Gaar Humbug
In his first column for Spear’s, Martyn Gowar asks whether the introduction of a General Anti-Avoidance Rule would help or would confuse taxpayers and make legislation murkier still
IT IS A great pleasure for me to have been asked to take over the column previously written by my friend Caroline Garnham but, in following her, I do so with some trepidation. I can but do my best.
For my first offering, I thought I might comment on the proposal to introduce a GAAR in the UK. Before your eyes glaze over, let me explain that a GAAR is an acronym for a General Anti-Avoidance Rule. Australia and Canada, to name but two, have such a rule and last year a leading tax barrister, Graham Aaronson, led a review committee of very senior barristers, judges and academics to discuss whether this should be proposed in the UK.
The conclusion of this committee was that the rule should be introduced and, although there has been no government response to the report as yet, mutterings from ministers tend to suggest that the idea is attractive to them in bolstering their armoury against tax avoidance.
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What does it actually mean for taxpayers? Having been involved in many discussions with HMRC officials over the years about proposed new legislation, I can say that the drafting of tax legislation always includes consideration of how tax charges could be avoided and inclusion of specific anti-avoidance provisions.
A GAAR would be a tool allowing HMRC to come back later when someone invents a clever avoidance device and say that the intention of the legislation was being subverted by this scheme and, whether or not the law said so, the scheme could be struck down.
Proponents of the scheme agree that, while they accept that it is still the law of the land that no person is obliged to pay a penny more in tax than he is obliged to do so, there have been a range of cynical schemes created to use loopholes to undermine what was clearly intended by a piece of tax legislation. These schemes have been actively marketed and for many years there has been a battle going on over them. Typically, a scheme is produced, backed up with an opinion from counsel saying that the scheme works and avoids or reduces a tax liability otherwise payable.
Corporations have also used schemes as tax-avoidance techniques, but generally these have been individually tailored to the specific corporation and have been examined individually. Many individual taxpayers rely on collective advice and do not ask their own individual adviser to comment — because they do not h ave the expertise to judge whether a scheme will or will not be successful. That is pretty obvious, but if you were sitting on HMRC’s side of the desk it might lead you to think that the individual taxpayers were enthusiastically looking for way to avoid tax.
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I don’t think that is necessarily right. Individual taxpayers trust advisers and latterly, with a much more aggressive approach from HMRC against tax avoidance, they have found that schemes are being actively attacked. They then find themselves faced with a tax bill, and the heavy costs of defending an action by HMRC if they want to avoid having to pay.
One problem with a GAAR is that tax officials are no more immune from rewriting history than other mortals. The policy behind a piece of legislation very often shifts in the way the tax is applied after a number of years. Legislation can be interpreted in a way that nobody had thought of at the time the law was passed. If that favours the taxpayer, then HMRC will very often change the law. If it favours HMRC, taxpayers find it very difficult to get the law changed.
The practical implications of all this are that the taxpayer wishing to keep his tax bill down is going to face more problems in being able to do so. In particular, taxpayers will be frightened of arguing with an interpretation of the law that HMRC proposes for fear of falling foul either of the actual legislation being litigated or HMRC claiming that the intention behind the legislation led to a tax liability which the individual was trying to avoid.
AS ALWAYS, THE problem is that we are talking here not in the realms of what is black and what is white but in the realms of what is grey. You might share my view that in the world of what is grey, a lot of the problem arises from the fact that tax legislation is not clear. It is complicated and is often rushed through without anything more than a cursory glance. I commend this government’s efforts to try to introduce a better process, but there is a long way to go. Taxpayers should know when tax is or is not due. At present, that is not the case, and my concern is that a GAAR is only going to make the position worse.
Efforts need to be made to deal with the real problem, which is the drafting of good tax legislation. We don’t need sloppiness or a get-out-of-jail card for HMRC to compound poorly drafted provisions.
Martyn Gowar is a partner at McDermott Will & Emery UK LLP
