The new Guidance on the new General Anti-Abuse Rule (GAAR) in UK taxation has been published today. I sat on the committee drafting this guidance, and so there are some restrictions on what I can say about it, especially with regard to process, but no restrictions at all on what I can say about what it means.
First, let's get the obvious observation out of the way: despite all that I will say that is positive about the GAAR it remains the case that this is not the legislation I wanted to tackle tax avoidance in this country. I'll deal with that in a separate post, because this GAAR does have major structural problems within it.
And then let me say that within this constraint I welcome the GAAR and most especially parts A to C of the new Guidelines that are published to day.
The reason for my enthusiasm is that the GAAR Guidelines are without precedent as far as I know in UK tax law, because they are in effect legal precedent in their own right that any court has to take into account once Royal Assent is given. And that opportunity has been seized by those drafting them to fundamentally change the environment of UK tax avoidance law forever.
For over seventy years UK tax avoidance has been considered legal on the basis of four UK court decisions. As Part B of the new Guidance notes:
Amongst these Court decisions the following are routinely cited as providing legitimacy to even the most abusive tax avoidance schemes:
“My Lords, the highest authorities have always recognised that the subject is entitled so to arrange his affairs as not to attract taxes imposed by the Crown, so far as he can do so within the law, and that he may legitimately claim the advantage of any express terms or of any omissions that he can find in his favour in taxing Acts. In so doing, he neither comes under liability nor incurs blame.”[1]
“Every man is entitled if he can to order his affairs so that the tax attracted under the appropriate Act is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.”[2]
“No man in this country is under the smallest obligation, moral or other, so as to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores. The Inland Revenue is not slow — and quite rightly — to take every advantage which is open to it under the taxing statutes for the purpose of depleting the taxpayer's pocket. And the taxpayer is, in like manner, entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue.”[3]
And as the GAAR Guidance then notes:
The GAAR Study Group Report was based on the premise that the levying of tax is the principal mechanism by which the state pays for the services and facilities that it provides for its citizens, and that all taxpayers should pay their fair contribution. This same premise underlies the GAAR. It therefore rejects the approach taken by the Courts in a number of old cases to the effect that taxpayers are free to use their ingenuity to reduce their tax bills by any lawful means, however contrived those means might be and however far the tax consequences might diverge from the real economic position.The last quote from the judgment of Lord Clyde in the Ayrshire Pullman case epitomises the approach which Parliament has rejected in enacting the GAAR legislation. Taxation is not to be treated as a game where taxpayers can indulge in any ingenious scheme in order to eliminate or reduce their tax liability.
Accordingly, it is essential to appreciate that, so far as the operation of the GAAR is concerned, Parliament has decisively rejected this approach, and has imposed an overriding statutory limit on the extent to which taxpayers can go in trying to reduce their tax bill. That limit is reached when the arrangements put in place by the taxpayer to achieve that purpose go beyond anything which could reasonably be regarded as a reasonable course of action.
There are less obviously extreme views — which may be commonly held — that nonetheless cannot be regarded as reasonable for the purposes of the GAAR. Perhaps the clearest example is the view that it is the function of HMRC and the Parliamentary drafter to get the legislation right, and that if they fail to do so there is nothing wrong with individuals or companies exploiting defects in the drafting[4]. However, this is wholly inconsistent with one of the basic purposes of the GAAR, namely to deter or counteract the deliberate exploitation of shortcomings in the legislation. Accordingly, even if such views are held by someone who would ordinarily be regarded as reasonable, and indeed may be eminent in a field of work (such as accountancy or the legal professions), those views themselves would not fall to be regarded as reasonable for the purposes of the GAAR.
If the person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be. In other words, if there be admissible, in any statute what is called an equitable construction, certainly such a construction is not admissible in a taxing statute.
[1] Lord Sumner in Fisher's Executors v CIR [1926] AC395
[2] Lord Tomlin in Duke of Westminster v CIR [1936] AC1
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I look forward with bated breath to reading something >complimentary< about Mr Osborne in your blog then!!
As you say, a good start. Though I shall miss Mr Justice Crewe's turn of phrase.
D’ohh — that should read “Lord Clyde” (failing memory) — sorry!
As a citizen, small business owner, and tax payer – thank you!
Would you then be happy to see the Lobler case overturned on the same basis? http://www.bailii.org/uk/cases/UKFTT/TC/2013/TC02539.html (I know I would…)
The GAAR makes clear it cannot be used to reduce a tax liability
But should it be extended so that it can reduce an obviously unfair liability like the one in Lobler?
