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1936: a good year for tax?

25 August 2005 / Philip Fisher
Issue: 4022 / Categories: Comment & Analysis , Admin
PHILIP FISHER considers whether a general anti-avoidance rule to be avoided at all costs

UNLESS YOU ARE aged 69, 1936 may not be a particularly significant year. The King abdicated, the Spanish Civil War started, the Berlin Olympics took place and not a lot else. However, this was the year that the Income Tax Assessment Act in Australia introduced that country's general anti-avoidance rule or 'GAAR'.
On the basis that so many Brits are still happy to holiday 'down under' or even to emigrate to Sydney, Melbourne and Brisbane, it seems reasonable to assume that life goes on pretty happily in that country despite the supposedly fearful legislation.
In Britain, for decades, tax advisers and presumably their clients have lived in fear of the dread imposition of such a rule. Some pretty outlandish arguments have been put forward to justify a belief that the idea of a general anti-avoidance rule was dreamt up by Satan and the death penalty might be rather more palatable.
However, in mid-July, the Institute of Chartered Accountants of Scotland actually publicly called for the introduction of such a rule in the United Kingdom and for there to be a general debate on the topic. Therefore it is timely to reconsider what the real implications of its introduction might be.

The debate

Without wishing to seem too blasé about it, parallels might be drawn with comments the same week from an advanced motoring organisation with regard to the dangers to their members of speed cameras. On the basis that advanced motorists should only claim that title if they clearly comply with driving legislation including speed limits, the pontifications of their representative might not seem wholly reasonable.
Similarly, in that taxpayers have an obligation, now provided by self assessment, to declare and pay the correct amount of tax in respect of their income and capital gains in any fiscal year, it is hard to see that most would even notice the imposition of this legislation. The corollary of this is that if this assumption is made then the Government and HMRC would equally feel no need or desire to impose even more legislation on taxpayers (or perhaps non-taxpayers).
Sadly, we do not live in quite such a Utopian world and while taxpayers and their advisers attempt to avoid (or even on occasion evade) tax, those bloodhounds from HMRC would argue that they need all the help that they can get to ensure that there is a level playing field.
The average man in the street, taxpayer that he is, would probably be delighted with legislation which means that some of the rich no longer avoid paying taxes and allow everybody else to pay for their success.
If the United Kingdom ever does make the big leap, it will find itself in good company. Not only does Australia have a rule of this kind, but so do the United States, Canada, New Zealand and South Africa amongst others.

The duke and disclosure

In the United Kingdom, a man's freedom to arrange his tax affairs has been defended since that same year, 1936. In the case of Duke of Westminster v CIR 19 TC 490, the principle was established that 'every man is entitled to arrange his affairs so that the tax attaching under the appropriate act is less than it otherwise would be'. It is this principle that many would like to see continuing to apply after the introduction of any general anti-avoidance rule in this country.
In the last year, legislation has been introduced that requires advisers to notify HMRC of certain kinds of scheme that may constitute tax avoidance. However, these are not across the board and it remains to be seen what action they will take when they receive such notifications. It may well be seen in the fullness of time that these rules act as a precursor to the introduction of something rather more wide-ranging.

The 1998 proposals

The Government last suggested introducing a general anti-avoidance rule in a 1998 consultative document. At that time, the arguments were nicely summarised when they said:

'When individuals and businesses develop schemes to avoid paying tax or defer or reduce their liability, it leads to higher burdens falling on the majority of taxpayers. The Government is committed to countering abuses and artificial avoidance whilst recognising that businesses and individuals may operate in a tax-efficient way.'

