It seems some people are surprised that I have had anything good to say about the proposed General Anti-Abuse Rule and the Guidance notes, announced yesterday. They miss the point. As I said to the House of Lords Economic Affairs Committee in January (page 88):
The Exchequer Secretary was surprised that I welcomed Graham Aaronson's report in November 2011, I think. But I pointed out that if you are campaigning for street lighting for a whole street, if you at least get the first light you will welcome it, even if you are a long way from achieving your whole objective. So of course I welcomed this but it is a long way from being the lighting for the whole street that I would like.
So let me step back and say what the problems with this GAAR are, even though I would rather have it than not. Much of this I have already said in evidence I presented to the same House of Lords Committee in January. My objections to the GAAR made then, and still, are:
The General Anti-Abuse Rule as proposed for inclusion in the Finance Bill 2013 suffers from three fundamental problems:
1) It is not general in nature;
2) It does not tackle tax avoidance as that term is now widely understood, including by the Prime Minister[i];
3) Its construction makes it unlikely to succeed in its objectives.
Those are big claims, but I think they are right despite the work I have done on the Guidance.
The first point is obviously true: the General Anti-Abuse Rule only tackles the most egregious of schemes and the Guidance notes are littered with references to HMRC having the right to tackle tax avoidance falling outside the scope of the GAAR with other measures available to them. By definition that means it is not general in nature.
The second point is also obviously true. The GAAR does not tackle Google or Amazon. It fail the Prime Minister's own test of acceptability, by design. On that basis it is flawed from the outset.
The third point hinges on the "double reasonableness" test inherent in the GAAR, with which I have major problems. As the new Guidance notes say, to apply the GAAR HMRC has to show that the arrangements:
“cannot reasonably be regarded as a reasonable course of action”. This recognises that there are some arrangements which some people would regard as a reasonable course of action while others would not. The ‘double reasonableness' test sets a high threshold by asking whether it would be reasonable to hold the view that the arrangement was a reasonable course of action. The arrangement falls to be treated as abusive only if it would not be reasonable to hold such a view.
1. HMRC should be able to commence GAAR action on its own initiative without the advice of a panel;
2. The deeply subjective double reasonableness test should be replaced with an objective economic substance test which would assess whether tax was paid in the right place at the right rate under the right tax code at the right time given the economic impact of the transactions that actually occurred;
3. The burden of proof should be on the taxpayer to show that this has happened;
4. Penalties should be imposed on those who sought to avoid tax in a way that falls foul of this test to deter those seeking to do so;
5. A clearance system should be provided so that any taxpayer could obtain a prior agreement to their proposed arrangements from HMRC, albeit at a price for the certainty that could supply them with.
The General Anti-Abuse Rule is a step in the right direction. But we have a long way to go to get this right as yet.
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To not have a clearance process (even if paid for by the person seeking clearance) when the test involves this ridiculous double reasonableness test (whatever that means) is crazy
What ever happened to the tax simplification/rewrite project? How can any sane person get to grips with weird wording?
I agree
the whole this was designed by Aaronson to secure his high end patch of the tax avoidance industry. it will satisfy the ‘something must be done’ brigade, drive the cowboys tax advisers out of business but secure the postion in the market of the big boys. Aaronson has just launched a boutique tax avoidance firm with a solicitor – that doesn’t look like the begining of the end of the costliest tax abuse being predicted here.
I presume you are being deliberately perverse
I have not said it will work in its current form – I said it’s step towards something that might
What is it that you want me to say?
Actually, Robert couldn’t be more wrong.
Richard will know from his personal involvement in the discussions leading to the GAAR proposal, and his very valuable participation in the Advisory Panel work on the Guidance, that I have endeavoured in good faith to eliminate abusive tax behaviour by legislation that respects the coalition government’s terms of reference.
As for setting up a “boutique tax avoidance firm with a solicitor”, well wrong again. I have set up a litigation firm with another barrister who specialises in commercial disputes (which as it happens is also how I started my carrer as a barrister). It will not be in the business of offering any tax advice, let alone tax avoidance advice. It will be involved solely in dispute resolution including, but not restricted to, tax litigation.
So Robert, two things to note please. first, don’t be so quick to assume that everyone acts in bad faith, with ulterior and self-serving motives. Secondly, yes I do read Richard’s blogs (some of which I agree with and others I don’t)!
Graham
Thanks for the comment.
Let me put it on record that we disagreed on where the GAAR should go before working together on the Guidance notes and still do now, but despite those differences I think we respected each other, worked well together (with some good humour also thrown into the mix on occasion) and the consequence has been real progress in the fight against tax avoidance in the UK, and to deny this is not just churlish; it’s wrong.
Best
Richard
You will remember what the Association of Revenue and Customs said about the GAAR proposal:
10. In our view a GAAR that tackles only highly abusive, contrived and artifi cial schemes has substantial and unintended risks. Underlying all of HMRC’s compliance activity is the wish to permanently change customers’ behaviours so as to replace non-compliance (that HMRC must tackle) with voluntary compliance. Part of that shift is undoubtedly a less complex tax system but ARC members, like practitioners and business, must deal with the rules currently in place. We believe a narrow GAAR will risk changing perceptions of what is responsible tax planning.
