This amendment to the 2009 Finance Bill was tabled for discussion last July by the Lib Dems:
‘(1) If, when determining the liability of a person to taxation, duty or similar charge due under statute in the United Kingdom it shall be established that a step or steps have been included in a transaction giving rise to that liability or to any claim for an allowance, deduction or relief, with such steps have been included for the sole, principal, main or explicit purpose of securing a reduction in that liability to taxation, duty or similar charge with no other material economic purpose for the inclusion of such a step being capable of demonstration by the taxpayer then subject to the sole exception that the step or steps in question are specifically permitted under the term of any legislation promoted for the specific purpose of permitting such use, such step or steps shall be ignored when calculating the resulting liability to taxation, duty or similar charge.
(2) In the interpretation of this provision a construction that would promote the purpose or object underlying the provision shall be preferred to a construction that would not promote that purpose or object.’
There is an uncanny likeness to another one I noted here. As is apparent, I am author of both amendments.
We need them very badly, for reasons I note here and here.
And on this occasion it’s good to see my work flowing through into the Coalition.
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Sounds good. Let’s try a case study:
A shop (say Top Shop) makes profits. It pays its due tax on those profits. From the Profit after Tax, Dividends are paid (lets call her ‘Mrs Green’). She is not a UK Tax resident so pays no tax on the dividend.
HMRC is now short of receipts because Mrs Green hasn’t paid what HMRC might have anticipated were she a UK resident. Which she is not.
Now – I’m guessing that the relevant step to be ignored under your GAAP provision would be the step whereby ownership was transferred from Mr Green to Mrs Green. One might argue that the primary purpose of that step was simply to secure that reduction/elimination of tax due on the dividend.
But my understanding is that intra-marriage transfer of assets is specifically permitted in UK law. So Mrs Green simply reminds HMRC that the step or steps in question *are* specifically permitted, and points HMRC to the relevant legislation.
Would a GAAP have changed the outcome in the the case of the ‘Greens’? As a non-accountant it’s not clear that it would, and at the very least a debatable point sounds like the mother of all money spinners for the Tax lawyers and Tax accountants to argue endlessly over the definition of economic substance.
Re (2): What is the purpose of (1)?
Re (1): What if the transaction you refer does not give rise to a liability BUT the taxpayer acquires a “tax benefit” from the transaction?
@Gary
I think that Richard might argue that the settlement provisions should be amended to catch situations like this, meaning that the income would be taxable on Mr Green irrespective of the fact that it is actually the property of Mrs Green.
It’s a different issue, I think. Just because the GAAR doesn’t help in the situation you described doesn’t mean it is worthless however.
@Adam
err..OK…so a General Anti Avoidance Provision doesn’t actually stop a basic, obvious and topical example of ‘general tax avoidance’?
I think I just might have spotted a flaw.
The only people who will win under a GAAP are lawyers.
@Gary
Hang on
I never said it was a universal panacea
It’s a tool
A back stop
And it will never replace purposive legislation
But it will empower it
@Richard Murphy
Fair enough. I imagine the Guardian set will be pretty dissapointed though: “great – a general principle that can sock it to the Greens!” is likely to be a common initial reaction.
You might want to think through some ‘use cases’ where it would have worked on a *material* scale.
Imagine a UK phone company that owned a German phone company (lets call it ‘Voice & Data Phone’). The German phone company makes a profit, pays tax on that profit and exports that profit to Luxembourg. The UK company repatriates the profit from Luxembourg at very low tax rates.
Now I’m guessing that the relevant step to be ignored under your GAAP provision would be the step whereby the proceeds were transferred to the UK via Luxembourg. One might argue that the primary purpose of that step via luxembourg was simply to secure a reduction of tax due.
But if that phone company actually held its European roaming and content operations in Luxembourg, employing many staff and adding real economic value through aggregating roaming traffic for the good of the Group, it would simply explain the economic substance of the operations to HMRC who, of they didn’t understand telecoms so well, would ask an independent expert to explain it to them/the court.
Would a GAAP have changed the outcome in the the case of ‘Voice & Data Phone’? As a non-accountant it’s not clear that it would. This has the look and feel of a trough that City Lawyers and Accountants could feed on for a long, long time.
