The Government commissioned study, by Graham Aaronson QC, rejected the idea of a widely drafted ‘catch-all’ rule as used in a number of countries, such as Australia, and those due to be introduced in India. While in many countries it is necessary to obtain prior clearance for new schemes, no such clearance would be required in the UK.
Thankfully, the intention is only to catch contrived and artificial schemes designed to achieve a beneficial tax result. It recognises that organising someone’s affairs in a tax efficient manor by maximising allowances and exemptions is entirely justified. And with the burden of proof resting with HM Revenue & Customs to prove tax avoidance has occurred, centre ground tax planning can continue unaffected.
Tackling tax avoidance
Tax avoidance in the UK is currently tackled in one of three ways. Firstly, by targeted anti-avoidance measures within the tax legislation. Secondly, where weaknesses exist within the tax legislation the courts can apply a purposive interpretation to determine what was intended by the legislation. Known as the ‘Ramsay Principle’, it allows the courts to look beyond each individual step and apply the legislation to the arrangement as a whole. Lastly, the Disclosure of Tax Avoidance Schemes (DOTAS) rules act as an early warning system alerting HMRC to new schemes.
The GAAR would add a fourth dimension to discourage tax avoidance where all other steps have failed. For example, in the recent case HMRC v Mayes, the Court of Appeal reluctantly had to find in favour of the ‘SHIPS 2 Scheme’, costing the exchequer an estimated £24m ($38m, €29m). This was despite the artificial nature of the scheme and the multiple steps surrounding the surrender of a second hand investment bond purchased from a non-resident company which resulted in a CGT loss and corresponding deficiency relief for income tax. The judge concluded that while she instinctively felt the scheme ought not to succeed she was powerless and had to find in its favour.
The introduction of a GAAR would clearly make such planning obsolete. In time it should make the drafting of future legislation simpler by reducing the need for specific anti-avoidance measures.
The scope of HMRC’s powers
HMRC’s powers under the GAAR will extend to income, capital gains and corporation taxes. Curiously, it will not apply to inheritance tax. A similar approach was seen in the introduction of the DOTAS rules. Initially new IHT schemes were excluded from the need to disclose but were subsequently included at a later date. A repeat of ‘mission creep’ cannot be ruled out and, with the GAAR set to be reviewed every five years, the breadth of its scope could well be extended to other taxes.
The merits of a narrowly focused GAAR are that financial planners can continue to add value for their clients by recommending sensible tax planning. It should also mean advisers who continue to follow tried and tested solutions are less likely to have their clients heads turned by those offering fanciful schemes with artificial tax savings.
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Julie Hutchison is head of international technical insight at Standard Life International
