{"id":401,"date":"2012-01-25T00:37:22","date_gmt":"2012-01-25T00:37:22","guid":{"rendered":"https:\/\/david-kirk.co.uk\/?p=401"},"modified":"2014-03-19T09:54:58","modified_gmt":"2014-03-19T09:54:58","slug":"be-careful-what-you-wish-for","status":"publish","type":"post","link":"https:\/\/david-kirk.co.uk\/?p=401","title":{"rendered":"Be careful what you wish for"},"content":{"rendered":"

Do we want a general anti-avoidance rule? DAVID KIRK thinks not
\nKEY POINTS
\n\uf0b7 A suitable quid pro quo for the GAAR? \uf0b7 Importance of a clearance system. \uf0b7 What is reasonable tax planning? \uf0b7 Effect of a GAAR on income shifting \u2013 Arctic Systems. \uf0b7 Corresponding non-abusive arrangements.
\nWe are all in favour of a general anti-avoidance rule (GAAR), are we not? At least we are in public: it is very difficult at a time of financial stringency to be defending tax avoidance.
\nAny criticism of steps taken to counter it, particularly from tax consultants, can easily be seen as special pleading.
\nIt is against this background that comment on the report by Graham Aaronson QC [1] has been somewhat muted, and there is a danger that the GAAR could slip in without proper scrutiny.
\nThis would be a pity, as proper scrutiny has too often been lacking when it comes to tax legislation.
\nMr Aaronson\u2019s proposal has much to commend it. The main feature is that it is only intended to apply to the most \u2018egregious\u2019 tax schemes. He calls it a \u2018general anti-abuse rule\u2019, which conveniently abbreviates to the same \u2018GAAR\u2019.
\nIts essence is that it asks taxpayers to treat HMRC fairly, by playing the law with a straight bat and not relying on loopholes. Taxpayers should be asking for a quid pro quo here, which is that HMRC treat us fairly too.
\nOne-sided
\nA first and fundamental objection to the proposed GAAR is that it does not give us anything meaningful in return.
\nFor example, it seems to be generally agreed that an anti-avoidance rule cannot operate fairly without a clearance system. This is something to which HMRC seem to object as they would have to find the resources to staff it.
\nThe report suggests that because it is only targeting \u2018egregious\u2019 abuse, a clearance system is unnecessary.
\n2
\nThis is surely unacceptable: there is no essential difference between an anti-abuse rule and an anti-avoidance rule. The one is merely a narrowly drawn form of the other.
\nNeither are we promised simpler legislation. Mr Aaronson speculates: \u2018In time, once confidence is established in the effectiveness of the anti-abuse rule, it should be possible to initiate a programme to reduce and simplify the existing body of detailed anti-avoidance rules\u2019.
\nIs he serious? He recognises a \u2018particular concern\u2019 that \u2018the prospect of reducing the volume and complexity of specific anti-avoidance rules, which an anti-abuse rule would facilitate, will not be fulfilled\u2019.
\nHis solution: \u2018Provision for a regular, say five yearly, review of progress would instil confidence that the benefits which the GAAR should bring will be delivered\u2019.
\nA five-yearly review? Government moves slowly at the best of times: a five-yearly review will not impress anyone.
\nThe clearance system and simplification go hand in hand. Having a clearance system is the only way of putting sufficient pressure on HMRC to make them want to simplify the law.
\nIt is an essential quid pro quo for that reason too. Once the law is simplified, there will be much less need for clearance.
\nSo if this GAAR is introduced, our representative bodies must make it absolutely clear that they will be putting relentless pressure on the government to do away with unnecessary legislation. They should have a wish-list for every budget, and be very vocal when the expected simplification does not happen.
\nThey might perhaps start with ITEPA 2003, part 7A [2] on disguised remuneration: this extends to nearly 28,000 words\u00a0 \u2013 every one of which ought to be rendered unnecessary by the GAAR. (The GAAR itself is only 1,500 words long, and commendably comprehensible by comparison.)
\nPurpose of tax
\nWhat of the proposal itself? Much of it will undoubtedly achieve the aim of counteracting \u2018egregious\u2019 avoidance schemes without creating the kind of uncertainty that will drive business away from our country.
\nUnfortunately it will not eradicate all such schemes, and in particular one rather vague provision reflects the unsatisfactory philosophical basis on which the measure is proposed. That basis is laid out in paragraph 3.3 of the report, where Mr Aaronson says:
\n\u2018My approach to taxation\u2026 is based on the premise that the levying of tax is the principal means by which the state pays for the services and facilities which it provides for its citizens.\u2019
\nHe contrasts this with \u2018earlier days, when it was common to regard tax as a form of confiscation by the state\u2019.
