Graham Aaronson QC leads the study into a GAAR, which is due to report on 31 October 2011.The study group has concluded that a GAAR should cover flagrant tax avoidance schemes and not affect ‘centre ground’ schemes where there can be legitimate debate over their validity – but it is not yet been decided whether it is possible to enshrine the principles of such a GAAR in a statutory framework. A working draft has been prepared for the purpose of seeing whether it is possible to capture and to delineate the principles with sufficient certainty.
Graham Aaronson QC talks to Tax Journal editor, Paul Stainforth, about the progress of the study into a general anti-avoidance rule
PS The study has now reached its halfway point. How is it going?
GA It’s actually going extremely well from the management of a study point of view. Everything which we need to cover, we are covering.
There have been very worthwhile discussions and the conclusions reached at each plenary session have been very valuable and have clarified thinking.
And we have reached the stage of being quite clear as to whether any sort of GAAR could be worth having and if so what and why.
The background which we’ve had to consider very thoroughly is whether we need a GAAR at all given the development of purposive interpretation of tax statutes by the Courts, the creation and expansion of the disclosure of tax avoidance schemes, the greater emphasis on corporate governance by large companies and the risk management strategies of HMRC, the introduction by HMRC of Customer Relationship Managers, the Code of Conduct on tax for banks and so on.
The view I’ve formed is that a GAAR is only worthwhile if the advantages are really worth having and there are no significant disadvantages.
A GAAR is a particularly sensitive issue for the UK.
The UK doesn’t automatically attract industrial and commercial activity – we’re not a resource generating jurisdiction, apart from North Sea oil, and we’re not like the United States with a massive internal market.
To help attract business, we need a tax regime which is regarded as appropriate and fair and as certain as possible.
A GAAR, if we were to have one, must not have any significant detrimental effect to the attractiveness of the tax regime.
To the contrary, it needs to be seen as providing real benefit.
PS What are the potential advantages of a GAAR?
GA There are two which appeal to me particularly as a lawyer and someone working in tax.
And there’s one which I think should appeal to everyone.
Taking that last one first, there is outrage at flagrant tax avoidance schemes.
This is something that the committee emphasised must not be underestimated.
I’m not just talking about public outrage, but also distaste within the profession over the fact that a scheme like ‘Ships 2’ in the Mayes case, for example, is being promoted.
It’s outrageous that someone should say, I’ve got an income of £1.7 million, how do I get a loss of £1.7 million? Many of us have seen these schemes, we’re asked to advise on them.
I think we’re all pretty disgusted and it is also a waste of brain power that is being used to generate these abusive schemes.
If a GAAR can stop that, that in itself is a good thing.
I hope every responsible tax professional would agree with that.
The second advantage appeals to me as a lawyer, but others might not necessarily regard it as important as I do.
I am getting very upset at the lengths to which judges will go to to stretch the purposive interpretation of tax statutes in order to defeat what they see as tax avoidance schemes.
I entirely sympathise with the Courts, but this is leading to a distortion of true purposive interpretation.
It leads to uncertainty and it is increasing litigation risk – I do feel strongly about this.
The third advantage concerns something which flows from the GAAR, namely that a GAAR should lead to a serious attempt to strip away from future legislation, and then to strip away from existing legislation, some of the enormous complexities that are introduced in order to deal with anticipated tax avoidance strategies.
PS It would be a brave policy adviser who recommended abolishing existing targeted anti-avoidance rules ...
GA It would be a foolish person who would do that immediately. But I don’t think it would be either foolish or brave to say that a serious study should be set up to examine the extent to which existing targeted anti-avoidance rules, or particular rules that have been introduced to defend certain tax principles, can be simplified given the protection of the GAAR.
My own view is that if you have in place a GAAR which will deter and prevent the flagrant tax avoidance schemes, it should be possible to identify various existing provisions in our tax code which are rendered unnecessary.
But more importantly for the future it should be much easier to draft the principles of new tax provisions with far fewer anti-avoidance additional provisions.
PS At the ICAEW Tax Faculty's Wyman Symposium the other week you suggested that, if it is possible to enshrine the principles of a GAAR in a statutory framework, a GAAR would cover flagrant tax avoidance schemes and not affect ‘centre ground’ schemes where there is debate over their validity.
