Reasonable tax planning or ‘morally wrong’ tax avoidance? UK GAAR attempts to draw the line

Thursday, July 05, 2012 | Posted by: Francesca Lagerberg
Categories: Personal, Protecting your wealth | Tags: tax, tax planning, Francesca Lagerberg, tax avoidance, GAAR, tax evasion, UK GAAR, general anti-avoidance rule, general anti-abuse rule, reasonable, aggressive

Draft legislation for a general anti-abuse rule (GAAR) to tackle tax avoidance in the UK was published last month – to a mixed response. Do the proposals clearly separate ‘reasonable’ from ‘abusive’? And will the new GAAR (previously known as the general anti-avoidance rule) affect your tax planning arrangements?

What is a GAAR?
A GAAR is intended as an overriding safety net to catch artificial and abusive tax avoidance schemes with the intention of improving the UK tax authority’s ability to tackle tax abuse.

Of course the UK already has many hundreds of pages of anti-avoidance tax legislation but these tend to be targeted at quite specific issues. The GAAR is meant to be more flexible, to capture schemes not already known about or covered by specific statutory provisions.

Legitimate tax planning versus tax avoidance
Tax planning falls within a spectrum. At one extreme there is tax evasion (which is illegal). At the other end there is ‘government-sponsored’ tax avoidance, such as ISAs. In between are a few shades of grey, which can broadly be described as the unacceptable and the acceptable – or as the GAAR would have it, the reasonable and the unreasonable.

Draft legislation included in the GAAR consultation document outlines that tax arrangements will be ‘abusive’ if they “cannot reasonably be regarded as a reasonable course of action”.

Ultimately much court time could be taken up in defining this term. Disappointingly no clearance procedure is on offer. The key for achieving an effective GAAR, therefore, will lie in the quality of the guidance that surrounds it.

The introduction of this GAAR is intended to prevent those schemes that the Government deems to be ‘abusive’ and which Prime Minister David Cameron has described as “morally wrong”.

Tax is a pretty blunt instrument for a morality debate but the real question here is: can you judge a tax planning arrangement with a sort of sophisticated ’smell test’? While the ideal may sound promising, the old adage applies; if it looks too good to be true, that is probably the case.

Can the GAAR be a success?
There will be a UK GAAR from April 2013. Many other jurisdictions, such as Canada and Australia, have tried similar approaches but not with wholehearted success. The difficulty has been around interpretation and clarity.

Given that a GAAR is inevitable, the consultation that is ongoing this summer should be used to bring thought, rigour and challenge to the draft legislation to ensure that we end up with a test that is fit for purpose, clear and does not lead to years of court hearings as the words are picked over.

In my view this can only be achieved with clear guidance that will help companies and individuals understand where the line falls.

You might also find these posts useful:

* ‘How does HMRC know I have undisclosed income?’
* Tax traps: When HMRC changes its own guidance
* Cuckoo clock is ticking on Swiss bank accounts