Do you see where I’m going with these examples? Looking back over the recent, material examlples you have raised, what *would* this Principle have stopped without just feeding the City?
Gary,
Australia has had a general anti-avoidance provision (part IV A) in Australia since 1981. See here http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/ and scroll down to Section 177A onwards.
You are right about it being a bonanza for lawyers/accountants. Some behaviours seen in Australia (haven’t lived there a while so my knowledge may be out of date):
– The ATO (Oz Tax Office) is very reluctant to litigate on this part of the Act for the reasons you suggest (ATO doesn’t want courts placing limits etc on it).
– The big end of town knows the ATO likes to settle. They play the game, lots of posturing, and eventually a deal is struck. After both tax advisor and tax inspector has done a lot of ‘work’ justifying their respective existence, and in the case of the advisor, his fee to the client.
– The little guy is unlikely to have the resources for this exercise, and is more likely to capitulate at the first sign of trouble with the ATO.
– There have been a number of high profile ‘defections’ of senior ATO officials (including Deputy Commissioners, I think??) over to the big law and accounting firms.
The idea it has put the Tax sections of the big law and accounting firms (and the structured finance depts of the big I-banks) out of business (so that tax has become simply a routine ‘compliance’ activity) didn’t happen nearly 30 years on. They are still doing pretty well, and I assume they are doing more for their money than simply helping taxpayers fill in their forms.
If we adopted this in the UK, we can look forward to Vodafone-type settlements becoming commonplace. Something I very much dislike. I much prefer ‘rule of law’ rather than ‘rule by negotiation’ which this will eventually become. Think of the opportunity for corruption, political wheeling and dealing etc. Yuck!
I agree with the philosophy behind cracking down on tax avoidance. I do think people should pay their taxes. And I dislike the waste of human endeavour put to dreaming up these schemes — such skill can be put to much better use. But I don’t think this is the way to go.
Cheers
@Gary
I love this stuff – and that from Adrian
Sure this probably won’t be litigated – the whole point f this law is to change behaviour
It does change behaviour by increasing risk
If it does so it works
That’s its whole point
When it’s litigated it has, to some extent, failed
@Adrian
The Australian precedent confirms my every suspicion.
I’m not saying eggrarious tax avoidance is always right, but I am saying that this doesn’t look workable, and the law of unintended consequences will prevail.
Winners: City Lawyers, Accountants, Tax Inspectors, corruption
Losers: small businesses, taxpayers, rule of law.
@Richard Murphy
OK, let’s say nothing gets to court. Let’ say for now it’s all about risk influencing behaviour.
So what *is* the risk? Maybe the risk is that HMRC *will* litigate against our hypothetical ‘Greens’ or ‘Voice & Data phone’. But the Australian precedent says they wont litigate, and you and I both know that’s what will happen here. Our Appellants in these case studies know that too. So that’s not really the risk.
More likely, the risk goes something along the lines of: “look here is a potential tax trick. The law isn’t perfectly clear on this one. I’m not sure how this will pan out in court, but it doesn’t matter, ‘cos it wont ever come to that. I’ll negotiate behind closed doors, reach a settlement in a smoke filled room and reach a compromise noone really understands.”
I see *that* risk all right, but its not a risk borne by the the big firms at all. On the contrary, the risk is being borne entirely by me as a taxpayer. I know something of ‘tax settlement by negotiation’ in other countries, and I don’t recommend it.
@Gary
Get real
Tax is always negotiated at that scale
Indeed, whenever HMRC start to enquire
That’s the reality
This pretence of certainty all you guys ask for is just that – a pretence you like to put up
Live with the uncertainty of life and its ambiguities – even in tax
That’s the reality now and always will be
A GAntiP helps define how that uncertainty is managed better
I believe the culture in Australia has already changed and the clamp down on tax avoidance is staring to take hold.
Let’s look at the Greens, shall we.
Philip Green’s tax planning with his wife works because under the current law he is able to live in the UK anf the two of them are happy that she lives in Monaco. Wouldn’t work for some couples, but it works for them.