GA Yes, that’s right. I think ‘flagrant’ is the right word here. A flagrant scheme is absolutely obvious when you see it.
It’s something which would never be done in the normal world, not in the commercial world, and not in the family world.
So, a GAAR would concentrate on that segment of the spectrum and it would leave the rest for normal, unstrained, purposive interpretation.
As many judges have said, it’s perfectly proper to try to minimise your tax as long as you’re doing it in compliance with the intent of Parliament.
What is not proper is to exploit provisions of the tax code that were never intended to be used in that way to achieve a tax result that no-one could possibly think Parliament intended to be achieved.
I’ve had numerous discussions now, including with the CIOT, ICAEW, ICAS, many individuals in the tax profession, and I’m also meeting representative bodies of lawyers and the CBI.
I would be very, very surprised if anyone thinks this type of flagrant avoidance should be protected.
So far, no one has suggested it.
PS Some people may say that, if a GAAR were to be restricted to flagrant schemes, it might not catch very much.
GA It might not be what UK Uncut might want. But a GAAR has little to do with the closing of the perceived tax gap as far as I’m concerned.
I don’t think that increasing the tax take is a sufficient reason for having a GAAR.
If it is possible to enshrine the principles of a sensible GAAR in legislation – and I do not yet know whether it is – a GAAR which stops the flagrant schemes would allow the judges to get back to proper interpretation of the legislation, and it would allow the draftsman not to have to worry about the wholly artificial attacks on their new tax principles.
So, I think you get a multiple advantage. You increase the certainty, you make the legislation easier to read and easier to understand, you allow the judges to operate in a more predictable way when interpreting tax statutes, and you deter or strike down the abusive attacks on the tax regime.
PS You’ve spent a lot of time looking at GAARs in other common law jurisdictions, what have you learned from those?
GA Each overseas GAAR needs to be considered in its own context, and none of them is appropriate so far as our own particular circumstances are concerned.
As we heard from Brian Keegan [Director of Taxation, Chartered Accountants Ireland, at the Wyman Symposium], in Ireland the Courts could not follow a Ramsay route constitutionally.
In Australia and other jurisdictions, when the GAARs were introduced, the courts were adopting very strict interpretive rules.
In other words, the Courts weren’t using purposive interpretation and so a GAAR was introduced in an attempt to tackle tax avoidance which existed by exploiting very rigid interpretations.
Our situation is different – we’re trying to stop a reduction in tax where the reduction in tax relies on an unquestionably abusive exploitation of the legislation.
If we do have a GAAR, it would therefore be different to anyone else’s.
There could be elements which are common but we have a different starting point, and therefore the structure and some of the tests would be different.
PS Should there be a de minimis limit?
GA That’s a very difficult issue, because you know what some people might make of it. People might try to avoid the de minimis limit by carrying our consecutive transactions below the limit or having them carried out by different people.
Also, if all a GAAR is doing is attacking the flagrant scheme, is there really a need for a de minimis starting point, conceptually speaking? We will be considering this topic at the next meeting of the study group.
PS Given the concerns about the need for certainty, would a pre-transaction clearance be an absolute necessity if a GAAR were to be introduced?
GA There are disadvantages with a system that needs either formal or informal clearance arrangements.
Informal clearance arrangements tend to favour the big and the well connected.
Formal clearances could encourage a deluge of applications which would require very significant resource to process them.
So you’ve got to avoid the need to have a clearance system. That’s the key message.
The key question is, how conceptually do you avoid the need to have a clearance system? And having seen conceptually how you do it, how then do you turn that into legislation? Conceptually the answer is pretty obviously once you see it.
You avoid the uncertainty by not dealing with questions where there is room for legitimate debate as to whether something is acceptable or unacceptable tax avoidance.
So a GAAR should not cover situations where tax professionals can responsibly hold the view that a particular tax strategy is perfectly proper and acceptable.
In all the discussions that I’ve had on this, everyone agrees on it as a matter of principle – I haven’t come across a single dissenting voice.
But would we recommend a clearance system for those areas where there are already clearance facilities, for example, for company reorganisations? The answer to me is probably yes, but this again is a specific topic we will be considering at the next meeting.