\nThis is lazy thinking. The fact is that both these viewpoints are statements of the obvious. To those who think that, because of its confiscatory nature, the levying of tax had to be justified by the letter of the law, and the statutes that did this therefore needed to be interpreted strictly, it is patently unsatisfactory to say that this has not worked so we need a GAAR.
\nIt is surely simpler, and more justifiable, to say that there is no reason why the \u2018letter of the law\u2019 should not incorporate a GAAR.
\n3
\nFurthermore, it is precisely because of its confiscatory nature that tax cannot be viewed as another way of paying for services. Some of the services that the state provides are themselves controversial, and much of the manner of their provision is appallingly inefficient.
\nThe state cannot give what it has not first taken away, and a mentality that acknowledges where the money comes from and how it could be used if it was not confiscated is one of the necessary checks on over-powerful government in a modern society.
\nIt is from this weak philosophical underpinning that one can see that the proposals do not always make clear what they are trying to prevent.
\nIn many ways they are clear: there are some fearsome-looking safeguards intended to make sure that HMRC do not use the GAAR as a blunt weapon to blast away at anything that they do not like.
\nThe list of \u2018abnormal features\u2019 that are likely to be caught by the rule looks eminently sensible. So does the fact that the burden of proof for most items in this rule lies with HMRC.
\nWhat is reasonable?
\nTrouble comes with one of the GAAR\u2019s key features, which is that an arrangement is not counteracted if it constitutes \u2018reasonable tax planning\u2019.
\nThe report defines reasonable tax planning as follows.
\n\u2018An arrangement does not achieve an abusive tax result if it can reasonably be regarded as a reasonable exercise of choices of conduct afforded by the provisions of the Acts\u2019.
\nThere is some rather odd use of the English language here: using \u2018reasonable\u2019 twice. Mr Aaronson is at pains to say that the GAAR is designed to let someone off the hook when, even though the judge does not regard what he does as a reasonable use of tax planning, others might.
\nThe concept of reasonable behaviour in English law generally crops up when one is looking at a public official carrying out his duties, or in negligence cases, where more objective criteria can be applied.
\nThis is because the failure to act reasonably can have bad consequences for innocent parties, which are easy to foresee and for which there is a direct link.
\nThese are well understood, but there are a couple of key differences between these doctrines and Mr Aaronson\u2019s proposals.
\nThe first is that the consequences of unreasonable behaviour in the world of tax are indirect and difficult to establish: the only direct and foreseeable consequence of avoidance is that a very large government department has less money than it otherwise might.
\nOne cannot go on from this to conclude that because Mr Jones did not pay his tax, Mr Smith did not get a rise in his pension.
\nThe other difference is that, in tort and public law, we are concerned with what the reasonable person does, whereas Mr Aaronson is asking us also to concern ourselves with what the reasonable person thinks.
\nInside whose mind is the judge supposed to get, to decide what is reasonable? The number of reasonable views on what is reasonable tax planning must be almost unlimited, and in any event, most reasonable people keep their thoughts to themselves much of the time.
\n4
\nDoes the fact that a large number of businesses in the UK follow a particular model constitute evidence that it can be viewed as reasonable?
\nIf so, is there not an incentive to mass-market ideas for avoidance? And in what numbers does tax planning have to be carried out before it will be accepted as reasonable?
\nThis does not seem like an entirely right and proper way of looking at the concept, but how else does one judge what is a reasonable exercise of choices of conduct, without being totally subjective?
\nI wrote above that some of the services that the government provides were controversial: indeed, a few people regard some of them as both immoral and offensive in themselves or carried out in an immoral and offensive way.
\nThese may be minority views, but they are not unreasonable, and it is a perfectly reasonable conclusion to draw that those holding them are entitled to use whatever legal (and I stress the word \u2018legal\u2019) means they can devise to avoid paying for these services, or paying taxes to this alien state.
\nA probably more widely held view is that, far from being fair that the government needs to seize more than one-third of everything that the country earns to function (on one measure it is 39%), confiscation on this scale is frankly monstrous, however the money is spent. Is such a view really unreasonable?
\nWho decides?
\nJudges who think that it is will come up against precedents. An example quoted by Mr Aaronson is Lord Loreburn, who said:
\n\u2018It is trite law that nothing less than clear, express and unambiguous language is effective to levy a tax\u2019.