How can anybody argue with such reasonable sentiments in a Pre-Budget Report document entitled 'Fairness'?
The consultative document outlines the way in which such a rule might be applied for direct taxes for companies. At that time, it was not envisaged that Customs and Excise, as it then was, would be looking to introduce a parallel rule for indirect taxes such as VAT. Similarly, any extension to individuals would follow at a later date. It seems logical that in the fullness of time any tax provision of this type should apply to all of the major taxes and many more taxpayers.
The most surprising aspect of this document is how much of its content has already been embodied into law generally, as part of the tax avoidance scheme legislation enacted in 2004.
The second surprise is that this is not really what its name implies. It is not an unrestricted right for HMRC to look at any transaction and decide that they believe that it is a 'tax scam' and as a consequence will levy tax on the amount avoided. It is far more structured and rigid, and with minor amendments its introduction is unlikely to have any drastic impact or to cause any significant degree of dissent.
In the introduction to the document, the Financial Secretary to the Treasury, Dawn Primarolo was clear about the rationale behind the proposed introduction.

'Most people accept that the tax burden should be spread fairly across all taxpayers. But artificial tax avoidance undermines the fairness in the system, making the burden fall more heavily, and unnecessarily heavily, on others. And there is less money, as a result, in the public purse to pay for Government programmes such as healthcare and education.'

She continued, 'the Government is determined to make the tax system fairer and a GAAR might have a role to play in achieving that objective … A carefully constructed GAAR might make a positive contribution not only in preventing the leakage of tax revenues but in promoting commercial competition by levelling the playing field between taxpayers'.
The Government explained that a general anti-avoidance rule was under consideration because, while the courts have managed to use the principles in W T Ramsay Limited v CIR 54 TC101 to cover much tax avoidance, a further more drastic step might be required to achieve that level playing field.
The difference between having a general anti-avoidance rule and the current system based on case law is that 'legislation targeted at specific avoidance schemes or arrangements stops them for the future. But, short of retrospective legislation, the Government cannot recoup the tax lost to early users of the schemes. Consequently it has little or no deterrent effect. This type of legislation is vulnerable to yet further avoidance schemes, constructed to find a way around the letter of the law'. While the points made thus far may not be written in terribly grammatical language, it is hard to see ethical reasons to object to them.

Certainty through clearances

The Government's 1998 proposals included provision for giving certainty in respect of transactions. One of these was that it would be necessary to couch the legislation in clear language. This might come as a surprise to those who have rarely found parliamentary draftsmen capable of doing this, even in tax law rewrites.
There would also be provision for pre-transaction clearances guaranteeing that the general anti-avoidance rule would not be applied. However, these clearances might literally come at a cost, as the original proposal was that the Government would levy charges to those applying for clearances. This might prove controversial.
The purpose of the rule would be very simple. This would be 'to deter or counteract tax avoidance'. Tax avoidance in this context would mean:

(a) not paying tax, paying less tax or paying tax later than would otherwise be the case; or
(b) obtaining repayment or increased repayment of tax, or obtaining repayment earlier than would otherwise be the case; or
(c) obtaining payment or increased payment by way of tax credit, or obtaining such payment earlier than would otherwise be the case.

The intention was that tax avoidance might also include creating a loss or other amount with a view to tax avoidance in another accounting period or by another company. This last sentence might give rise to some questions of semantics, but the underlying principles would seem to make sense.

Acceptable tax planning

The Government accepts that it must allow people to use acceptable tax planning measures. It proposed the following definition.

'Acceptable tax planning means arranging one's affairs so as to avoid tax in a way that does not conflict with or defeat the purpose of the tax legislation. The fact:

 (a) that the purpose of the transaction is to take advantage of a relief or allowance provided by the tax legislation; or
 (b) that a transaction is specifically excepted from an anti-avoidance provision,

is an indication, but not a conclusive indication, that it is acceptable tax planning.'

