse of the provision of the convention have been entered into.” The proposal is that the abusive tax advantage would be counteracted on a just and reasonable basis.
However, the draft legislation does not contain the further provisions suggested by the study group that add detail as to what factors should be taken into account in determining what is just and reasonable. This matter has been the subject of judicial debate in the past, and the study group’s recommendation were intended to address this uncertainty.
The GAAR study group, headed by Graham Aaronson QC has now issued a supplementary report in response to the consultation issued by HMRC. Overall, the GAAR study group agreed that the consultation draft embodies all of the main principles that the study group considers need to be incorporated in, and to form the framework of, a GAAR that would be appropriate for the United Kingdom.
The study group considers that the consultation GAAR is very well drafted and it does not recommend any amendments to the draft. The study group does comment on the differences between its suggestion and the consultation GAAR. In some cases it accepts the change, in others it highlights the need for care. In particular, the study group views it as essential that the guidance should be as impartial and objective as possible.
Our view of the GAAR proposal
Overall, Ernst & Young welcomes the approach taken with regard to the introduction of a GAAR; introducing a ‘broad spectrum’ general anti-avoidance rule of the type currently in place in Australia, New Zealand, Canada, South Africa and Hong Kong would not be beneficial for the UK tax system and so the proposal that the GAAR should be targeted only at artificial and abusive arrangements and not ‘the centre ground of tax planning’ is also to be welcomed.
The proposals do raise the concern, however, that the highly subjective test introduces an unwelcome degree of uncertainty for taxpayers and HMRC alike. At its heart, the GAAR requires taxpayers (and potentially) a court to consider whether there are arrangements where:
- “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”
- The entry into the arrangements “cannot reasonably be regarded as a reasonable course of action, having regard to all the circumstances …”
Although a challenging proposition, this subjectivity needs to be replaced with an objectively based test to give greater certainty that the key operative provisions would apply only to their intended target and not to a broader range of circumstances. We also have a concern that, as it stands, the draft legislation set out in the consultation document (the Draft GAAR) itself does not contain sufficient safeguards to prevent possible “mission creep,” i.e., the use of the GAAR in circumstances not intended at the outset.
While the stated overall intention of the legislation is to apply only to “artificial and abusive” tax schemes, in our view the legislation goes further than this potentially catching so-called “reasonable tax planning” arrangements. This seems to us to be at odds with the Government’s message that Britain is open for business and has a competitive tax system.
One area where there is still little detail is the composition and operation of the Advisory Panel. It is proposed that the Advisory Panel will be established to advise on the application of the GAAR to a particular transaction and to approve guidance that must be taken into account by a court or tribunal in determining whether or not the GAAR applies in a particular scenario.
The concept of an Advisory Panel, whose opinion must be taken into account by a court or tribunal, is a novel one in UK tax law. However, we agree that this should, subject to the points made below, provide a helpful safeguard against the use of the GAAR in circumstances not covered by its stated purpose. Involving an independent member with experience in the relevant area will also reduce the chance that HMRC will misinterpret the nature of the transaction.
Given the key role that the Advisory Panel will play, it is vital to have considerably more detail on its composition and operation. The Advisory Panel will have significant influence over how the GAAR will apply in practice. The composition and operational mechanics of the Advisory Panel are therefore critical in determining whether the GAAR achieves its intended objectives and its impact on UK competitiveness.
There is an urgent need for more detail as to how the crucial safeguard of the Advisory Panel will operate and for this to be consulted upon. Particular points that need to be addressed include:
- We understand that HMRC is considering a “double blind process” for the appointment of the Advisory Panel so that an independent chairman would be appointed who would be free to choose its members. While this has some benefits, in that it should reduce the risk associated with a panel appointed in its entirety by HMRC, there are some drawbacks of such a system as, in our view, it leaves too much discretion in one individual’s hands. If this route is followed, we would suggest that the Chair be given very clear guidance as to the broad composition of the Advisory Panel. So for example, while it would be for the Chair to select the Advisory Panel in any particular case, the wider Advisory Panel should include: tax advisors with experience of the relevant taxes; industry members taken from the corporate, small businesses and financial services sectors, and accountants with an understanding of the accounting treatment of complex transactions.
- At the launch event, it was suggested that a “shadow panel” would be in place before the commencement date (currently scheduled for 1 April 2013), but there was little detail on how this would work in practice. We would strongly encourage that this panel be established as soon as possible. Given the need to select members with a wide range of experience, this may take some considerable time.
- The consultation suggests that only written representations can be made to the Advisory Panel. To make sure that the transaction, its implications and purpose are fully understood by the Advisory Panel, we suggest the taxpayer be given the option to make oral representations.
The consultation document states that: “It would clearly be optimal for the first version of the guidance on the GAAR to be produced by the time the GAAR is enacted.” We consider this to be too late.
The Draft GAAR states that the court or tribunal must take the guidance into account in considering any issue in connection with the GAAR. The guidance will therefore be fundamental to the operation of the GAAR. In our view it is therefore essential that the guidance is subject to consultation at an early stage as it goes to the heart of how the GAAR will apply in practice.
We consider that any GAAR should initially be restricted to the taxes contemplated in Aaronson’s Report and should not be extended to encompass inheritance tax (IHT). The application of the GAAR to IHT presents a number of significant difficulties arising from the different way in which this tax operates from the direct taxes. If the GAAR is to be extended to cover this tax, we suggest that there should be a delay so that due consideration can be given to these particular issues.
Next steps for the GAAR consultation
With responses to the GAAR consultation now lodged, it is likely that the government will bring forward legislation in Finance Bill 2013.
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