Equitable liability was a very useful concept, and indeed is pretty much what the GAAR seeks to impose – albeit only one-.
The implication that if someone got their tax planning wrong they could then retrospectively claim to use the GAAR to correct it is just to absurd to contemplate
But in Lobler it wasn’t tax planning gone wrong, it was just that he didn’t realise that the tax consequences of realising his investment in the way he did would be completely counter-intuitive and unfair.
He put some money in an investment, then took it out again in stages. He made no profits or gains, but the tax rules rules create an entirely artificial gain and an entirely artificial loss and say that the one is taxable and there’s no relief for the other.
If creating an artificial loss is abuse (and I think it is), why isn’t creating an artificial gain also abuse?
Because the law says it isn’t
And the GAAR doesn’t change that
No, the GAAR doesn’t change that.
The question is, *should* the GAAR say that?
After all, strictly the GAAR doesn’t yet say that anything at all constitutes abuse – at least, not until Royal Assent. Is this not the right time to consider amending it to work both ways?
I have already noted the problems that would be created if the GAAR could be used to reduce liabilities retrospectively on taxpayer appeal. The uncertainty that would create would mean this is never going to happen
But in Lobler, all that would have been needed is for the GAAR to allow HMRC to say that the liability shouldn’t have arisen in the first place.
At present HMRC has no discretion in this sort of case – or at least, it is not clear that it does. If the GAAR were to say that HMRC could refrain from collecting tax in a case where it would not be reasonable to suppose that the liability was reasonable, then Lobler would be in a much fairer position.
I’d like to turn the “could refrain” into “should refrain”, but of course that would need some guidance. But the GAAR mechanisms (advisory panel, etc) should work equally well both ways round to make sure it’s only applied in cases of manifest injustice.
Keep campaigning for a general anti-avoidance principle then
Ah, now that I’m undecided about. I’d like to see how the GAAR plays out before looking at whether the idea should be extended.
I wouldn’t want acceptable tax avoidance to come under threat, in particular, and given that there’s no clear line between acceptable and unacceptable I’m not happy with radical shifts.
So I’ve called your bluff
I thought I might
What bluff? I’m not bluffing at all, I try to make my views clear.
I don’t at all like abusive avoidance, as targeted by the GAAR. I’m unhappy with aggressive avoidance, like treaty shopping, but I find it hard to gauge the level of aggression accurately and so it’s difficult to separate it clearly from acceptable avoidance like choosing where to do business. I’d rather Government didn’t set up legitimate tax avoidance schemes like ISAs and R&D tax credits, as I think they’re better tackled in other ways, but they seem to be entrenched now so I accept that they’re always going to be around. And the new ATL R&D credits are much closer to what I’d like (though I’d rather they were grants than tax credits).
The GAAR is clearly good, in my view, as it tackles something clearly unacceptable in a relatively simple manner.
Your GANTIP is not so clearly good, in my view, as I’m not sure what it tackles or how it seeks to do so, and I’m concerned that it would make life far more complicated for small unobjectionable taxpayers without actually having much effect on the large aggressive ones.
Come on! That is one of the best starts to a week ever!
Do you think that your, dare I mention the word, interpretation of the guidelines is held by other members or are we likley to see a round of counter-interpretations? Forgive my hesitation but I’ve been around this long enough to not quite believe it will be that straightforward.
I do not think the Guidance leaves room for another interpretation
At least, I hope not
Obviously you have more of an insight into the views of your fellow committee members, Richard, but given the affiliation of at least two of them I’d be surprised if they don’t come up with an alternative interpretation.
Then again – as we’ve noted before when discussing this and related subjects – as the UK is well and truly committed to a race to the bottom in terms of corporation tax rates and legitimating various dubious practices, there’s a diminishing need for avoidance.
Additionally, I note from the most recent Private Eye that it appears that yet another corporate (HSBC) his struck a deal with HMRC – thus reducing their tax bill by a massive amount.
Nevertheless, one small but significant ‘victory’, I hope, and well done to you for the role you’ve played in that.
I agree with much of what you say – and I remain of the opinion that the GAAR is overall far too weak
But the Guidance makes the best of it
As for my other former Panel members, I wait to see what they say
Good on yer, Richard!
“The GAAR Study Group Report was based on the premise that the levying of tax is the principal mechanism by which the state pays for the services and facilities that it provides for its citizens”
A pity the premise is incorrect and propagates the myth that our government is somehow constrained fiscally.
It isn’t.
The reason for taxation is to reduce effective demand for real goods and services so that the state can deploy them for the public purpose. If there is insufficient demand in the first place, there is no need to tax. The state can just deploy.