PS So the big question is, as you said in your letter to David Gauke, whether it is possible to develop the conceptual framework into a set of statutory rules fit for enactment.
GA Yes, the question is whether one can sufficiently clearly draw the line to ensure that only flagrant schemes are caught and steer clear of the centre ground where there can be responsible views holding that what is being done is acceptable.
Whether that can be enshrined in a draft that is suitable for enactment is what we will be working on over the next few months.
PS Has the wording used in the Code of Conduct for tax on banks helped here?
GA No and yes. Obviously we’re looking at everything but we start with a blank sheet of paper and consider what it is that should be protected, what shouldn’t be protected, and how it can be described in terms which would be sufficiently certain to be properly enacted as legislation.
That’s how we’re proceeding. What I found very important in all the discussions is, what do people want to protect? What about things which have been effectively blessed by the HMRC, which have been standard practice unchallenged for decades? For instance, everyone’s been creating preference shares for the purpose of a takeover.
To say that that is now caught by GAAR would be outrageous.
What about things that were said in Parliamentary debates or included in Revenue publications, can they be relied upon? It would be unfair to invoke the GAAR in these circumstances.
So, that’s the sort of issue we are considering.
I have drawn up a draft, it’s about five pages long – it’s purely a working draft.
One member of the committee very helpfully proposed terms for a draft several months ago.
I do not know whether my draft is going to survive in any recognisable form or whether it’s going to have too many holes picked in it by the other members of the committee, people whose views I genuinely respect.
There are still lots of detailed issues to be considered. But the basic principles are agreed.
What will be interesting, if we proposed a GAAR, is to see the reaction of HMRC and the Treasury, perhaps whether there are different reactions between the two.
It may be that HMRC will feel that this sort of GAAR is not going to give them any weapon except against flagrant schemes, and that that is short changing them.
I don’t know, it will be very interesting to have that discussion.
From my point of view, if we think it is possible to have a GAAR, even if it doesn’t do as much as UK Uncut would like, I hope there will be no misinterpretation of it.
I really would like our report to represent the consensus as near as possible – whether we propose a GAAR that people agree is actually very sensible, or whether we ultimately conclude that it can’t be done.
Graham Aaronson QC leads the study into a GAAR, which is due to report on 31 October 2011.The study group has concluded that a GAAR should cover flagrant tax avoidance schemes and not affect ‘centre ground’ schemes where there can be legitimate debate over their validity – but it is not yet been decided whether it is possible to enshrine the principles of such a GAAR in a statutory framework. A working draft has been prepared for the purpose of seeing whether it is possible to capture and to delineate the principles with sufficient certainty.
Graham Aaronson QC talks to Tax Journal editor, Paul Stainforth, about the progress of the study into a general anti-avoidance rule
PS The study has now reached its halfway point. How is it going?
GA It’s actually going extremely well from the management of a study point of view. Everything which we need to cover, we are covering.
There have been very worthwhile discussions and the conclusions reached at each plenary session have been very valuable and have clarified thinking.
And we have reached the stage of being quite clear as to whether any sort of GAAR could be worth having and if so what and why.
The background which we’ve had to consider very thoroughly is whether we need a GAAR at all given the development of purposive interpretation of tax statutes by the Courts, the creation and expansion of the disclosure of tax avoidance schemes, the greater emphasis on corporate governance by large companies and the risk management strategies of HMRC, the introduction by HMRC of Customer Relationship Managers, the Code of Conduct on tax for banks and so on.
The view I’ve formed is that a GAAR is only worthwhile if the advantages are really worth having and there are no significant disadvantages.
A GAAR is a particularly sensitive issue for the UK.
The UK doesn’t automatically attract industrial and commercial activity – we’re not a resource generating jurisdiction, apart from North Sea oil, and we’re not like the United States with a massive internal market.
To help attract business, we need a tax regime which is regarded as appropriate and fair and as certain as possible.
A GAAR, if we were to have one, must not have any significant detrimental effect to the attractiveness of the tax regime.
To the contrary, it needs to be seen as providing real benefit.
PS What are the potential advantages of a GAAR?
GA There are two which appeal to me particularly as a lawyer and someone working in tax.
And there’s one which I think should appeal to everyone.
Taking that last one first, there is outrage at flagrant tax avoidance schemes.
