The Government's seemingly endless war on Tax Avoidance continues.

Currently there is consultation on:

1.    The £50,000/25% of "adjusted total income" cap on Income Tax relievable amounts
2.    The intensification of the Disclosure of Tax Avoidance Schemes (DOTAS) provisions
3.    The General Anti-Abuse Rule (GAAR).

It is on the latter that this article concentrates and the approach taken will be founded on extracts from the consultation document (Condoc) issued on 12th June. A reading of the Condoc provides invaluable insight into Government thinking about the need for, deployment, utility and aspired to effect of the GAAR.

Its need is clearly born out of "official" frustration at the inability of specific legislation to adequately anticipate all of the ways of achieving a taxpayer-beneficial outcome that is other than what Parliament intended.

Before looking at the promised GAAR extracts, though, it's important to appreciate what the proposed GAAR is not. In some other jurisdictions we see a GAAR that is very wide accompanied by a robust (and potentially very costly) system of clearance. This type of widely drawn rule would essentially work on the premise that everything that saves tax could potentially be "caught". This type of rule inevitably leads to a search for certainty through applications for clearance. The resulting uncertainty (while waiting for clearance) and cost (of applying for and delivering clearance) means that this type of general rule will not be pursued in the UK.

In December 2010, Graham Aaronson QC was asked by the Government to report on whether a general anti-avoidance rule would be beneficial for the UK tax system. Graham Aaronson's report was published on 21 November 2011. He concluded (as indicated above) that introducing a broad spectrum general anti-avoidance rule would not be beneficial to the UK tax system, and instead recommended the introduction of a rule which is targeted at "abusive" arrangements. The Government announced in the 2012 Budget that it accepted this recommendation and would consult with a view to bringing forward legislation in Finance Bill 2013 that was both effective in tackling artificial and abusive avoidance schemes and also practical both for taxpayers and HMRC.

The Government agrees with the Report's conclusion that a "broad spectrum" general anti-avoidance rule would not be beneficial for the UK. The Government has been clear that any GAAR must ensure that sufficient certainty about the tax treatment of transactions could be provided without undue costs for businesses, individuals and HMRC - a broad rule risks compromising the certainty that is vital to provide the confidence to do business in the UK.

The Government therefore agrees with the Report that a rule targeted at abusive tax avoidance arrangements would be the right approach for the UK tax system.

The GAAR aims to target “artificial and abusive” tax avoidance schemes which, because they are often complex and/or novel, could not have been contemplated directly when formulating the tax legislation. The GAAR will apply to counteract, on a just and reasonable basis, the tax advantage that would otherwise be obtained.

So the target and scope of the GAAR appears to have been made tolerably clear. And "abuse" (rather than "avoidance") follows "anti". The GAAR should not affect what the Report describes as "the centre ground of tax planning".

This should be seized on and used by Chartered and Independent Financial Planners looking to put clear blue water between what they do for their clients and the kind of "egregious and abusive" schemes that the Government refers to in the Condoc. As to the Government's aspirations for the GAAR, they are made very clear in the Condoc.

A GAAR may lead to a simpler tax regime for the UK by:

• Enabling future tax rules to be drafted more simply and clearly
• Reducing the need for specific remedial legislation
• Once confidence in the effectiveness of the GAAR is established, paving the way for a reduction and simplification of the existing body of detailed anti-avoidance rules.

The Government intends that the GAAR will be an effective deterrent against artificial and abusive tax avoidance, and will over time influence the culture of tax planning. To the extent that it deters and discourages taxpayers from entering into artificial and abusive schemes and the future development of such schemes, the need for further targeted anti-avoidance rules ("TAARs") may be reduced.
The reference to "changing the culture" of tax planning is one especially worth noting.

GAAR coverage and application will be wide. It is intended that all of these taxes could have GAAR applied.

• Income Tax
• Corporation Tax (including taxes linked to Corporation Tax, such as the Bank Levy)
• Capital Gains Tax
• Petroleum Revenue Tax
• Inheritance Tax, and
• SDLT and the enveloped property annual charge

The GAAR will also apply to NICs, but this will require separate legislation and this is likely to be enacted after the GAAR has been introduced. To the extent that they are not specific to tax or to specific taxes, the questions and issues raised in this document should also be considered in relation to NICs.

Before considering the most important (and, it is thought, relatively clear and easy to understand) provisions of the proposed GAAR it's worth just reflecting on the overriding purpose of the GAAR.
The purpose of the GAAR is to counteract tax advantages arising from abusive arrangements. The GAAR is by nature a general rule, and this statement, by setting out a clear overall purpose, should make it easier for taxpayers and their advisers to consider and interpret the provisions that follow, and in many cases help them to conclude quickly that the GAAR has no application.

The provision also introduces 3 concepts that are Key to the operation of the GAAR. The 3 Key factors that need to be present for the GAAR to be applied are:

• Tax arrangements
• Abusiveness
• Tax advantages.

Arrangements

“Arrangements” are "tax arrangements" if it would be reasonable to conclude that the obtaining of a tax advantage was the main purpose, or one of the main purposes, of the arrangements.
The use of the "main purpose" test is seen in many targeted anti-avoidance rules so its use in the GAAR causes no surprise.

