Why the UK needs a general anti-avoidance principle (GAntiP)
and why
Graham Aaranson's General Anti-Avoidance Rule (GAAR) won't work
Richard Murphy FCA
February 2012
Background — and what the government is proposing
In December 2010 the Government[i] asked Graham Aaronson QC to lead a study that would consider whether General Anti-Avoidance Rule (GAAR) could deter and counter tax avoidance, whilst providing certainty, retaining a tax regime that is attractive to businesses, and minimising costs for businesses and HMRC.
Aaranson reported in November 2011. He, to use his own words[ii] “strongly recommended the introduction of a GAAR specifically targeted at highly artificial and abusive tax schemes”. But he did at the same time in his report[iii] say “I have concluded that introducing a broad spectrum general anti-avoidance rule would not be beneficial for the UK tax system. This would carry a real risk of undermining the ability of business and individuals to carry out sensible and responsible tax planning. Such tax planning is an entirely appropriate response to the complexities of a tax system such as the UK's.” The inherent conflict within his report is readily apparent.
As the Exchequer Secretary to the Treasury (David Gauke MP) noted in his response[iv] to the report “Mr Aaronson has recommended a narrowly focused GAAR which should initially apply to the main direct taxes — income tax, capital gains tax, corporation tax, and petroleum revenue tax, as well as national insurance contributions”. That is a fair summary: what is being proposed is a narrowly focussed GAAR that has the sole, and very limited aim, of tackling what it calls “the most egregious tax avoidance schemes [that] focus on prescriptive tax rules which are not susceptible to contextual interpretation”.
What's wrong with the government's proposal
The government appears to have endorsed Aaranson's GAAR, making claim in the process that it is serious about tackling tax avoidance. Unfortunately the two claims are not really compatible. Aaranson's GAAR will not tackle almost any of the recent high profile tax avoidance issues that have reached the press and rightly attracted outrage including:
- The recent problem at the Student Loan Company[v]
- The abuse of Channel Island's VAT[vi]
- The use of offshore, such as Google billing all its sales in the UK from Ireland to avoid maybe £100 million in tax a year[vii]
The reality is that this GAAR will stop a handful of the most extreme tax planning cases a year, and that is it.
It has to be said this is not surprising. One of those on the committee advising on this GAAR was Lord Hoffman. As a House of Lords judge he was instrumental in reversing the impact of the 1982 House of Lords decision known as Ramsey[viii] which effectively gave the UK a GAntiP because as Lord Diplock subsequently noted when applying the decision[ix] in order for the Ramsay principle to apply, there had to be:
1) a series of transactions; which are
2) pre-ordained; and
3) into which there are inserted steps that have no commercial purpose apart from tax avoidance.
Under Ramsey the artificial step inserted for tax avoidance was ignored when calculating the tax due— effectively delivering a general anti-avoidance principle.
Lord Hoffman overturned this logic in the 2001 House of Lords case called Westmoreland Investments[x]. He did two things in so doing. First, he ignored principles and reinforced the right of a person to be taxed in accordance with the strict wording of the law, whether the result was desirable or otherwise. As such he reinforced the power of prescriptive tax rules and downplayed the importance of contextual interpretation. In other words he created the problem the currently proposed GAAR is supposed to address, which is, no doubt, why it does it so half-heartedly. Secondly, he reinforced the legal right to tax plan within those strictly prescriptive tax rules. This is the favourite game of the tax avoider. As such he was the last person who should have been engaged in the process of producing a GAAR and the GAAR we are being presented with has minimal impact, precisely because that is what he has sought to achieve as a judge.
There is an alternative
The GAAR we are being presented with will not work. What we need is a legal embodiment of the Ramsey principle as noted above. I drafted such a proposal, which was tabled in debate on the Finance Bill 2009 by John Pugh MP and Michael Meacher MP. It was a general anti-avoidance principle in two clauses that said:
"1 If when determining the liability of a person to taxation, duty or similar charge due under statute in the UK 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 having been included for the sole or one of the main purposes 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 preferred to a construction that would not promote that purpose or object".
I believe that this would deliver the Ramsey principle into law. That's not what Hoffman and Aaranson wanted, but it is what the UK needs.
And I happen to believe that this also delivers a tax regime “that is attractive to businesses, [whilst] minimising costs for businesses and HMRC” to quote the government's objectives, noted above. That is because such a general anti-avoidance principle would:
- Provide certainty because anyone would know that artificial steps in transactions will not work;
- Will create a level playing field for all business and people because those, to quote the Prime Minister[xi], “who have the fancy corporate lawyers and the rest of it” will be subject to “a tougher approach” so that “very wealthy individuals and … bigger companies …. pay their fair share” by being denied access to loopholes;
- Will ensure business and its advisers focuses on making money and not on avoiding tax, to the benefit of the economy at large;
- Will reduce HMRC's costs by letting them tackle abuse directly.
