If we’re to beat widespread tax abuse then we must have a real general anti-avoidance principle

 GAntiP, Tax avoidance  6 Responses »
Feb 192012
 

I’ve just posted a blog on why we need a real general anti-avoidance principle in UK tax law. There’s a PDF of it here.

This is something I have argued for for some time – longer than most in this country. And I am more convinced than ever that we need one now. The latest reports on thousands of people in what are really employments getting round tax law by being paid through companies – when this is obviously a ruse to save them and their employers tax and national insurance – proves how widespread this need is. And I very strongly contend that it’s neither anti-competitive, nor  a source of uncertainty in the UK tax system to say this.

People in employment should be taxed as if they’re in employment under UK tax law, or as H M Revenue & Customs say:

If these requirements are not met it creates unfair competition between those businesses that meet their responsibilities and those that do not. It also creates unfairness where, for instance, two workers engaged on the same project and performing the same tasks for separate businesses are not paying the same tax and NICs due to the incorrect classification of one of them.

So it’s fundamental to tax justice that this happen. And yet despite there being law to try to enforce this as is very obvious this type of abuse goes on. A general anti-avoidance principle of the type I propose would stop this because if there was, under the  arrangement I suggest:

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,

then the artificial step(s) would be ignored. In the case of these false consultancy arrangements that artificial step is inserting a company into what was really an employment relationship. The risk in such a case would also, appropriately, be on the employer who had not applied PAYE who would then have to make good the shortfall to HMRC, maybe taking into account what the recipient company of the employee had paid, if any.

But let’s be clear, this general anti-avoidance principle does not stop in this case:

1) people genuinely self employed running a business through a company;

2) people genuinely self employed running companies paying themselves by dividend, which remains a wholly legal activity albeit one that has attracted government attention in the past.

For both of these issues, and the sensitive issue of paying spouses who (in my experience) frequently do contribute to the management of self employed businesses primarily run by their partners I have offered a much broader solution, which would bring small business tax into the twenty first century, here.

But I stress, those issues are largely unrelated to the abuse of companies to avoid PAYE obligations (although curiously many on the political right seem quite unable to differentiate them). That is why different solutions are needed for each of them.

But of the two it is apparent that the abuse of employment law is the more important now and if ever there was a reason why the UK needs a general anti-avoidance principle and not the extraordinarily limited general anti-avoidance rule Graham Aaranson has recommended, then this is it.

 Posted by Richard Murphy at 4:38 pm

Why we need a genuine general anti-avoidance principle to beat tax abuse

 GAntiP, Tax avoidance  30 Responses »
Feb 192012
 

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:

  1. Provide certainty because anyone would know that artificial steps in transactions will not work;
  2. 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;
  3. Will ensure business and its advisers focuses on making money and not on avoiding tax, to the benefit of the economy at large;
  4. 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:

  1. 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.
  2. 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.
  3. 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.

NB: A PDF of this blog is available here.

 Posted by Richard Murphy at 4:06 pm

Making aggressive tax avoidance illegal – what a new GAAR might do

 GAntiP, HMRC, Tax avoidance  5 Responses »
Nov 212011
 

The proposed General Anti-Avoidance Rule, published today and written by Graham Aaronson QC, about which I wrote earlier today, attacks arrangements with one or more of these qualities:

(a)       arrangements that would result in receipts being taken into account for tax purposes which are significantly less than the true economic income, profit or gain;

(b)       arrangements that would result in deductions being taken into account for tax purposes which are significantly greater than the true economic cost or loss;

(c)        arrangements that includes a transaction at a value significantly different from market value, or otherwise on non-commercial terms;

(d)       arrangements, or any element of it, inconsistent with the legal duties of the parties to it;

(e)       arrangements including a person, a transaction, a document or significant terms in a document, which would not be included if the arrangement were not designed to achieve an abusive tax result;

(f)         arrangements that omit a person, a transaction, a document or significant terms in a document, which would not be omitted if the arrangement were not designed to achieve an abusive tax result; and

(g)       arrangements that include the location of an asset or a transaction, or of the place of residence of a person, which would not be so located if the arrangement were not designed to achieve an abusive tax result.

All or welcome; the last especially so since it is clearly aimed at tax havens.

And all have another welcome characteristic: without exception the drafting notes that the arrangements in question are legal and would work but for the new GAAR. The idea that tax avoidance can be made illegal has been established. That is  massive leap forward in thinking.

 Posted by Richard Murphy at 7:54 am

A GAAR for the UK – one step closer today

 GAntiP, HMRC, Tax avoidance, Tax compliance  8 Responses »
Nov 212011
 

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.

 Posted by Richard Murphy at 12:10 am

Dawn Primarolo, the unlikely anti-tax avoidance hero of the day

 GAntiP, HMRC, Tax avoidance, Tax management  7 Responses »
May 052011
 

Dawn Primarolo was the unlikely hero of yesterday’s hearing before the House of Lords.