I agree with you 100% that the distribution needs to be fixed so that what taxation there is distributed as parliament intended, but it is a pity that it is justified on an incorrect premise.
You are right of course
But don’t expect tax experts to get MMT just yet
Richard,
I have to say that I have found your views on this GAAR very curious. Long before you joined the advisory group you enthused about it so much that Gauke used your own argument against you when Meacher’s bill you wrote was debated. Now you’re repeating the same mistake. Ramsay principle was supposed to have overruled all the old case law you referred to. Even the Keith Report of 1978 predicted the end of tax avoidance. It never happened. This GAAR, compared to Ramsay principle as enunciated in Furniss v Dawson is extremely weak. So it will do exactly what Aaronson set out to achieve – catch badly structured schemes while legitimising the schemes set up by the high end of the tax avoidance industry where Aaronson and his ilk operate.
Hang on – I’m not defending this GAAR as a whole – I have not said that
I am saying some things in the Guidance are very powerful
I still intend to promote a General Anti-Tax Avoidance Principle Bill – but there are so many hours in the day
Yes but you talk as if Guidance is law! It will be debated by barristers on both sides and then judges will have their say. The end product will be very different from what you’re claiming. I can assure you that. The sad thing is that it will take years to get there and in the meantime you’ll be providing cover for Osborne and Cameron just played they massaged your ego by inviting you to join the advisory group.
You are of course entitled to your opinion
I thought long and hard about joining this group, and consulted some wise people before deciding to accept
I confess I see no reason at all why Osborne wanted to appease me
And I have not change my opinion in the GAAR as such
But by accepting appointment I think I helped shape the Guidance – and candidly it has gone further than I daed hope for
You can say lawyers will reject what I says. Now note this is purposive drafting. Please tell me how it’s purpose can be missed on the points I have raised
I will give to all the room you need
But let’s have an argument based on some sound jurisprudence please – not just some personal abuse or. Think I can safely dismiss what you say
The judges disregarded the Ramsay principle – binding case law – by finding ways around it. And you seriously think they’ll abide by a non-binding Guidance? I respect your optimism but I think it’s misplaced on this occasion. I remain a big fan; just can’t get my head your position on the GAAR.
Your mistake is in thinking this Guidance is non-binding
It is
I have explained why in a later post
My confidence is based on that fact
English judges have always been free to distinguish binding case law and statutes let alone a guidance on something as contentious and lucrative as tax avoidance. No, the guidance is not binding either as a matter of elementary law or in fact hence the name ‘guidance’.
I am sorry
But I think you really have missed the point completely here
Please go and read the guidance and draft law
You keep going on about the guidance and draft law. Go and read the case law from Partington through the Duke of Westminster and Ramsay to Tower Mcashback and you will see that judges will always be persuaded by counsel to ignore or distinguish any law whether case law or statute or soft law like a guidance. The point is that is that you overreach yourself when you make these sweeping statements about the GAAR. You are not in a position to say how it will work out. Legislators have said great things about pieces of legislation only to blame judges down the line. That’s how the common law operates.
Undoubtedly true
But you also entirely fail to say how they will ignore this
Answer the question
if subsequent judges could emasculate the Ramsay principle the way they did your guidance doesn’t stand a chance. i don’t see how you can’t get this. perhaps it’s time to get expert legal advice on statutory interpretation.
You seem to ignore the fact that maybe that’s just what I’ve been sharing for the last couple of months
Richard, I think you should pay more attention to what Monckton is saying. You can promote the merits of a piece of legislation or statutory guidance but you cannot predict how it will operate in practice or what it will achieve. That’s not the way the legal machinery operates. I hate to see you make a fool of yourself.
All I have said is four precedents have been overturned
And they have been
Now, what’s the problem with that?
In normal parlance, a legal precedent can only be overturned by a higher or equal court. This isn’t the case here, all that the guidance notes state is that in matters where the GAAR is applicable (i.e. abusive transactions) the taxpayer may not rely on the cases. In matters that fall outside GAAR, the dicta of the cases are still relevant
All cases where the dicta may be relevant are likely to fall within the scope of the GAAR
You really do have to learn how to argue
the four judicial statements were overturned by the Ramsay principle in the eighies and yet tax abuse remains and we have the need for a GAAR now. they ceased being precedents then yet counsel continued to persuade judges to apply them! your suggestion that a Guidance is stronger and will be more effective than a principle laid down by the House of Lords is risible. step back from your participation in the advisory group and your clear need to exaggerate your contributions for a bit.
Note what I have written this morning
I think you reveal the weakness in your arguments all to clearly by making them personal