Look out, tax avoidance will soon be illegal
I know what you’re thinking, it’s tax evasion that’s the illegal one (ask Lester Piggott) but in recent times tax avoidance, acting within the letter of the tax law, has also become a shady occupation. Just ask Secretary to the Treasury, Danny Alexander who said “Tax avoidance and evasion are unacceptable in the best of times but in today's circumstances it is morally indefensible” at the Autumn 2010 LibDem conference. Yes, the same Danny Alexander who was accused by the Telegraph of using the vagaries of capital gains tax law to avoid tax on the sale of his second (constituency) home.
Where the line is drawn between legitimately avoiding tax and doing so amorally is a difficult question, with tax-saving schemes such as ISAs or childcare vouchers at one end of the spectrum; offshore protected cell companies for footballers at the other end. However, a new report published by the Treaury has concluded that we do need a blanket anti-avoidance rule.
The idea of such a general anti-avoidance rule (GAAR) has been around for some time, but many tax experts and commentators fear that such a heavy-handed approach would punish the many to catch the few. Now, a team of tax experts, including academics, barristers and judges, has advised the Treasury that in their opinion, a GAAR is the way forward for the UK and would help prevent schemes “widely regarded as an intolerable attack on the integrity of the UK's tax regime."
However, what is especially interesting* about this report is the acknowledgement that a rule that banned any tax avoidance completely would damage UK business by preventing reasonable tax planning. "Such tax planning is an entirely appropriate response to the complexities of a tax system such as the UK's."
So, it looks like we have the beginnings of a sub-division within tax avoidance. Bad stuff will become contrary to tax law (i.e. illegal) and “responsible” stuff will be OK. A targetted anti-abuse rule would “ level the playing field for businesses, depriving tax avoiding businesses of the competitive advantage they gain from tax abuse.” A blanket rule could also reduce the cumbersome weight of the current UK tax law.
The report says "The starting point should be to see whether the arrangement is abnormal, in the sense of having abnormal features specifically designed to achieve a tax advantageous result. If an arrangement has such an abnormal feature or features then it becomes in effect "short listed" for consideration as a potential target for the general anti-avoidance rule (GAAR)."
Cynics could argue that the wealth of case law on the subject, such as the Ramsay principle which causes circular transactions to fail are already serving this function, but the report highlighted the SHIPS 2 scheme as one successful arrangement which allowed a complex series of transactions in life insurance contracts, resulting in a tax loss for the scheme user but no economic loss.
The report also recommends a number of ‘safeguards’ to prevent application of a GAAR where this would be heavy-handed or unfair. Alongside safeguards disapplying the rules for “reasonable tax planning” or where there is no “intent to reduce tax”, it is recommended that the burden of proving an arrangement is not ‘reasonable’ falls on HMRC, rather than the taxpayer. Any arrangement that is considered unreasonable should then be considered by an Advisory panel made up of a majority of non-HMRC members.
The Chancellor has confirmed the Office of Budget Responsibility will make its Economic and fiscal outlook on Tuesday 29 November along with the Chancellor's Autumn Statement, but the Treasury has said it will announce if it intends to proceed with the report’s recommendations in next year's Budget.
*it really is interesting. Trust me.