Let’s just say that his planning doesn’t work any longer and that as a result he cannot spend so much time in the UK. He decides that he isn’t going to accept those dividends being taxed in the UK so he decides to go as well to Monaco and actually live there. Or indeed somewhere else. Absolutely no more tax is collected. TopShop’s UK high street profits continue to be subject to Corporation Tax as per now, but HMRC don’t get their hands on those dividends at all. They are simply UK dividends paid to a non-UK resident.
Is there a tax avoidance motive there ? Individuals are entirely free to leave the UK and the UK welcomes overseas investment by non-residents, especially when lots of Corporation Tax results, as well as lots of jobs.
The bigger hurdle here is EU law. EU law already overrides UK domestic tax law in many respects. Under the EU laws there can be no discrimination against transfers of capital to other EU member countries. If a UK resident is discriminated against by being adversely taxed in the UK under a GAAP in respect of a transfer to a Luxembourg, Dutch or Irish or Cypriot or Maltese company, then as things currently stand I believe the EU will say that the GAAP cannot be applied to such a transaction as its discriminatory and thus illegal.
Without the EU, the UK can do what it likes. But if the EU wishes to retain free trade and free movement of individuals and capital then the UK cannot ignore EU law. Not such an issue of course if the EU is disbanded…
@Richard Murphy
What recent and material instances of tax avoidance *would* GAntiP have prevented?
All I’m looking for is just one recent and material instance where the taxpayer would have benefited without the lawyers and accountants bonanza.
We can come back to the personals about who knows more about the real world of tax negotiation.
But one example would help build the ‘use cases’ to take to the Guardian and TUC.
Any takers?
Not just Richard?
@Gary
While you continue to take such absurd – and absolute position s- ones I could never endorse – you’re not worth debating with
This may come as a shock to you but the world is not black and white
And sure I would not expect anyone to want to litigate – but they could, of course
Out hee in the real world these choices are made
Not in yours it appears
@Michael Hardy
Australia is currently undertaking a full-scale review of Part IVA, particularly to determine whether the current provisions (including SAAP/TAAR’s).
One of the aims of the Treasury is to improve the certainty, integrity and simplicity of Australian anti-avoidance provisions – I am sure that the Aaronson committee will keep a close eye on developments.
@Richard Murphy
OK – fine. I concede the litigation point entirely. I apologise. It is perhaps extremist of me to expect legislation to result in litigation.
I think the kernel of the question remains though – would this GAAP prevent the eggrarious examples of tax avoidance you seek to curb? If it wouldn’t have worked in the Top Shop or Vodafone instances, why would it work in future instances? In what instances *would* it work?
In almost any tax enquiry, the end settlement and liability is the product of negotiation. This is true even in the case of small businesses, where the quantity of data is comparatively limited. Larger companies must be engaged in almost constant negotiation even before any enquiry, becasue the quantity of data is so large. Even when preparing a set of accounts, there will be areas where there is uncertainty, with the best will in the world. Certainty in terms of tax outcomes is never possible.
Hmmmm… it seems like only one of Richard and Gary has “real world” experience worth listening to.
Perhaps Gary should start a blog
@ Rupert
I think what you are pointing out is that even emigrating could be interpreted as a step designed to minimise a tax liability. Is that what you were getting at?
@James from Durham
You are a voice of sanity
@Gary
If you can’t debate maturely please don’t try
There’s nothing extreme about this
It’s likely that 0.0000001% or less of tax cases are litigated
the law still applies to the rest
What is your problem with real world scenarios?
@Gary Taylor
Another crass argument from you – which is why I’m stopping wasting my time on your absurd points
If I have meningitis and go to hospital I need antibiotics not heart surgery
That does not invalidate heart surgery
Actually – a GAntiP may well have hit Vodafone – there was an artificial step
But the point is no rule suits all purposes
So what
It does not invlaidate it
You’re choosing examples that may have no such step and then saying it does not work
the words straw man apply
As ever from those defending the abuse inherent in the status quo
Back to Gary’s initial point regarding transfers between spouses:
Why can’t Parliament make it clear in the legislation what can or can’t be done? The answer: its too hard!
On one hand it is right for us to consider the wife to be a separate economic entity — not her husband’s chattel etc.