The "main purpose or one of the main purposes" test recognises that incidental steps taken to minimise a tax liability arising from an arrangement will not usually constitute a main purpose. Whether a purpose is a main purpose of an arrangement is a question of fact.

Abusiveness

"Abusiveness" - This is where the GAAR embodies the referred to narrowing. Yes, the main purpose needs to be shown to be the securing of a tax advantage but there will also be a need to show that the arrangement was "abusive" -the real focus of the Government's attack on schemes.

Tax arrangements are "abusive" if they are arrangements the entering into or carrying out of which cannot reasonably be regarded as a reasonable course of action, having regard to all the circumstances including:

1.    The relevant tax provisions
2.    The substantive results of the arrangements
3.    Any other arrangements of which the arrangements form part.

In subsection (2)(a) of Condoc the reference to the relevant tax provisions includes:

1.    Any principles on which they are based (express or implied)
2.    Their policy objectives
3.    Any shortcomings in them that the arrangements are intended to exploit.

Each of the following is an indication that tax arrangements might be abusive:

1.    The arrangements result in an amount of income, profits or gains for tax purposes that is significantly less than the amount for economic purposes
2.    The arrangements result in deductions or losses of an amount for tax purposes that is significantly greater than the amount for economic purposes
3.    The arrangements result in a claim for the repayment or crediting of tax (including foreign tax) that has not been and is unlikely to be, paid
4.    The arrangements involve a transaction or agreement the consideration for which is an amount or value significantly different from market value or which otherwise contains non-commercial terms.

Subsection (4) is not to be read as limiting in any way the cases in which tax arrangements are regarded as abusive.

The GAAR is intended to be capable of altering the tax consequences of abusive arrangements if the consequence claimed is one that manifestly would not have been countenanced by Parliament, had it foreseen the arrangement and the claimed tax consequences. Such arrangements inevitably seek to take advantage of perceived limitations of the tax legislation. Subsections (2) and (3) are intended to make clear that both Parliamentary intent and limitations in the relevant tax provisions are key considerations in the application of the GAAR.

So if it is thought by HMRC that abusive tax avoidance arrangements exist that deliver tax advantages, what will HMRC do? Well, currently it would issue an assessment under (probably deficient) targeted legislation and possibly then rely on the Tribunal/Courts systems to enforce a "substance over form" purposive ruling if needed.

With the GAAR in force HMRC can take a clearer more certain course of action to counteract what it sees as "abusive" avoidance.

The draft GAAR makes it clear that if

1.    There are tax arrangements that are abusive
2.    The procedural requirements have been complied with - the tax advantages arising from the arrangements are to be counteracted on a just and reasonable basis.
3.    The counteraction may be made in respect of the tax in question or any other tax to which the general anti-abuse rule applies.

The usual appeals process will, however, be available to taxpayers - this is made clear in Condoc.

If there is a dispute about whether HMRC's proposed counteraction is appropriate, on appeal a tribunal or court should be able to reach its own conclusion as to what would be the appropriate counteraction. The GAAR is intended to operate within existing processes, and the appropriate appeal rights will apply. The tribunal or court will have the power to increase or reduce assessments and adjust claims to an amount that it considers correct. Further details in relation to appeals and related procedural aspects will be developed and published later in the year.

A novel development is that of the proposed Advisory Panel. This will be made up of various independent experts who could vary depending on the matter at hand.

The Advisory Panel will have two key functions:

1.    To provide opinions to HMRC and the taxpayer on the potential application of the GAAR to any particular arrangement
2.    To update and expand the guidance to the GAAR.

The giving of “opinions” that would carry weight but not be binding could be particularly useful.

The proposed process for the Advisory Panel is stated in Condoc to be as follows:
 
Stage one: Written notification to a taxpayer that a designated HMRC officer considers that the GAAR may apply (with reasons and proposed counteraction), and inviting a written response.

Stage two: Written response from the taxpayer.

Stage three: If the taxpayer provides a written response, the designated HMRC officer must consider the response. If the officer is still of the view that the GAAR may apply, he or she must refer the matter to the Advisory Panel.

Stage four: The Advisory Panel will give its opinion to HMRC and to the taxpayer.

The Advisory Panel should be a relatively inexpensive and quick method of providing opinions on the application of the GAAR. The Government does not propose that it should perform a judicial function or that the process would involve formal hearings where cases will be presented and heard. Instead, it is proposed that the Advisory Panel will consider only written representations from HMRC and the taxpayer.

The Advisory Panel would deliver an opinion, not a judicial decision. In keeping with its intended role, the Panel should be able to deliver its opinion in whatever form is relevant to the circumstances. It is also intended that there would be regularly updated guidance on the GAAR.

Chartered or Independent Financial Planners can most definitely take the "positive" from the development of the GAAR and the other associated measures. This is because what this new legislation is attacking is not what most good financial planning is founded on. In effect, the new provisions will remove some "competition" for the hearts, minds and wallets of those interested in tax planning. For some whose heads may, in the past, have been turned by some of the racier schemes promoted promising appealing tax savings to boost (or even comprise) returns, tried and tested Retail Client strategies based on Pensions, ISAs, Collective Investment and Insurance products may have been seen as dull and unexciting. Well, given the latest developments in tax avoidance, "boring" may be the new "exciting".