This is something that the committee emphasised must not be underestimated.
I’m not just talking about public outrage, but also distaste within the profession over the fact that a scheme like ‘Ships 2’ in the Mayes case, for example, is being promoted.
It’s outrageous that someone should say, I’ve got an income of £1.7 million, how do I get a loss of £1.7 million? Many of us have seen these schemes, we’re asked to advise on them.
I think we’re all pretty disgusted and it is also a waste of brain power that is being used to generate these abusive schemes.
If a GAAR can stop that, that in itself is a good thing.
I hope every responsible tax professional would agree with that.
The second advantage appeals to me as a lawyer, but others might not necessarily regard it as important as I do.
I am getting very upset at the lengths to which judges will go to to stretch the purposive interpretation of tax statutes in order to defeat what they see as tax avoidance schemes.
I entirely sympathise with the Courts, but this is leading to a distortion of true purposive interpretation.
It leads to uncertainty and it is increasing litigation risk – I do feel strongly about this.
The third advantage concerns something which flows from the GAAR, namely that a GAAR should lead to a serious attempt to strip away from future legislation, and then to strip away from existing legislation, some of the enormous complexities that are introduced in order to deal with anticipated tax avoidance strategies.
PS It would be a brave policy adviser who recommended abolishing existing targeted anti-avoidance rules ...
GA It would be a foolish person who would do that immediately. But I don’t think it would be either foolish or brave to say that a serious study should be set up to examine the extent to which existing targeted anti-avoidance rules, or particular rules that have been introduced to defend certain tax principles, can be simplified given the protection of the GAAR.
My own view is that if you have in place a GAAR which will deter and prevent the flagrant tax avoidance schemes, it should be possible to identify various existing provisions in our tax code which are rendered unnecessary.
But more importantly for the future it should be much easier to draft the principles of new tax provisions with far fewer anti-avoidance additional provisions.
PS At the ICAEW Tax Faculty's Wyman Symposium the other week you suggested that, if it is possible to enshrine the principles of a GAAR in a statutory framework, a GAAR would cover flagrant tax avoidance schemes and not affect ‘centre ground’ schemes where there is debate over their validity.
GA Yes, that’s right. I think ‘flagrant’ is the right word here. A flagrant scheme is absolutely obvious when you see it.
It’s something which would never be done in the normal world, not in the commercial world, and not in the family world.
So, a GAAR would concentrate on that segment of the spectrum and it would leave the rest for normal, unstrained, purposive interpretation.
As many judges have said, it’s perfectly proper to try to minimise your tax as long as you’re doing it in compliance with the intent of Parliament.
What is not proper is to exploit provisions of the tax code that were never intended to be used in that way to achieve a tax result that no-one could possibly think Parliament intended to be achieved.
I’ve had numerous discussions now, including with the CIOT, ICAEW, ICAS, many individuals in the tax profession, and I’m also meeting representative bodies of lawyers and the CBI.
I would be very, very surprised if anyone thinks this type of flagrant avoidance should be protected.
So far, no one has suggested it.
PS Some people may say that, if a GAAR were to be restricted to flagrant schemes, it might not catch very much.
GA It might not be what UK Uncut might want. But a GAAR has little to do with the closing of the perceived tax gap as far as I’m concerned.
I don’t think that increasing the tax take is a sufficient reason for having a GAAR.
If it is possible to enshrine the principles of a sensible GAAR in legislation – and I do not yet know whether it is – a GAAR which stops the flagrant schemes would allow the judges to get back to proper interpretation of the legislation, and it would allow the draftsman not to have to worry about the wholly artificial attacks on their new tax principles.
So, I think you get a multiple advantage. You increase the certainty, you make the legislation easier to read and easier to understand, you allow the judges to operate in a more predictable way when interpreting tax statutes, and you deter or strike down the abusive attacks on the tax regime.
PS You’ve spent a lot of time looking at GAARs in other common law jurisdictions, what have you learned from those?
GA Each overseas GAAR needs to be considered in its own context, and none of them is appropriate so far as our own particular circumstances are concerned.
As we heard from Brian Keegan [Director of Taxation, Chartered Accountants Ireland, at the Wyman Symposium], in Ireland the Courts could not follow a Ramsay route constitutionally.