\nLord Loreburn was a Liberal politician and Lord Chancellor when he gave this judgment in 1910, a year in which the government was only attempting to seize 15% of GDP, rather than 39%, to carry out its functions.
\nCan one really say this is unreasonable when it comes from the lips of so eminent a judge? If it was reasonable then, by what argument is it not reasonable now?
\nAnd if it is reasonable now, why is tax avoidance unreasonable? It is, after all, a process of reasoning that leads to this conclusion.
\nSome judges will doubtless be able to exercise their judgment on this in a genuinely impartial way. There are bound to be others who cannot.
\nWhat is a judge, faced with an application to use the GAAR, to make of all this? If this argument is correct, the GAAR is neutered at birth.
\nIf not, the judges are forced to use their private judgment on a matter of ethics to decide whether or not something is unreasonable. I cannot believe that they will want to do this, so this section of the GAAR needs rethinking from scratch.
\nIn practice
\nLet us now see how the GAAR might work in practice. Readers may recall a consultation that came out in 2007 with proposals to combat income shifting.
\n5
\nAt its crudest, this is when someone does all the work in a business but arranges things so that their spouse gets a good slice of the income, so as to reduce the overall tax bill.
\nThe proposals were badly thought out and did not go any further: many spouses do not do business as individuals but as a family unit, and establishing the quantum of what belongs to whom would be almost impossible.
\nBut if there is one thing that would be messier than Parliament trying to counter income shifting by statute, it would be the courts trying to do so by precedent.
\nThat is because, while a statute would consider all the circumstances that it wishes to address, a court only addresses the circumstances of the case in hand, and if the judges do not think the consequences through properly they will give a judgment that is a model of lucidity for that case, but makes the position no clearer for those whose facts are not the same.
\nConsider what might happen in the case of an IT consultant. We might, for the sake of argument, call him \u2018Geoffrey Jones\u2019.
\nHis wife helps him in a few administrative tasks in the business, and the business is conducted through a company, which we\u2019ll call \u2018Arctic Systems Ltd\u2019.
\nThe company pays Mr Jones a very small salary, with the result that, although he is responsible for bringing in most (if not all) of its income, the company has large profits which it can pay out as dividends in equal shares to both of them, thus doubling up Mrs Jones\u2019s basic rate band and saving the couple (or you might say saving him) a lot of tax.
\nAlong comes Mr Garnett, a tax inspector, who challenges this and says that all the income belongs to Mr Jones, and should be taxed as such.
\nAs readers will know, it was HMRC\u2019s loss in Garnett v Jones (re Arctic Systems) [2007] STC 1536 [3] that led them to try to instate the anti-income shifting legislation referred to above.
\nThe consequences of that legislation, had they succeeded, would have been very messy, and still would not have raised significant sums of money.
\nImpact of a GAAR
\nHow would the Joneses have fared had there been a GAAR at the time of their appeal, so that HMRC would have been able to say to the court that he had achieved an abusive tax result, which ought to be struck down?
\nThis was clearly the Revenue\u2019s view of what he had done. An \u2018abusive tax result\u2019 is defined in Mr Aaronson\u2019s report as an \u2018advantageous tax result\u2019 that is neither \u2018reasonable tax planning\u2019 nor an \u2018arrangement without tax intent\u2019. It also has to incorporate \u2018abnormal arrangements\u2019.
\nMr Jones has certainly achieved an \u2018advantageous tax result\u2019, and the judgments show that he had a \u2018tax intent\u2019. Is this \u2018reasonable tax planning\u2019?
\nThere are certainly many people who would regard it as such, but are they reasonable in holding that view, or can they be excluded because they have an interest in the matter?
\nIt would be a brave judge who took on the wrath of the independent contractors\u2019 lobby because he thought that none of them was being reasonable, but Mr Aaronson\u2019s proposal would have required him to consider that possibility.
\n6
\nHow does one appeal such a decision? Unless the judge has taken evidence as to what reasonable people think, which is unlikely, then in deciding whether it is a view that can reasonably be held, he is merely expressing his opinion on a matter of ethics.
\nA Court of Appeal judge might have a different opinion, so there would be every incentive to appeal.
\nFinally, are there abnormal arrangements? They may not look abnormal \u2013 indeed, because they are so widely used, they look normal.