The subject of a GAAR or General Anti-Avoidance Principle as I’d prefer came up, partly in its own right and partly in the context of the need to tackle the abuse going on in Employee Benefit Trusts (or Tax Cheating Arrangements, as I was happy to call them).

I pointed out that one of the best days in recent taxation history was that in December 2004 when Dawn Primarolo stood in the Commons and said whatever attempts were made thereafter to avoid the obligation to apply tax and national insurance to payment of remuneration arising from an employment they would be blocked by legislation and that legislation would be back-dated to December 2004.

At the time the tax profession howled in protest. This was unreasonable they said. This was retrospective legislation they cried. And this was an abuse of the right a person had to abuse tax law they implied.

But yesterday John Whiting agreed with me: Primarolo’s statement may have appeared to be retrospective legislation at the time, but it straightforwardly worked where nothing else had. In the face of knowing that any attempt to abuse the law would be stopped, retrospectively, people stopped trying to abuse PAYE regulations. And NIC abuse died out for some time.

Until that is Employee Benefit Trusts came along.

And it was John Whiting who wondered out loud why a) the Primarolo principle was not being applied to Employee Benefit Trusts because there seems no reason why it should not be b) it had seemed to be forgotten, which he thought an error c) (and I think this came out of our exchanges) it was not now influencing the current debate on the GAAR because the evidence was emphatic – it works.

The moral: principles based attacks on tax abuse work.

It’s an important lesson to note.

 Posted by Richard Murphy at 10:23 am

Treasury announces general anti-avoidance principle study group

 GAntiP, Tax avoidance  13 Responses »
Jan 142011
 

The Treasury has announced the creation of a study group to look at a UK general anti-avoidance principle. As it says:

Graham Aaronson QC, today notified the Exchequer Secretary to the Treasury David Gauke, of the experts who will work on his study into a General Anti-Avoidance Rule (GAAR), and the areas they will cover.

This follows the Exchequer Secretary’s announcement in December that a study group would be set up to explore the case for a GAAR in the UK. This is part of the Government’s commitment to tackling tax avoidance and building sustainable defences to address long-standing avoidance risks.

Those working with Graham Aaronson in the committee are:

  • John Bartlett
  • Judith Freedman
  • Sir Launcelot Henderson
  • Lord Hoffmann
  • Howard Nowlan
  • John Tiley

Topics which the committee will look at include;

  • consideration of existing experience with GAARs and other anti avoidance principles in other jurisdictions;
  • what a UK GAAR could usefully achieve; and
  • what the basic approach of a GAAR should be.

The study group will complete its work by the 31st October 2011 and will report its conclusions to the Exchequer Secretary.

It’s got some good people on it, some of whom I know.

Let’s hope it delivers.

 Posted by Richard Murphy at 3:38 pm

Tackling the tax avoiding bankers on their bonuses

 Banking, GAntiP, Tax avoidance  Comments Off
Dec 102010
 

The FT notes this morning:

More than 50,000 high earners in the UK face a crackdown on offshore trusts used to avoid tax on bonuses, in a move tax planners said could disrupt the current round of bankers’ bonuses, reports the FT. The plans, unveiled by the UK Treasury on Thursday, are expected to raise £500m a year and affect about 5,000 businesses or so, ranging from big banks to single-employee companies. The attack on “disguised remuneration” is an attempt to tackle the use of employee benefit trusts in which tax-free money is put in trust for an employee who will pay tax on it only years later, if at all. They often benefit from the money in the meantime by making use of loans or property bought with the cash.

Poor dears.

But also note, this is something that a General Anti-Avoidance Principle could have killed, easily. And then we’d be better off now.

 Posted by Richard Murphy at 12:55 pm

Christian Aid calls for GAntiP and country-by-country reporting (subtly!)

 Country-by-country, GAntiP  3 Responses »
Dec 092010
 

From the FT today:

From Mr Alex Cobham.

Sir, A study into measures to tackle tax avoidance is a welcome first step towards meeting the coalition’s commitment to confront the issue (“Doubts cast on rule to tackle tax avoidance”, December 7).

Still lacking, however, is a clear commitment to ensuring that developing countries share in the benefits of an international climate less tolerant of corporate tax dodging in general.

As Angel Gurr??a, secretary-general of the Organisation for Economic Co-operation and Development, has highlighted, developing countries suffer revenue losses from tax dodging that are in excess of all aid received.

If the coalition government is serious about tackling avoidance, and serious about ensuring value for money for UK aid, it must take a lead in demanding that its own, welcome commitment to transparency is extended to the corporate sector through changes to international accounting standards.

Alex Cobham,

Chief Policy Adviser,

Christian Aid,

London SE1, UK

 Posted by Richard Murphy at 6:31 pm