Examples
To give examples of how the GAAR would work, using the cases noted above:
- In the case of the Student Loan Company, the inclusion of the personal service company in the transaction would be the artificial step to reduce tax. The result would be that it would be ignored and PAYE would have been operated, as was obviously necessary. The same would be true of all the other similar arrangements now in force throughout the civil service. If a case had to be made for a general anti-avoidance principle then this is it.
- In the case of Channel Island's VAT abuse, shipping the goods to and from the Channel Islands for no reason but tax saving would have been the artificial step and would have been ignored for VAT purposes. Hundreds of millions of pounds would have been saved as a result.
- In the case of billing sales from Ireland when those sales are arranged in the UK, the billing from Ireland would be the artificial step and the sale would be deemed to have been made in the UK.
In other words, this general anti-avoidance principle works where the GAAR will not.
The result is that tax compliance would be promoted by this general anti-avoidance principle where tax compliance is seeking to pay the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes. And that is why it is exactly what the UK needs right now and Aaranson's GAAR is not.
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Macniven v Westmoreland Investments did NOT overturn Ramsey. What it did do was show that HMRC’s interpretaion of Ramsey was wrong. That is two very different things.
You are being highly disingenuous, as ever.
Far from it – Templeman, for example, said it was Westmoreland that was wrong, driven by a judge (Hoffman) who wanted to allow tax avoidance and who incorrectly qualified Ramsey
HMRC read Ramsey 100% correctly
Hoffman went out of his way to neuter them
You are wrong, like all wh seek to encourage tax abuse
I also suspect you’re very frightened your opportunities for abuse might be limited, soon
And yet 4 other Law Lords on the Bench concurred with Hoffman. Lets not forget that it was Templeman who was on the bench at the Appeal Court in Ramsay case – go figure.
I have figured
The Lords got it wrong
HMRC and Templeman got it right
The difference was Thatcher had appointed the Lords by the time of Westmoreland
“The Lords got it wrong”
I must say, that without any detailed explanation as to how you formed such an opinion, this is probably your greatest outburst of intellectual arrogance.
Do you think then, that the Lords got it right in Barclays?
I’m simply saying in my opinion they got Ramsey right and Wstmoreland wrong.
Hardly intellectual arrogance
More like common sense – which is the last thing Westmoreland was
and if you mean Barclays Mercantile – they got that wrong
You are incorrect with your assertions about Thatcher – Templeman was appointed durring the Thatcher regime.
The bench in McNiven were all appointed either under the Major regime or that of Blair.
You mentioned Hoffman was one of the panel reviewing the GAAR who were the others (Templemann perhaps) or others for balance? It does seem that an anti avoidance principal or even a narrow based rule in one are would be contrary to Hoffman’s prior ruling.
I would have thought some effort would have been made to address such a potential bias?
Does any change have to be statutory? or is it possible a Supreme Court or even EU court may challenge it in the future. I ask only as the politics within government may well be compromised by similar arrangements used by government.
The panel was biased against a rule and has ruled against a rule
Aaranson only wants to stop the ‘most egregious’ schemes
Hoffman got his way, as did Gauke
I haven’t been able to verify what Templeman said but I highly doubt he would have accused a fellow judge of wanting to allow tax avoidance.
The fact is that in Westmoreland there were commercial reasons for that recompany seeking to refinance and this indeed was Hoffman’s point. In Ramsay there we no commercial reasons save to avoid tax. That it what was distinguished.
As for a GAAR, it is notable that one party who is not calling for, and has never done so, is HMRC.
Just go and do a little research: Templeman was livid with Hoffman.
He wrote to me to tell me so.
Why don’t HMRC want a GAAR? Only because the current management don’t want to collect tax, and just want to reduce staff. That’s why. Do you think under Hartnett they’re credible on this issue?
Then in the interests of research, would you please publish this letter.
At present all we have is Templeman’s opinion as expressed in LQR 2001 and there was little in that article to indicate that “Templeman was livid with Hoffman”. It is noteworthy that Templeman’s opinion itself found strong disagreement from other eminent jurists and academics as much as it has found equally strong support.
It is also interesting that Aaronson was part of the Law Review Commitee in 1997 (together with Templeman and others) that appeared to recommend a limited, sensible GAAR (incidentally with the initial onus of proof being on the Revenue). This was rejected by the government – outright. So in some respects, Gauke is actually moving where others feared to tread.
No, I will not publish the letter
Do you think the PSC was deliberately inserted to avoid tax in the Ed Lester case?