Interestingly, the burden of proof would be on the taxpayer who would have to show that what he was doing fitted within legislation. In situations of 'acceptable planning' where it is self-evident, this would be unnecessary. On the other side, HMRC would be obliged to show that a transaction was one to which the rule applied.
To help things run smoothly, the Government had proposed that it would offer guidance on clearances that might consist of general consents referring to transactions that were regarded as permissible. They would also issue warnings about particular schemes or devices for which clearances were unlikely to be given. Once again, this seems to have been considered when the legislation relating to tax avoidance schemes was introduced in 2004.
The tax planners will be pleased to know that the clearance body within HMRC would be obliged to give an explanation when refusing a clearance. However, it might be couched in relatively general terms and therefore may not be as helpful to them in devising new schemes, as they might wish.

The Scottish view

In a letter to a fellow Scot, Gordon Brown, Derek Allen — the Director, Taxation at ICAS — summarised their position.

'Our recommendation is:

  • To consider the repeal of much of the existing complex anti-avoidance legislation.
  • To protect the fisc by the introduction of a GAAR which would enable avoidance to be challenged.
  • To introduce a pre-transaction ruling system to give certainty.'

For this article, he explained the Institute's views on this knotty subject in greater detail.

'Initially, the Institute's taxation committee started with the principle that a repeal of the majority of existing anti-avoidance legislation would be a good thing. We believe that half a page of new legislation will get rid of over 1,000 pages of existing legislation. The process of enacting increasingly complex legislation cannot continue.'

He believes that many businesses are sinking under the weight of anti-avoidance laws and in particular, smaller businesses are struggling.
In his eyes, there has to be a distinction between responsible behaviour encouraged by the Government to avoid tax legally — for example making pension contributions — and complex artificial transactions that enable tax to be avoided in ways that had never been contemplated when the legislation was drawn up.
Mr Allen also made a significant point quoting from the results of a survey in Australia, which discovered that 'if people do not think the tax system is fair and manageable, the level of compliance goes down'. Put simply, if you do not believe that you are capable of completing a tax return, then you may well stick your head in the sand and hope that it goes away. In addition, presumably some may feel that if tax is optional for others, they don't want to buy into the system.
In the short period since the publication of the open letter, reaction has been divided. 'So many people are agreeing with us. The overwhelming majority of ICAS's 16,000 members are strongly in favour of what we are trying to do. However, a significant and vociferous minority of ICAS members are very concerned and disagree strongly with the proposals.'
In summary, Derek Allen believes that 'the world has moved on so much that we thought it was time to change our conclusion that the 1998 proposals were a bad thing. We wanted to start a debate'.
It is understood that HMRC are already considering the letter with a view to setting up a working party to consider the best way to move things forward.
The key to the ICAS proposals is that the introduction of a GAAR should only be permitted with the quid pro quo that swathes of anti-avoidance legislation would be removed at the same time. This might not be good news for the average tax adviser!

… and the English

Francesca Lagerberg, Chairman of the Tax Faculty for the Institute of Chartered Accountants in England & Wales, was considerably more reticent about the introduction of a general anti-avoidance rule than her Scottish colleague.

'When a GAAR was fully considered in 1998, the Tax Faculty raised a number of objections but chief was the lack of certainty such a rule would bring without any kind of pre-transaction ruling process in place. The same remains true today. Taxpayers have a right to know the tax effects of any transactions they undertake and a broad GAAR, which is loosely defined, will bring more problems than it solves. Worse still, if worded too harshly, it will drive companies to undertake transactions in other jurisdictions where the tax implications are clearer. It is certainly time to move to a more mature debate on tax avoidance issues than has characterised recent discussions in this area but, as other countries have found, a GAAR is not necessarily going to be the solution.'


In reality, the reactions of accountants both north and south of the border are not as dissimilar as they might initially seem. With the will on all sides, it may well be possible for the UK Government to introduce a general anti-avoidance rule with support from most interested parties in the relatively near future. However, in order to get that support, it will be necessary for them to put in place a number of very significant safeguards to give taxpayers confidence in the system's application.         
Philip Fisher is a tax partner with Chantrey Vellacott DFK. He can be contacted on 020 7509 9453 or by e-mail at


Issue: 4022 / Categories: Comment & Analysis , Admin
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