\nHowever, that ignores the definition in the rule. One could argue that this arrangement fulfils three of the seven criteria for abnormal arrangements described in clause 7(3) of the proposed rule:
\n\uf0b7 it \u2018results in receipts being taken into account for tax purposes which are significantly less than the true economic income, profit or gain\u2019 (item (a): in his case, viewed in isolation from his wife\u2019s); \uf0b7 it \u2018includes a transaction at significantly less than market value, or otherwise on non- commercial terms\u2019 (item (c), referring to his salary); and \uf0b7 it \u2018includes a person \u2026 which would not be included if the arrangement were not designed to achieve an abusive tax result\u2019 (item (e), referring to his wife).
\nSo Mr Jones would be completely dependent on the definition of \u2018reasonable tax planning\u2019. Bearing in mind that two of the judges that heard the Jones v Garnett case found against the taxpayer under existing legislation, one need not be too hopeful.
\nIt is also worth a look at the consequences of the Joneses\u2019 arrangements being struck down under the GAAR: they have to be replaced by a \u2018corresponding non-abusive arrangement\u2019.
\nDoes this mean a company with Mr Jones as the sole shareholder? Or should he be a sole trader? Or should he raise his salary to reflect his earning power in the open market?
\nThe GAAR is silent on what to do if there is more than one \u2018corresponding non-abusive arrangement\u2019, and bearing in mind the general tenor of the proposals and all the other safeguards, the choice of alternatives ought to be at the taxpayer\u2019s discretion.
\nThis is but one example of how a GAAR could affect tax planning. There are more that other specialists are better qualified to draw to the profession\u2019s and the government\u2019s attention.
\nA long period of consultation is needed, with plenty of time for specialists in all fields of tax to give the Aaronson report proper scrutiny and see how other transactions stand up to it.
\nThat means you, dear reader, so I look forward to seeing other areas put under the microscope in the tax media. Only in this way will a proper debate get underway that will allow us to conclude whether this general anti-abuse rule is really a good idea after all.
\nCategories:\u00a0 Income Tax [4] Tax Topic Tags:\u00a0 Comment & Analysis [5] Tags:\u00a0 GAAR [6] Arctic [7]
\nSource URL: http:\/\/www.taxation.co.uk\/taxation\/Articles\/2012\/01\/25\/34791\/careful-what-you-wish<\/a>
\nLinks: [1] http:\/\/www.taxation.co.uk\/taxation\/Articles\/2011\/11\/23\/32161\/general-anti-avoidance-rule-steps-forward<\/a>
\n7
\n[2] http:\/\/www.lexisnexis.com\/uk\/legal\/api\/version1\/sr?csi=274768,282817,292143,292140,274674&amp;sr=NO<\/a> RMCITE%282003_1a%29%20AND%20PART-NUM%287%29&amp;shr=t [3] http:\/\/www.lexisnexis.com\/uk\/legal\/api\/version1\/sr?csi=274713&amp;sr=REPORT<\/a>– CITATION%282007%20pre\/1%20STC%20pre\/1%201536%29&amp;shr=t [4] http:\/\/www.taxation.co.uk\/taxation\/category\/income-tax<\/a> [5] http:\/\/www.taxation.co.uk\/taxation\/category\/content-type\/comment-analysis<\/a> [6] http:\/\/www.taxation.co.uk\/taxation\/category\/tags\/gaar-0<\/a> [7] http:\/\/www.taxation.co.uk\/taxation\/category\/tags\/arctic-0<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Do we want a general anti-avoidance rule? DAVID KIRK thinks not KEY POINTS \uf0b7 A suitable quid pro quo for the GAAR? \uf0b7 Importance of a clearance system. \uf0b7 What is reasonable tax planning? \uf0b7 Effect of a GAAR on income shifting \u2013 Arctic Systems. \uf0b7 Corresponding non-abusive arrangements. We are all in favour of […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"_links":{"self":[{"href":"https:\/\/david-kirk.co.uk\/index.php?rest_route=\/wp\/v2\/posts\/401"}],"collection":[{"href":"https:\/\/david-kirk.co.uk\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/david-kirk.co.uk\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/david-kirk.co.uk\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/david-kirk.co.uk\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=401"}],"version-history":[{"count":1,"href":"https:\/\/david-kirk.co.uk\/index.php?rest_route=\/wp\/v2\/posts\/401\/revisions"}],"predecessor-version":[{"id":402,"href":"https:\/\/david-kirk.co.uk\/index.php?rest_route=\/wp\/v2\/posts\/401\/revisions\/402"}],"wp:attachment":[{"href":"https:\/\/david-kirk.co.uk\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=401"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/david-kirk.co.uk\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=401"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/david-kirk.co.uk\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=401"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}