On the other hand, the ‘economic substance’ is that many (most?) couples (married, de factos, gays in a civil partnership etc) really do act as one unit. That’s how my marriage works and I would assume it is typical. What’s mine is yours etc. It really makes no difference to me (in terms of economic benefit) whether assets or income is in my name or my wife’s. My standard of living is unaffected and so is hers.
Whilst it may be wrong to suggest that Tina Green earned all of the income she has received from Arcadia, it is equally wrong to suggest she earned none of it either. If they went through a divorce, her contribution would be seen as enormous, given they have been married a long time. And a lot of that would be a reward on risk which she bore as much as her husband (as far as I know). If hubby had got it wrong, she would have suffered the same as him.
This is a difficult balance requiring the wisdom of Solomon, and there is no obvious middle ground. If it is too hard for Parliament, what chance should a HMRC officer have of working this out?
@Richard Murphy
Based on your Gantip – what was the artificial step in Vodafone that lacked economic substance?
If you recall, the Appeal Court ruled that the UK CFC apportionment will not apply to an EU resident CFC if: (a) it was/is actually established in the relevant period, and (b) it carried out genuine activities.
@Adrian
Feminism created separate taxation
But progressive taxation requires taxation as a household….
Yep. Agreed. And I’ve never disputed it (go on and check – I just have). Rather what I did say was that the GAAP would lead to more negotiations and settlements.
So the question is not whether negotiated settlements exist now (of course they do – Vodafone being a topical case in point); the question is whether we are happy for Vodafone-type settlements to become more common.
And of course we already know we most definately do *not* want more of that ‘cos Richard has told us already that it simply doesn’t work (1).
Do we really want to press on with an initiative that creates more of these negotiated settlements that Richard dissaproves of? Really?
(1) http://www.taxresearch.org.uk/Blog/2010/11/16/vodafone-hmrc-and-regulatory-capture/
@Gary
All deals are negotiated#
James has already told you that
A GAntiP adds to the strength of HMRC’s hand
Of course that’s a win
*My* tax isn’t negotiated. Nor should it be.
But anyway, it’s only a win if it actually changes outcomes, and noone is willing to explain in practical terms how or in what circumstances this win would be created. It doesn’t seem to apply to the topical examples, and noone seems to offering up better examples.
I’m not in the pay of the Global NeoCon Conspiracy ™, nor am I saying eggrarious tax avoidance is always right, but I am saying that this doesn’t look like it will achieve its noble objectives and the law of unintended consequences will prevail.
“Feminism created separate taxation
But progressive taxation requires taxation as a household….”
I don’t disagree with you, but wonder what the reaction of our protesting friends outside Top Shop would be if they realised this.
Who wins? Feminism or progressive taxation? I have no idea.
And it is isn’t just feminism. What about gay couples? Or by giving ‘loopholes’ to unmarried couples not available to those who are married or in a civil partnership – with all the fun of the fair those issues arouse.
And getting back to Vodafone or Cadbury, how can the tax issues be judged in isolation from the wider ‘freedom of movement in the EU’ issues?
It is impossible to claim ‘spirit of taxation’ and such like by looking at tax in a vacuum. It needs to be taken into context of other things going on outside the narrow confines of tax.
Complicated stuff. Now if Parliament can’t make its intentions crystal clear on these things, it plain unfair to try to delegate these big questions to unelected HMRC officials. It isn’t their job.
I have no problem with a crack down on avoidance. None.
However, any provision like the one suggested above (which will entail Vodafone-type settlements beoming commonplace as we all seem to agree on in this post) is a sincere admission that the State has lost the intellectual argument on how to tax its population.
@Gary
Methinks you doth protest to much
“’m not in the pay of the Global NeoCon Conspiracy ‚Ñ¢”
I thin k you are
It’s why you’re on the banned list now
You “General anti-avoidance” provision is nothing more than a statement of the Ramsay principle or the ruling in Furniss v. Dawson and is thus completely superfluous. It wouldn’t have prevented any successful ta avoidance since the mid 1980s.
