One of first taxation related announcements of the new Conservative/Liberal coalition government was that they would start an informal consultation on the introduction of a General Anti-Avoidance Rule (GAAR). In fact it has started to become a recurring theme for a new UK government to look at whether a GAAR is the way forward, as New Labour did exactly the same thing back in 1997 when they took power. New Labour of course decided after consultation not to introduce a GAAR and have instead opted to attack avoidance schemes with a number of different weapons, with differing degrees of success, namely:
- Disclosure of Tax Avoidance Schemes (DoTAS);
- Specific legislation;
- Targeted Anti-Avoidance Rules (TAAR);
- Retrospective legislation;
- Increased litigation; and
One of the problems with this approach is that it has led to increasingly complex legislation and this is cited by many as a reason to introduce a GAAR. These, some might say rather optimistic individuals, believe that Her Majesty's Revenue and Customs (HM Revenue and Customs or HMRC) is a non-ministerial department of the UK Government responsible for the collection of taxes, the payment of some forms of state support and the administration of other regulatory regimes including the national minimum wage.... More will accept that the quid pro quo of getting this new super-weapon is that they would have to give up some of their existing armoury, and in particular the TAARs. Others are not so sure that HMRC would agree. After all it would be a big risk for them to give up what they would say is a proven piece of legislation for a new one that may or may not perform the same function. The reality appears to be that a GAAR would, at least in the medium term, sit on top of all the existing TAARs and thereby increase complexity and uncertainty rather than reduce it.
One way to help reduce this uncertainty would be to have a clearance procedure operated by HMRC. This would enable people to inform HMRC about a transaction that they intend to undertake and get formal confirmation that the GAAR would not apply. Clearly, for this clearance department to be effective in a fast moving and complicated commercial world, it would need to be adequately staffed by suitably qualified individuals. There seems to be no doubt that in these days of austerity the only possible way this department could come into existence would be if HMRC were to charge for this service, something which is being actively considered. This brings up lots of questions not least how much would they charge and how quickly will clearance be given?
Would it be a one-off flat fee? This is unlikely to be fair for smaller transactions which would inevitably end up subsidising much more complex transactions. So a sliding scale of fees or time based fees? A sliding scale could be based on the quantum of the proposed transaction or complexity. If the latter or if time based, it may be difficult for HMRC to be accurate about the cost at the start and this could lead to fee disputes.
Commercial deals often happen very quickly so if this clearance procedure is to be of any use it must be able to react very quickly. At least in the early years this would be difficult to adequately plan for and of course speed is not something HMRC have a particularly good record on.
Some sort of fast-track appeals procedure would need to be in place for situations where a taxpayer disagrees with a HMRC decision. And what if a taxpayer believes HMRC are wrong and goes ahead? Presumably that would affect penalties if the courts ultimately agree with HMRC? Alternatively, what if HMRC are proved wrong by a court and their refusal to give clearance led to a transaction falling through? Could HMRC be liable to pay compensation?
These are just a few of the issues that would have to be dealt with before a new “pre-clearance” department could be set up. Of course the experience of other countries, such as Canada, that offer a full clearance procedure will be helpful but there is no doubt that this would require significant resources to be given to HMRC to research all the issues and come up with solutions, recruit and train suitable staff, equip them with the necessary technology to do their jobs effectively and enact any necessary legislation or regulations. At a time of cuts to the budgets of most government departments can this really be justified, even to keep the Liberals who have long campaigned for a GAAR, happy?
So if it did happen, what would this GAAR look like?
There are many GAARs all over the world, including in Europe, and these take many different forms. It would take a book to cover the variety of drafting and approaches taken by Revenue authorities around the world so this article will consider just two – the GAAR in Australia, a Commonwealth country, and the GAAR in Ireland, a fellow EU member.
Australia is often quoted as having the longest history of GAARs, having had a GAAR in one form or another since at least 1915 and probably in effect since the 19th century! In addition, HMRC often adopt ideas and approaches pioneered in Australia.
The latest GAAR was introduced in 1981 and applies where a tax benefit is the “sole or dominant purpose” of the planning. The Australian Tax Office (ATO) wanted this new GAAR as the courts had been eroding the effect of the previous 1936 GAAR and to date they, if no-one else, have been reasonably happy with its effectiveness.
The problem for the taxpayer is that any appeal must prove that Part IVA does not apply rather than for ATO to prove that it does. The full horror of the task that confronts the taxpayer in this position was neatly summarised in an article by Justice G T Pagone, a Judge of the Supreme Court of Victoria, Australia where he pointed out that:
“A taxpayer who has obtained a tax deduction impugned under Part IVA may need, for example, to disprove that, in the hypothesis of the transaction not having occurred, it is not reasonable to expect that a tax deduction would not have been obtained.”
You might think that after 30 years there would have been many cases through the courts to give guidance on when Part IVA does or does not apply. However, it wasn’t until 1994 that the first case (Peabody) made it all the way to the High Court (the highest court in Australia) where the taxpayer won. In addition, it seems even the judges can’t always agree when it applies as the Macquarie Finance case in 2004 showed; where two Federal Court judges held that it did apply and two held that it did not. If the judges can’t agree it doesn’t bode well for taxpayers and their advisors.
Ireland is worth looking at as it has had a GAAR since 1989 (now contained in the Taxes Consolidation Act 1997) and is an EU country like the UK. The Irish GAAR seeks to target transactions which give rise to a tax advantage and are undertaken primarily to obtain that tax advantage. There is no clearance procedure, but there is a rather strange “protective notification” procedure which can be used to protect against interest and surcharges if the notification is made within 90 days. This was actually introduced to collect intelligence on avoidance schemes but has been singularly unsuccessful in that regard.
And how has this fared in the courts in Ireland and is it having the desired effect? Well the answer to the first question is that no-one really knows yet because in the 21 years since its introduction so few cases have made it to the courts. In the first ten years the Irish Revenue authorities didn’t formally assess a single transaction as being caught by the GAAR!
The answer to the second question is probably “no” because the Irish Revenue authorities continue to introduce specific legislation to block what it regards as abusive anti avoidance schemes. If the GAAR was working this really shouldn’t be necessary.
There are lots of ways to draft, police and administer a GAAR and many methods have been tried around the world. So far none has been wholly successful and all have introduced further complexity and uncertainty to a greater or lesser extent.
The reality is that a GAAR will be costly to introduce and while the Liberals want it, the Conservatives probably don’t. So the question is whether David Cameron and George Osborne are willing to take on their own backbenchers, not to mention the Conservative party contributors, in order to keep Nick Clegg and his cohorts happy?
On balance probably not but we should not have too much longer to wait and find out, as HMRC will announce the conclusion of their GAAR consultation on 9 December.