Graham Aaronson QC's report for HM Treasury on the desirability of a General Anti-Avoidance Rule (GAAR) for the UK is published this morning, and I warmly welcome it.
There are two reasons for me saying that. First, in the days when Vince Cable and I used to talk he was quite a fan of my work, and as a result he and Matthew [Lord] Oakeshott put this idea, for which I had campaigned hard, into the LibDem manifesto on 2010. From there it went into the Coalition agreement and so I might, I think, fairly claim a small credit for the fact that this issue has reached this stage.
Second, and in the interests of full disclosure it is only fair to record I met Graham Aaronson twice during the course of his work, doing so on behalf of the TUC who I advise on tax. I did as a result have a chance to read drafts of this report and to input into the process, and both appreciated that opportunity and Graham's receptiveness to ideas, many of which he took on board.
So what of the outcome? Well, this is more like a principle than a rule, and I appreciate that. It would be hard to see how a piece of legislation could more precisely enact the will of parliament without using those words than this draft does. It's very clever in that respect, and I welcome that.
I also think that many appropriate checks and balances are built in to the drafting. HMRC cannot use this willy nilly, and that's right. This should be a tool of last resort and not a battering ram for widespread use. Appropriate defences for action are built in. Safeguards to prevent HMRC over-using the provision are included. The result is that the rule will be used against egregious cases, and not be aimed at all tax planning. That's right: where the law provides for choice planning is inevitable and right and I for one have never denied that fact.
But let's also be clear: this suggested rule says very clearly that things that may be legal can also be morally unacceptable and the chance to prevent a person availing themselves of that abuse should exist. That is an enormous step forward in UK tax law if it comes to be enacted and I welcome it. So should all wise companies and tax professionals, not least because this means no one is now obliged, even in their wilder moments, to mention these egregious schemes any more: they can simply say they are sure they will fail and as such can recommend clients to ignore them. Companies can also do so with a clear conscience, knowing the chance of failure in using such schemes has now increased, a lot. Anyone who does not welcome this is simply saying they think abuse of the law is desirable: it will be a foolish person who does that. Certainty is, incidentally increased because such schemes will also now be unavailable
But that said there are compromises which I would not have embraced. For example, I think the burden of proof should rest with the taxpayer in all cases when an action is taken under these rules. It has been made so hard for HMRC to begin them I think that the right balance. Right now that's not the case: in all but the cases most likely to impact on small business and individuals the balance of proof is on HMRC. That, curiously, is reversed in the case of what will arise for most small businesses and individuals and the impression that this is another measure that picks on the small player is reinforced as a result. That is unfortunate.
Second, I think there is real risk that the tax profession may have too much influence on the advisory board that will be established to run this GAAR. That would be a serious problem and more balance is required in my opinion.
Third, the scope is simply not wide enough. NIC and SDLT should be in from the outset.
I would hope that progress can be made on all these issues, but let's have no doubt about it: this is a very big step forward for tax justice and I warmly welcome this report and hope it moves rapidly towards becoming law. The Tories will need to be held very firmly to account on that one.
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“I think the burden of proof should rest with the taxpayer in all cases when an action is taken under these rules”
Whatever happened to innocent until proven guilty?
It does not exist in tax
The taxpayer says they are innocent when signing their tax return
It is always up to them to prove it
That’s how the system works, now
Howard, I don’t think innocence is an issue here. This is legislation designed to counteract abusive practices, not impose criminal sanction. However what Aaronson is suggesting is that the normal civil law practice is applied to the GAAR where the onus is placed on the party making the allegation to prove it on a balance of probabilities.
Well done, Richard. I don’t follow all the detail but it sounds on the right track. I don’t hold with the idea that all politicians are selfish/stupid/ in the pay of the corporations- although some are.
It’s encouraging to see that ordinary people , by which I mean you, can have an influence on policy. It would be even more encouraging if more people used their power and were not seduced by the modern version of the Roman ‘bread and circuses’. I suppose-but I don’t want to advertise on your website- McDXXXXds and X factor !
Not quite sure where you are coming from on the issue of burden of proof?
The proposal provides for the onus of proof being on the HMRC in all cases where abnormality (or the actions of the taxpayer were not a reasonable exercise of choice) is alleged by them – not under the law but under their discretionary power to do so.
Only where a taxpayer wished to defend the GAAR counteraction on the grounds that they had no intent to avoid tax is the onus on the taxpayer.
Seems pretty fair to me.
I think you have misread the rules then – taxpayer always has the benefit of the doubt and HMRC has to disprove it
I think that wrong
Section 5(1) of the draft GAAR states that an arrangement will not achieve an abusive result where the advantaged party (ie the taxpayer) can prove on a balance of probabilities that it wasn’t designed or carried out with the intent of obtaining a tax advantage.
That is unequivocally placing the burden of proof on the taxpayer.
In all other circumstances, without exception, the proposed GAAR places the burden of proof on the revenue authorities to show that (1) there is an abnormal arrangement, (2) that the abnormal feature has a sole or main purpose of achieving and advantageous tax result (ie. not reasonable tax planning) and (3) the counteractions are reasonable.
Effectively the burden is placed on revenue to show that the arrangement being attacked by the GAAR cannot be reasonably regarded as a reasonable exercise of choice. I dont know how this can be viewed as unfair to revenue – particularly as the legislation under scrutiny by the GAAR affords the taxpayer a choice on how to structure his arrangements.
The whole thing is based – perhaps inevitably – on a giant fudge: whether a particular course of conduct is or is not “reasonable”: given that it produces an advantageous result, consistently (ex hypothesi) with the intent of Parliament, why is it ever reasonable to pay more than the minimum? Aaronson’s answer, in effect, is that it is unreasonable when his advisory panel finds it distasteful (and hence an embarassment to the non-HMRC members in their private capacity as tax advisers). I have every sympathy with Aaronson, given the necessity to find an underlying standard which is just not there: I have been there myself in a former life. But it’s not a very exacting standard, even before the rats get at it. Even if it works, for a while, it leaves an awful lot of scope for “much-loved anomalies” which people who don’t live on Planet Tax (or, God help us, Planet Trusts) would find egregious if they could ever be informed about them in terms they could understand.