There was debate on the General Anti-Abuse Rule in the House of Lords last week, when Labour took issue with the government on the effectiveness of the GAAR in the context of its extension to National Insurance. Lord Davies said:
GAAR is not an answer to all tax avoidance, as is freely recognised. In fact, when looking at the returns thus far, we are all too well aware of how little they measure up to the massive challenges presented by those who seek to avoid tax with dextrous moves and huge resources. We know the ability of multinational organisations to indicate, in any administration that has an effective tax scheme, that very little of their operation is ever tax-worthy and tax-liable. Of course, a great deal of their activity is carried out in administrations that have precious little in the way of ability to abstract tax from them. That is to say nothing of the transfer of tax out of a significant country in which they operate: for example, the UK, which is a very significant market. The loss of tax revenue to any country is to be deplored when the activities of these companies are so significant in this country.
GAAR, as it stands, is so narrowly defined that the number of occasions on which it can be usefully deployed is obviously limited. The scale of the concept that the Government are working on at present is ludicrous in relation to closing the tax gap that we have all exemplified and identified. It will not go anywhere near closing the tax gap of any one multinational whose figures have come to light in recent years, let alone the totality of the position. We want to prevent that kind of abuse being extended. There is no doubt that the public reaction to those who avoid tax in an extensive and often blatant way is to regard it as utterly unacceptable.
The GAAR is in danger of becoming a bit of a fig leaf for the Government in that, when a difficult issue about tax abuse and avoidance is raised, reference can be made to the GAAR and everything will be resolved. However, the figures utterly and totally belie that fact. That is why I am asking the Minister to reassure the Committee that he will keep in mind the effectiveness of the GAAR. A government scheme for closing down tax avoidance should do more to close a tax gap than they suggest this policy will.
The attention given was well targeted and appropriate. The government response was that GAAR was compensated for by other anti-avoidance legislation, which is hardly the point.
My own analysis of the weaknesses in the General Anti-Abuse Rule and how and why it needs to be reformed, written for the TUC, is here. Labour comment in the Lords suggests that this is an area where Labour is serious about reform. I welcome that.
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Richard, you never did explain to me how you square your claim in the report:
“There are no penalties for using a scheme to which the Rule might be
applied, meaning there is little or no disincentive to tax avoiders as a
result”
… with the GAAR guidance which states at B16.3:
“Accordingly, if it would be reasonable for a taxpayer to believe that he or she has entered into an abusive arrangement that would be counteracted by the GAAR, then the self-assessment return must make an appropriate adjustment to reflect the fact that the GAAR would be applicable. Failure to do so could leave the taxpayer open to penalties for failing to take reasonable care in completing the tax return.”
and at B16.4:
“In practical terms this means that it is possible for penalties to be imposed for breach of the self-assessment requirements in cases where a taxpayer has completed the self-assessment return on the basis that a tax-avoiding arrangement has succeeded in reducing the tax bill, when it should have been obvious that the arrangement was abusive and would be caught by the GAAR. Similar considerations apply to those taxes that do not operate on a self-assessment basis.”
Those statements are in there because of the work of the GAAR panel
They are there because there is no penalty regime and this was the best that could be found to draw attention to the possibility of penalty
But they’re not in legislation and that is a serious weakness that I do not think the guidance fully overcomes
Richard, that seems quite contrary. It seems to me that the GAAR panel could not make those statements unless there IS a penalty regime for a “scheme to which the Rule might be applied”.
It is the same regime as applies to a scheme which the Rule doesn’t apply. Or, to be specific, the Rule doesn’t need to be applied to. Personally, I cannot see how this makes the GAAR position on penalties an ‘extraordinary’ omission. It makes it pretty ‘ordinary’.
Either way, perhaps you should have noted the GAAR panel’s view in your report to better inform readers.
There was no GAAR panel report
Only guidance we could approve or not
If you ask Graham Aaranson I think he’ll agree there is no GAAR penalty regime
What do you mean “report”? I’m quoting from the guidance which was approved: http://www.hmrc.gov.uk/avoidance/gaar-part-abc.pdf
The GAAR panel approved the statements I am quoting.
I agree there is no “GAAR penalty regime”. There is no specific penalty regime (I think that appropriate – why should abusive schemes that fail without reference to the GAAR be penalised less?)
But there is a penalty regime that applies to schemes that the GAAR might be applied. And there is a penalty regime that applies to schemes that do not work by virtue of the GAAR. To suggest that a user of a scheme could receive no penalty is just wrong.