His original contract (May -Dec 2010) at SLC was in an interim managerial role (admittedly as CEO) and there was probably no intention for him to be permanent or an employee. The role only existed until a permanent replacement could be found. His consultancy existed before the SLC work and he had had various government clients. If he had been supplied by a big consultancy under the original terms then he would not have been considered an employee of SLC.
It all changed in January 2011 when the 2 year contract was agreed (including a pension payment). It looks like he was wanted as a permanent employee, but the original interim contract appears to have tied him to providing his services through the HR agency Penna, and they would have had to be paid £82k to get out of the arrangement. So it might not be a clear cut case of artificial steps being added just to avoid tax.
The real issue with tax avoidance and tax efficiency is that a person can legally be liable for significantly different amounts of tax and different types of tax depending on small diffferences on how things are arranged (and some of the arrangements are not purely down to deliberately choosing the best option). There should be a better attempt to remove the different levels of taxation (e.g. between employment and investment and capital gains income), which would remove the issue.
An employment can last an afternoon
Ask a supply teacher.
The answer to the question you pose therefore is ‘yes’.
I’m no expert on supply teachers but I guess they are unlikely to be an employee of the school. They are more likely to be an employee of an agency or self employed. I suppose some may even operate through a PSC (and hopefully not one of the 500k companies that do not send returns).
Some companies may bring in accountants or lawyers (or David Milliband) for an afternoon or a year for their professional services and they are never considered employees and they operate through a PSC.
There is a big grey area around contracts for service and contracts of service and different taxation, and I don’t think using a GAAR will solve it. I think your recommendation on reforming small business tax regarding removing any tax advantage either way is the only solution (and hopefully doesn’t give big companies an advantage over small companies or the self employed).
All supply teachers are PAYE. That’s it. End of story.
If it can be done there it can be done elsewhere
That’s why your logic is wrong
And that’s why a GAAR can work – easily. The moment the risk is on the employer they’ll pay. The only problem is right now they can shift it via a company to the ’employee’
See my recommendation on how to reform small business tax re your last point.
And re CGT it’s simply – Nigel Lawson solved that one
Richard, supply teaching isn’t a good example. Yes, supply teachers themselves are usually on PAYE, either because they are employed by an agency or because they are employed by the LEA on a “key worker” basis. But peripatetic teachers, who may actually be doing more regular work in a particular school, generally are not – they are self-employed. Some peris work through limited companies, too. This is an extremely grey area and some schools are in my view on the shady side of the law.
All teachers are PAYE by HMRC regulation
Those who are not are breaking the law
It’s why I chose the example
Richard, with respect, peripatetic teaching is my day job, and I have been doing it for over ten years on a self-employed basis – like every other peri I know, and I know most of them round here. I’m not aware of any HMRC regulations that apply to us and HMRC has never once questioned the basis of my self-employment. The whole peripatetic teaching industry works on a self-employed basis. Check with the Incorporated Society of Musicians (our trade body) – they will confirm this.
Read this
http://www.hmrc.gov.uk/briefs/national-insurance/brief2509.htm
That’s fine if the pupil pays direct
Not if the school does
Oh, and just to add to that – my other half does both supply and peripatetic work, and he is on PAYE for supply and self-employed for peripatetic.
What I’ve said applies to schools in the public sector, but not necessarily the independent sector. When I did peripatetic teaching for an independent school I was on PAYE – apparently at HMRC’s insistence – even though the cost was being recovered from parents. Seems HMRC don’t apply the same rules in the public sector.
Which is why I argue for much stronger HMRC regulation and many more people to be employed by them or we end up with unlevel playing fields and destructive market environments
Richard, I’m well aware of those rules. But as I said in my original comment, there are grey areas (for example one or two individuals funded by the school for GCSE coaching within a generally parent-funded portfolio), and some schools in my view are definitely on the shady side of the law. But we peripatetic teachers don’t get to choose whether our work in a particular school is on an employed or a self-employed basis. Schools decide, and if we want to work we have to go along with how they want to organise things. Targeting peri teachers misses the point. It is schools who are possibly breaking the law.
I agree
but getting it right remains important – and is another reason we need to seond more on HMRC
equal treatment is part of justice
Very interesting – your proposed GAAR places the onus on the revenue to prove avoidance. I thought you were against the burden of proof being on the revenue authorities.
But the onus to disclose information would be on the taxpayer
It is always thus
There has always been a responsibility on the taxpayer to make full disclosure when required to do so by tax law.
The point that I am making is that, should revenue wish to invoke the mechanism provided in your GAAR, as you have worded the GAAR, they will bear the burden of proof in proving tax avoidance and artificiality should the courts be called upon to adjudicate.
Taxpayer can disclose as much probative evidence as required – HMRC will still have to prove their case in court.
Again, was ever thus