Tax Update - Monday 28 November 2011

1. General news

   1.1. GAAR Study

   The report by Graham Aaronson QC has been published with a clear recommendation that Government should introduce a narrowly focused general anti-abuse rule, rather than one with broad application.

   The report sets out the conclusions of the GAAR Study group and puts forward suggested legislation and guidance notes, as summarised below.

   Summary of conclusions

   In broad terms the purpose of the study was to consider whether the introduction of some type of general anti-avoidance rule would be beneficial for the UK tax system. One of the most critical factors was whether introducing such a GAAR might erode the attractiveness of the UK's tax regime to business. The report concludes that introducing a broad spectrum general anti-avoidance rule would not be beneficial for the UK tax system, as it would carry a real risk of undermining the ability of business and individuals to carry out sensible and responsible tax planning. Such tax planning was considered an entirely appropriate response to the complexities of a tax system such as the UK's. A broad spectrum rule would require a comprehensive system for obtaining advance clearance for tax planning transactions which would have significant resource burdens for all concerned. The group was also concerned that a clearance mechanism would give HMRC wide discretionary powers. The report concluded that bringing in a specifically targeted anti-abuse rule which does not apply to responsible tax planning would be beneficial for the UK tax system. Such a rule could bring a number of significant benefits. The rule should initially apply to the main direct taxes – income tax, capital gains tax, corporation tax, and petroleum revenue tax. It should also cover national insurance contributions (which would require separate legislation). At a later stage, when the GAAR is seen to be operating fairly and effectively, consideration should be given to including other taxes such as stamp duty land tax. The rule would not apply to VAT, because VAT has its own anti-abuse rules derived from EU law. A GAAR would highlight the need to improve the specific legislation, as the GAAR will operate most effectively where the principles underlying the specific tax rules are clear. Thus one of the advantages of a GAAR would be to encourage legislators to consider more carefully the principles behind proposed legislation. Perceived benefits of the moderate general anti-abuse rule proposed include:

   It would deter (and, where deterrence fails, counteract) contrived and artificial schemes. It would reduce the need for the Courts to stretch the interpretation of legislation in order to defeat abusive planning and thereby reduce the uncertainty that such interpretations introduce for the wider community. Enacting an anti-abuse rule should make it possible to draft future tax rules more simply and clearly. In due course it should be possible to initiate a programme to reduce and simplify the existing body of detailed anti-avoidance rules. A targeted anti-abuse rule will not apply to the centre ground of responsible tax planning. Consequently there will be no need for a comprehensive system of clearances, with the resource burdens which such a system would require. There should be an independent advisory panel that would help taxpayers and HMRC define the line between abusive and non-abusive planning...