Gary Taylor
Re your posting #21, what I meant was that emigration to another member country of the EU may well be driven by a tax avoidance motive, yet at the same time for the UK to attempt to apply a GAAP to attack tax-motivated emigration to another EU country would seem to me to be in direct contravention of EU laws facilitating the free movement of labour and capital within the EU.
It is easier to see how a UK GAAP to attack tax-motivated emigration could apply to individuals emigrating from the UK to non-EU member countries, but EU member countries such as Malta, Cyprus and Belgium would seem to be wide open to such individuals, even if Monaco and the Crown Dependencies would be problematic. It would only take the likes of Philip Green and the Candy Brothers an extra hour to fly to Malta instead of to Monaco in their private jets.
@Alex
Oh it would
It has stat backing
It changes jurisprudence
And it can’t be over-ruled as Westmorland and barclays did…
[…] also note, this is something that a General Anti-Avoidance Principle could have killed, easily. And then we’d be better off […]
@Adrian
You mean tackling tax abuse is losing the argument?
I think that says all we need to know about you
Westmorland and Barclays, McGuckian etc don’t “overrule” anything. They merely clarify interpretation. HMRC may think they were overruled in Barclays and Westmorland because they lost, but all htat happened was that the judges told them that their interpretation of Ramsay etc was wrong.
I hardly think your words would have any impact in the Barclays case where ownership of a very valuable piece undersea infrastructure passed from the owner to the bank for many years.
“You mean tackling tax abuse is losing the argument?”
No, tackling it IN THIS MANNER is losing the argument.
@Adrian
Oh, tell me your alternative….
And don’t tell me tax simplification because you and I both know that’s crap
@Alex
Oh yes they would – part 2 would have completely changed it
part 2 is the killer in what I propose
Despite 40 posts on the matter, in my opinion, Richard has singularly failed to show how a GANTIP would work, or even what it would prevent. A GANTIP hasn’t worked in any country.
I also notice that no-one other than Richard has supported it. Even James from Durham, who can usually be relied on to tag along, did not endorse it.
As to the (de)merits of it, it seems to me fundamentally unfair that a taxpayer should have to abide by “rules” when preparing tax computations, but the tax authorities are able to rely on “principles”. Either both have to go by “rules” (i.e. legislation), or both have to go by “principles”.
How will a GAAP judge whether transfers between husband and wife, permitted specifically by law, are okay or abusive? How will it help HMRC get more tax from a dividend paid from post-tax profits to a foreign national living overseas?
Answer: it won’t. We have the rule of law for a reason: to protect ordinary people from the thuggery of other people, in particular government. You can’t sweep aside centuries of tax law with an airy fairy principle that one’s tax liability becomes what HMRC/Richard Murphy/ukuncut says it is, no more and no less.
@Pat Lindon
a) right wingers dominate comments here – despite my best efforts
b) they’re fanatics who are beyond reason so will never be persuaded
So as a straw poll that’s useless
And your definitely of fair is not one widely accepted
Try reading Rawls and Sen
@Phil Richardson
It would have killed Arctic Systems
Voila
Oh no it doesn’t. Read the Barclays judgement and apply the same logic to your wording which refers to an inserted step with no commercial purpose. The judge is going to say that a contract for sale of an asset for severeal hundreds of millions of pounds is not a contract without economic consequences and that the leaseback with a third party exposure of several hundreds of millions of pounds on which the bank earns a return of tens of millions of pounds over 15 years is a material economic purpose.
@Alex
And I disagree
My suggestion builds the concepts in Halifax into UK law
And even makes clear what was read in in Vodafone was rioght
I am not sure where you are going with Halifax. The ECJ was clear that the doctrine was not a general anti-avoidance principle when it came to the “abuse of right” (6th Directive).
However, if you are trying to push the doctrine into domestic law, it probably would result in an anti-avoidance measure that provides that if tax avoidance is the sole or main purpose of a transaction or scheme, such tax benefit will be counteracted.
I fail to see how your Gantip or even the Halifax case helps finger Vodafone for abusive tax avoidance – in the absence of a factual enquiry, nobody has ever determined that Vodafone’s structure was artificial or even designed solely to avoid taxation.
You don’t change jurisprudence, it develops, largely through decisions of the court.
@JayPee
Nonsense
Of course it can be changed by legislation