The idea of introducing an anti-avoidance rule was first mooted by Gordon Brown but dropped, and then resurrected by the coalition in December 2010 when it asked Graham Aaronson QC to consider whether a general anti-avoidance rule (a GAAR) should be introduced in the UK.
Graham Aaronson published his report on 21 November 2011, setting out a recommendation for the introduction of a narrowly focused general anti-abuse rule (still a GAAR but with the second A standing for Abuse rather than Avoidance). In April 2012, the UK Government announced that it would indeed introduce a GAAR targeted at “artificial and abusive tax avoidance schemes” and, in December 2012, published the draft legislation to implement the GAAR which will come into effect in April 2013.
The proposed GAAR, according to HMRC, is intended to have a narrower application than the general anti-avoidance rules found in several other jurisdictions and its purpose is “to deter and counter abusive tax avoidance, while providing certainty, retaining a tax regime that is attractive to businesses, and minimising costs for taxpayers and HMRC”.
Whilst HMRC acknowledge that it is reasonable for a taxpayer to pursue a legal course which improves his economic position and it aims only “to counteract tax advantages arising from abusive arrangements”, the proposed GAAR is not as narrowly focused as the rule originally recommended by Graham Aaronson.
It is hoped the proposed GAAR will bring an end to abusive tax avoidance schemes “which, because they are often complex and/or novel, would not have been contemplated directly when formulating the relevant tax legislation.” If 2012 was the year of exposure (by the media) of abusive schemes, 2013 may be the year such schemes are closed down.
Whether the proposed GAAR will bite will depend upon the answers to the following four questions:
- Are there arrangements which give rise to a tax advantage?
- Does the tax advantage relate to one of the taxes to which the GAAR applies?
- Is it reasonable to conclude that the obtaining of a tax advantage was the main purpose, or one of the main purposes, of the arrangements?
- Are the arrangements abusive?
Whilst the first and second questions are more objective, the third and fourth are more subjective and depend upon what is deemed reasonable or unreasonable (by HMRC rather than the media).
Once it has been reasonably concluded that, having regard to all the circumstances, the obtaining of a tax advantage was the main purpose, or one of the main purposes, of the arrangements, the taxpayer must then consider whether the arrangements are abusive.
Tax arrangements will be considered as abusive if they fail the so-called “double reasonableness test”: if entering into or carrying the arrangements out cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions, having regard to all the circumstances.
The Channel Islands take a zero tolerance stance on tax abuse and both the Jersey and Guernsey Financial Services Commissions have been effective in closing down abusive schemes.
Jersey and Guernsey should therefore welcome the GAAR provided that once finalised and the promised guidance has been published, it does bring clarity and certainty to the often complex UK tax laws.
Much, though, will depend on how this new tool is actually used by HMRC, who already have many other tools at their disposal to deal with abusive schemes.