Commenting on a report published today by HM Treasury recommending the introduction of a General Anti Avoidance Rule (GAAR) in the UK, Chris Morgan, tax partner at KPMG in the UK, commented:
“We welcome the basic principles today’s report which make it clear the general anti-avoidance rule (“GAAR”) is aimed at artificial tax planning while allowing “responsible tax planning”. But it’s very much work in progress as it highlights the difficulty of achieving this objective.
“If a GAAR is introduced effectively, it should mean that tax planning which is an integral part of commercial arrangements is not affected. It should also reduce the need for ever more targeted anti-avoidance rules and in time lead to a roll back of some of the existing provisions.
“However, the key issue is how will the “reasonable tax planning” safeguard apply? The draft legislation refers to “a reasonable exercise of choices of conduct afforded by the provisions of the Acts.” The risk is that this just opens up a debate about the purpose of any piece of legislation and whether or not it has been used in a reasonable way. In other words we fall back into case law on purposive interpretation. While there are other safeguards such as the existence of the advisory panel and the incorporation of guidance in the legislation, we consider this key concept needs better refining.
“It’s also important that the legislation should make it clear that it only focuses on the UK effect of any arrangement. The question of reasonableness should not be determined by taking into account any non-UK effect.
“For taxpayers the biggest issue will be ensuring with certainty that what they are doing will not be caught by the GAAR. A big risk is that the scope slides to capture planning that the report’s author clearly does not intend it to. This risk is increased by the lack of a general clearance mechanism, albeit partially mitigated by the proposal to extend statutory clearances to include the application of the GAAR.
“There is a period of time now to influence the Government as part of their information discussions before they announce their conclusions in the Budget 2012. It’s crucial that all interested parties engage fully in this process.”
Background to the HM Treasury General Anti-Avoidance Rule report
On 21 November, HM Treasury published a report recommending the introduction of a General Anti Avoidance Rule (GAAR) in the UK, click here for more details. The report was written by Graham Aaronson QC, based on advice from an advisory panel including current and retired judges, academics and a representative from business.
The main conclusions of the report are:
- A broad spectrum anti avoidance rule should not be introduced;
- However, a general anti avoidance rule targeted on flagrant, abusive contrived and artificial schemes would be recommended.
- The aim would be not to affect the large centre ground of reasonable tax planning.
- The GAAR is aimed at capturing schemes where the current interpretation of tax law by the courts is not effective.
- The GAAR would apply initially to income tax, corporation tax, capital gains tax, petroleum revenue tax and national insurance contributions with potential extension to stamp duty land tax (SDLT) at a later date. It is not proposed that it would apply to VAT.
Various safeguards are proposed, which include:
- An explicit protection for reasonable tax planning
- An explicit protection for arrangements which are entered into without any intent to reduce tax
- Placing the burden of proving that an arrangement is not reasonable tax planning on HMRC
- Establishing an advisory panel to advise HMRC
- Giving taxpayers and HMRC the right to refer to material or information which was publicly available when the tax planning arrangement was carried out
- Application will need to be authorised by senior officials at HMRC
However, it is proposed that there will be no general clearance procedure as to whether any transaction falls within the scope of the GAAR. But where a taxpayer is applying for an existing statutory clearance (such as on a share for share exchange) it will be possible to additionally obtain clearance that HMRC would not invoke the GAAR.
The Government will be announcing its formal response at the time of the 2012 Budget, but there will be an informal discussion with businesses and tax groups in the interim. Any formal consultation is likely to take place during summer 2012.
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