The introduction of a narrowly focused General Anti-Avoidance Rule (“GAAR”) to the UK tax system has been recommended following a study into its scope and design.
Broadly, the purpose of the study was to consider whether the introduction of a GAAR would be beneficial for the UK tax system.
The report points out that “beneficial” does not mean simply providing HM Revenue & Customs (“HMRC”) with another weapon to counter tax avoidance plans and a number of important factors have been considered to determine whether, looked at overall, introducing a GAAR would be a positive step. For example, would the introduction of a GAAR make the UK’s tax regime less attractive to business?
The conclusion was that a broad spectrum rule would not be beneficial for the UK tax system since this would carry a real risk of undermining the ability of business and individuals to carry out sensible and responsible tax planning. It would also in practice give discretionary power to HMRC who would effectively become the arbiter of the limits of responsible tax planning.
On the other hand, introducing a narrowly-focused rule targeted at abusive arrangements rather than responsible tax planning, would be beneficial for the UK tax system and would:
- deter abusive tax avoidance schemes;
- contribute to providing a more level playing field for business;
- reduce legal uncertainty around tax avoidance schemes;
- help build trust between taxpayers and HMRC; and
- offer opportunities to simplify the tax system.
The report recommends that a GAAR should initially apply to Income Tax, Capital Gains Tax, Corporation Tax and Petroleum Revenue Tax, as well as National Insurance contributions.
The Government will consider the report in detail and will discuss the implications of the proposed rule with business and tax practitioners and respond fully in its 2012 Budget, setting out its plans for further, formal public consultation, if appropriate.
There has been a varied reaction from tax and law firms. Some commentators have been very positive while others are less so but see it as a good starting point for consultation. Others have expressed concern that too much subjectivity remains as to what constitutes “reasonable tax planning”. Clearly HMRC’s definition will not always be the same as that of tax practitioners!
It has been recommended that an independent Advisory Panel should give a view on whether planning is reasonable. HMRC will have representation on that panel and it is difficult to see how the established HMRC view will not be reflected in some way in the views of that panel member. That does pose a question mark as to the independence of the Panel.