In Australia and other jurisdictions, when the GAARs were introduced, the courts were adopting very strict interpretive rules.
In other words, the Courts weren’t using purposive interpretation and so a GAAR was introduced in an attempt to tackle tax avoidance which existed by exploiting very rigid interpretations.
Our situation is different – we’re trying to stop a reduction in tax where the reduction in tax relies on an unquestionably abusive exploitation of the legislation.
If we do have a GAAR, it would therefore be different to anyone else’s.
There could be elements which are common but we have a different starting point, and therefore the structure and some of the tests would be different.
PS Should there be a de minimis limit?
GA That’s a very difficult issue, because you know what some people might make of it. People might try to avoid the de minimis limit by carrying our consecutive transactions below the limit or having them carried out by different people.
Also, if all a GAAR is doing is attacking the flagrant scheme, is there really a need for a de minimis starting point, conceptually speaking? We will be considering this topic at the next meeting of the study group.
PS Given the concerns about the need for certainty, would a pre-transaction clearance be an absolute necessity if a GAAR were to be introduced?
GA There are disadvantages with a system that needs either formal or informal clearance arrangements.
Informal clearance arrangements tend to favour the big and the well connected.
Formal clearances could encourage a deluge of applications which would require very significant resource to process them.
So you’ve got to avoid the need to have a clearance system. That’s the key message.
The key question is, how conceptually do you avoid the need to have a clearance system? And having seen conceptually how you do it, how then do you turn that into legislation? Conceptually the answer is pretty obviously once you see it.
You avoid the uncertainty by not dealing with questions where there is room for legitimate debate as to whether something is acceptable or unacceptable tax avoidance.
So a GAAR should not cover situations where tax professionals can responsibly hold the view that a particular tax strategy is perfectly proper and acceptable.
In all the discussions that I’ve had on this, everyone agrees on it as a matter of principle – I haven’t come across a single dissenting voice.
But would we recommend a clearance system for those areas where there are already clearance facilities, for example, for company reorganisations? The answer to me is probably yes, but this again is a specific topic we will be considering at the next meeting.
PS So the big question is, as you said in your letter to David Gauke, whether it is possible to develop the conceptual framework into a set of statutory rules fit for enactment.
GA Yes, the question is whether one can sufficiently clearly draw the line to ensure that only flagrant schemes are caught and steer clear of the centre ground where there can be responsible views holding that what is being done is acceptable.
Whether that can be enshrined in a draft that is suitable for enactment is what we will be working on over the next few months.
PS Has the wording used in the Code of Conduct for tax on banks helped here?
GA No and yes. Obviously we’re looking at everything but we start with a blank sheet of paper and consider what it is that should be protected, what shouldn’t be protected, and how it can be described in terms which would be sufficiently certain to be properly enacted as legislation.
That’s how we’re proceeding. What I found very important in all the discussions is, what do people want to protect? What about things which have been effectively blessed by the HMRC, which have been standard practice unchallenged for decades? For instance, everyone’s been creating preference shares for the purpose of a takeover.
To say that that is now caught by GAAR would be outrageous.
What about things that were said in Parliamentary debates or included in Revenue publications, can they be relied upon? It would be unfair to invoke the GAAR in these circumstances.
So, that’s the sort of issue we are considering.
I have drawn up a draft, it’s about five pages long – it’s purely a working draft.
One member of the committee very helpfully proposed terms for a draft several months ago.
I do not know whether my draft is going to survive in any recognisable form or whether it’s going to have too many holes picked in it by the other members of the committee, people whose views I genuinely respect.
There are still lots of detailed issues to be considered. But the basic principles are agreed.
What will be interesting, if we proposed a GAAR, is to see the reaction of HMRC and the Treasury, perhaps whether there are different reactions between the two.
It may be that HMRC will feel that this sort of GAAR is not going to give them any weapon except against flagrant schemes, and that that is short changing them.
I don’t know, it will be very interesting to have that discussion.
From my point of view, if we think it is possible to have a GAAR, even if it doesn’t do as much as UK Uncut would like, I hope there will be no misinterpretation of it.
I really would like our report to represent the consensus as near as possible – whether we propose a GAAR that people agree is actually very sensible, or whether we ultimately conclude that it can’t be done.