12. The danger is that the existence of a GAAR introduced with this stated principle will encourage the view that any arrangement not caught by the ‘narrow’ GAAR is responsible tax planning. In other words it will, in the minds of taxpayers and planners, push the centre ground towards the right, and thus encourage more, not less, activity in the area of the spectrum that is avoidance.
13. We also believe this unintended potential shift is reinforced by the recommendation that it would be inappropriate to “include any provisions for applying special rates of interest or penalties to tax recovered by use of the GAAR” (para 5.48). This is particularly the case as the reason for it being inappropriate is that it would be seen as “presenting an irresistible temptation to HMRC to wield the GAAR as a weapon rather than to use it, as intended, as a shield”. This suggests a passive role for activity aimed at stopping what is described as egregious, or very aggressive, tax avoidance schemes.
14. Given the potential for adverse behavioural shifts we would rather consider a broader GAAR with the associated clearances (and additional HMRC resources) to provide taxpayers with an earlier view on the possible treatment of their proposed transactions.
You have quoted here in the past. Perhaps you can point me to the parts of the Guidance that address their principal concern (in para 12 above).
I am well aware of what ARC said.
Like me they want a stronger GAAR.
I am not sure why you’re saying I have changed my mind when it is clear I have not
All I am saying is that this GAAR does take us forward
And as the Guidance makes clear time and again, HMRC have the right to tackle avoidance that is not considered abusive. Take this from Part D:
As an overarching comment it is important to remember a key policy
objective of the GAAR — that it is targeted at abusive tax avoidance schemes, but
does not delineate in any way what may or may not be regarded as tax avoidance
in a broader sense and which HMRC might want to challenge outside the context of
the GAAR in any event.
Does that answer the point?
Richard, the debate as to how effective – or not – the GAAR will be could go on for weeks. Personally I remain sceptical about the merit of your involvement, though overall I’ll go with the adage that it’s better to be in the tent p—— out than outside p—— in. In any case I fully respect all the time and effort you put into working with a group of people who I suspect would have produced something far short of the Guidance had you not been around to moderate their biases, interests and values.
In your several blogs (and many responses to comments) on the subject, and this blog in particular, I think you’ve been very honest about it’s shortcomings. But overall I think you’ve established that in some important respects the situation re avoidance is an improvement on what it was up until yesterday.
Moving on, it seems to me that the target now should be to get the Labour party to sign up to implementing the Meacher proposal that you drafted. The acceptance of the GAAR pushes the door to reform ajar for the first time, the weaknesses you identify here and elsewhere provide a ready made rationale for pushing the door open even further, and the existence of the Meacher proposal gives the Labour party a ready made policy on which to campaign. Taken together that seems to me to be game, set and match IF the two Eds and their collegues have the courage to actually commit to doing something on taxation that truly sets them apart from the Tories.
If you remain sceptical – so do I! I knew the risks of doing this
And I do hope the Labour Party does take this issue on – if it does not, what is it for?
Richard — you were definitely right to engage, and the street light argument is well made.
We were never going to get from here to the desired outcome in one leap.
I assume your desire to have an economic test in the GAAR would extend to giving taxpayers the same benefit where a tax charge is raised when clearly absolutely no economic benefit is derived. I am sure you will be familiar with the Lobler case in which an individual was charged tax on $1,295,000 despite the fact that in economic terms he had actually made a loss of $60,000, a position that looks likely to push him into bankruptcy. This is of course the complete opposite of the Ships 2 case that led to the GAAR in the first place. The GAAR only works one way despite the fact that it is hard to believe anybody could reasonably believe this to be reasonable. Are you planning to include this sort of thing in your demand for fair taxation?
If there was a GANTIP I would have sympathy with that
But as yet there is not
A GAAR is about to be introduced which, it is claimed, would have put a stop to SHIPS 2, but it will not stop a case like Lobler, despite the fact that both outcomes are unreasonable in exactly the same way under exactly the same legislation. The only difference is that one collected tax that wasn’t reasonably due and the other failed to collect tax that was reasonably due. It is difficult to reconcile the fact that the GAAR will apply to SHIPS 2, but not to Lobler.
No, that’s called the law
SHIPS 2 followed the law, yet you seem to think that was a bad outcome.
If Lobler is an acceptable result because it follows the law, then surely SHIPS 2 is acceptable too?
So when any reasonable person would think to much tax has been collected its called the law, but when any reasonable person would think too little tax is collected something must be done to legislate to ensure it is collected.
Remarks like this suggest the guiding principle of the Tax Justice Network is simply to collect the maximum amount of tax possible, not to seek something that any reasonable person would call justice.
I am saying that is the law
I have always believed in equitable approaches to collection when appropriate
HMRC did not use one on this occasion. I would be open to it. But the GAAR is not the place for it
That’s what I said. Everything else you impute is just your straw man
Not that I think SHIPS 2 was acceptable, I hasten to add.