I am sure you did not mean to suggest that, but that is my understanding of what you are saying in your report. Perhaps a little clarification of your actual view would help?
The Guidance was issued by HMRC
And discussion of a specific GAAR penalty regime is entirely appropriate, but there isn’t one
That was the government’s choice, not the GAAR panels
I think there should be such a regime
No, but the normal penalty regime does apply, and I suspect that it would be quite reasonable for HMRC to apply the “deliberate mis-statement” levels of penalty to anything which proved abusive – I think it would be difficult for a taxpayer caught by the GAAR to argue that they were accidentally abusing the system.
So the GAAR bumps penalties from the 30% maximum for an error (normally nearer 15-20% once mitigated) up to 70% for a deliberate mis-statement, and again it would be hard to argue for mitigation if you’ve been deliberately abusive. That’s a serious bit of pain if you get caught in the GAAR.
Maybe
But I think a penalty regime in the GAAR would have been of vastly greater use
Richard
Your view appears to be that arrangements that are caught by the GAAR are not subject to ANY penalties.
This is contradictory to HMRC’s GAAR guidance which was “approved by the Advisory Panel with effect from 15 April 2013”, the guidance I have linked to above.
There is no need to introduce a distinct penalty regime. The GAAR is covered by the existing penalty rules, as Andrew has illustrated (which you have admitted is “maybe” applicable). The GAAR is covered by penalties in the most ordinary way.
Yet you say in your report: “Extraordinarily for a UK tax provision, the General Anti-Abuse Rule has no penalty regime attached to it.”
I cannot see how that statement is correct and not misleading.
Ben
Please do not be absurd
I approved the GAAR guidance – of course I know what is in it
But it is equally true that there is no GAAR penalty regime and no one is sure how the penalties referred to in the GAAR guidance will work – which is unsatisfactory in my view
So I think we need explicit GAAR penalties
I do not see what you do not understand
Nor do your comments make any sense, to be blunt
So what are you trying to achieve by making them?
Richard
Richard
I think it is obvious what I am saying and you appear to be avoiding the issue. Please justify your statements from your report:
“There are no penalties for using a scheme to which the Rule might be applied, meaning there is little or no disincentive to tax avoiders as a result”
“Extraordinarily for a UK tax provision, the General Anti-Abuse Rule has no penalty regime attached to it.”
These statements flatly contradict the GAAR guidance which you say you know the contents of and approved of. So either you now disagree with the GAAR guidance or you are contradicting yourself.
If you disagree with the GAAR guidance on this technical matter, you should be able to explain why you disagree.
If you are contradicting yourself and misleading people who read your report you should amend your report to make it so it is not factually incorrect.
Surely you agree that both of those propositions are in the public interest in a discussion of the GAAR?
Ben
I have been unambiguous – within the constraints of what I am allowed to say – and such constraints are significant, if you are not aware of them
There are no penalties in the GAAR
There was no reference to penalties in the first draft guidelines
By the time the guidelines were approved for reasons I cannot explain it was suggested penalties could in some cases be applied
But anyone but a fool will see the difficulties of doing so – especially if the taxpayer has taken advice
Therefore it is in my view an absolute requirement that the GAAR should be amended to provide clarity on when penalties apply and how and that is not the case at the moment
I could not be clearer
And with respect – you could not be more obtuse. It is not an endearing characteristic of yours
For which reason I will be delating all further comments from you here since it seems you have resumed your pastime of wasting my time, and I have better things to do
Richard
Richard
I’m sorry you see it that way. But as you often say that you go kite flying, it is difficult to know when you are not, if you catch my drift.
If you were permitted to explain it properly, that would be useful. As it is, I will simply say that I cannot reconcile your comments and leave it at that.
If any of your other commentators could do so, are you allowed to permit them to discuss it?
Ben
The constraint is in law re the GAAR panel
What do you not understand about that?
And if you cannot understand what I have written debate really is pointless, candidly
Richard
The constraint to your reply? Or the constraint to applying penalties?
I would like you to explain under what circumstances you think self-assessment penalties will not apply, but I appreciate you cannot.
Cheers
Ben
Ben
I have made clear that there is considerable uncertainty on this issue – as the GAAR notes also make clear and that is why I have made alternative suggestion
As noted previously your pursuing this point suggests you are time wasting or you are adopting a style not worth engaging with when any CTA should be readily able to appreciate the point made
In that case further debated is pointless on this it any other issue
Richard