cover situations where the ‘normal’ rules may be inadequate, the UK tax code has
developed specific anti-avoidance legislation. There are also rules where the
authorities target certain types of avoidance schemes, targeted anti-avoidance
rules (TAARs); rules for where tax planners must inform authorities of certain
schemes, disclosure of tax avoidance schemes (DOTAS); and, since July 2013,
rules detailing how the authorities can challenge certain types of avoidance,
It is worth noting that this last acronym does not feature the
word ‘avoidance’. Rather it stands for General Anti-Abuse Rule since those
writing the rules found it extremely difficult to define what avoidance was. In
truth, when talking about ‘avoidance’ with the implication that this is a bad
thing, the term is often preceded by an adjective such as ‘abusive’,‘aggressive’
Spirit of the Law versus Letter of the Law
In the current hard financial times, there is an argument that where tax
planning tries to minimise the tax bill – thus reducing the flow of monies to
government – then even if such tax planning is within the letter of the law
(i.e. it satisfies the very substantial body of law which restricts how one
might reduce one’s tax bill) it is nonetheless not within the spirit of the law.
The spirit of the law is usually seen as being linked to virtues such as
patriotism and morality.
This article’s modest remit does not include
a template on how to be patriotic or moral. It does suggest that if a society
begins to accept that the rule of law is not an adequate guide to what
government deems to be acceptable, then the society is in trouble. Who does
decide? Those who claim to speak for ‘the people’?
Legal Form versus
The courts have also been concerned to identify
unacceptably aggressive tax planning, moving to consider not simply the legal
form of a transaction but to take into account economic substance.
For example, where the UK government has sought to encourage investment into
certain areas such as British film production, some tax planning has sought to
operate structures whereby the amount invested was boosted by ‘non-recourse’
loans, that is identified by the court as not being a commercial debt. The
courts have restricted relief claim, excluding such loans.
some international groups have been accused of organising their affairs such
that entities in low tax jurisdictions provide services to entities in higher
tax jurisdictions, thus shifting profits into the lower tax jurisdiction.
Governments, often through the Organisation for Economic Co-operation and
Development (OECD), will act together to impose ‘transfer pricing’ rules to
ensure that charging for such services is at the appropriate market value.
In considering whether to support a challenge by the revenue authorities
into the tax effect of a series of transactions, UK courts can consider whether
the transactions in question were circular and self-cancelling; or whether they
were linear and pre-ordained; or whether the tax consequence meets the purpose
which the regulators had in mind when passing the legislation.
body of case law exists to help identify ‘unacceptable avoidance’.
Tax Avoidance and the Media
As various public personalities and
large corporate groups will testify tax, and certainly tax avoidance, have
become topics for mainstream coverage. Some coverage involves straightforward
illegality, tax evasion, often involving assets held abroad and hidden from the
UK authorities. Here the UK has adopted a ‘carrot and stick’ approach. The stick
involves agreement with offshore jurisdictions, which require information on UK
clients who can then be pursued. The carrot consists of various disclosure
facilities, which offer advantageous terms to taxpayers who make a voluntary
disclosure and get their tax affairs up to date.
The bulk of media
coverage has been focused on corporate tax avoidance. Mobile phone companies,
water companies and online retailers are among those to have been branded ‘tax
avoiders’. Criticism includes: using an offshore company to provide services and
paying for these services thus reducing UK profits; using a non-UK company to
book sales made to UK customers and so keep profits outside the UK; taking
advantage of incentives to invest in the UK while also taking steps to minimize
one’s UK tax bill.
The criticism of these corporate groups is not
that they are doing anything illegal. Rather it is that by structuring their
affairs so that they pay a smaller amount of UK tax than they might, they are
immoral, or unpatriotic, or have a ‘something for nothing’ culture; they are
‘evil’; the tax system is branded as ‘absurd’.
This is the politics
of the demagogue, but for serious politicians there is a difficult balance. They
wish to retain public confidence in the integrity of the tax system. They need
to balance the desire to minimise tax leakage from the UK with international
obligations, such as the EU requirement to allow the free flow of goods between
countries and the prohibition on discrimination against foreign companies.
Pragmatically, they fear that if they try to squeeze too much tax out of
corporates, the geese will fly out of the UK to a friendlier climate.
General Anti-Abuse Rule (GAAR)
So in tax, for both government and
taxpayers, there are competing priorities. Government wishes to maximise the
tax take of the UK, but not to scare business away. Politicians also know that
voters want them to be tough on ‘tax avoidance’- while it might be difficult to
define; there is general agreement that it is a bad thing.
Businesses, whether corporate or individual, wish to minimise tax as one more
business expense but they also wish to be good citizens operating within the
law. Consequently they seek guidance on what is legally acceptable planning.
The government hopes that the recently-introduced GAAR will show their
anti-avoidance credentials and discourage the more aggressive types of avoidance
planning. Her Majesty’s Revenue and Customs (HMRC) can refer schemes about which
they are concerned to a GAAR panel, which will review them according to
broad-brush criteria. The criteria are developed by HMRC and ratified by the
panel. At the introduction of GAAR, there were statements that the rule was
aimed at the most egregious forms of avoidance. However, in a subsequent list of
examples of schemes which might be GAAR-able – a list drawn up by HMRC with GAAR
panel approval – many advisers point to an element of ‘mission creep’, with
schemes which do not seem to be particularly abusive being identified as
From the point of view of taxpayers, the GAAR has
not provided more certainty. They fear that the very fact of being referred to
the GAAR panel will incur a degree of opprobrium, irrespective of the legality
of their planning. In effect, HMRC will have the legal equivalent of a ducking
The GAAR is being introduced into a system of governance
where, as seen above under problems of definition, there are already
considerable restrictions on tax planning which might be considered to be
abusive or artificial avoidance. Apart from wide ranging anti-avoidance
legislation, the courts can view the legislation purposively and apply it to the
facts from a commercial perspective.
The GAAR is thus only required
where planning satisfies the considerable restrictions imposed by the current
extensive body of legislation and case law. In the provocative words of David
Goldberg QC: “…the GAAR will apply to deny a tax advantage where the purpose of
the legislation is to give that advantage. And the basis for the denial of the
intended advantage is the disapproval of the administrator”.
There seems little doubt that tax avoidance will remain high
on the agenda of politicians and revenue authorities for the next few years. Tax
rates are unlikely to come down to a point where there is no incentive to
undertake tax planning. There is unlikely to be the political will to introduce
something like a common consolidated corporate tax base (CCCTB), as proposed by
the European Commission (EC), because of the political loss of sovereignty which
such an action would involve.
Few thought that the pre-GAAR world was
perfect. However, the justification for change should not be whether the old is
perfect but whether the new will be better than the old. Taxpayers already had
a major incentive to consider whether a particular type of tax planning
‘worked’, given the legislation, the case law, and the potential financial
consequences both in tax and penalties. They will now need to consider whether
the planning is GAAR-able under non-legislative guidance, how a non-judicial
GAAR panel will respond, and options for appealing the decision of the GAAR
panel where required.
Our new GAAR-able world has not simplified the
UK tax system, or provided more certainty. It has given tax administrators the
power to place the accusation of ‘tax avoidance’ before what might be termed the
court of public opinion.
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