The GAAR: where do we go from here?

Politically, there is no choice – so the question is not whether we are going to have a GAAR but what sort of GAAR are we going to have?

The Aaronson committee did as good a job as anyone could have done to argue the case for a limited scope GAAR – and it was right to do that given the political and judicial environment.

The court of public opinion

In the individual tax context, recent publicity has confirmed the decision of the court of public opinion that a GAAR is needed to deal with perceived abuse of the tax system.

The court of public opinion does not seem to be very well minded to the corporate tax world at present but that seems largely to be because the arguments there are complex and the debate has become very heavily politicised. It is easier to throw bricks than to follow a complex argument rationally – and the arguments in favour of the immediate need and benefit of a GAAR to combat corporate tax avoidance are much more balanced than press reports might suggest.

This government has wisely built on the start made by the last government in striving to make the UK tax system globally competitive in order to attract investment here and also to grow our portfolio of national champions in an increasingly mobile and global world. There is no doubt that that is a better course of action for a mercantile economy when the alternative might be to see the existing multinational base in the UK more and more vulnerable to foreign predators benefiting from a more benign regime than our own. But the decision to measure our domestic corporate tax system (which, together with all the other attributes that the UK has to offer, is part of the total UK PLC package) against the global standard rather than simply responding to immediate internal fiscal needs represents a long-term investment decision that can be difficult to explain in a period of austerity and an environment of political volatility.

The time is right for a GAAR to be introduced and tested in the current climate

The fact that government and business understand their respective needs better now should be to the benefit of the UK and all its citizens in the medium to long term – there are certainly signs that those in business see the advantages of an open and transparent relationship with HMRC and welcome the fact that that brings certainty and stability to the business environment. The government too must be benefitting from the fact that large long-running tax disputes are being settled and the appetite for aggressive tax avoidance in the corporate sector has disappeared. If you are continually bucking the system, you cannot be expected to have the same position in any tax debate as someone sitting rather higher up on the moral high ground – but there is also no need to buck a system that you are broadly content with.

After a considerable period of mutual distrust and hostility (with fault no doubt on both sides), the fact that peace has broken out in the corporate tax world is greatly to be welcomed.

Those who are concerned about even a limited scope GAAR and the possibility that that might concede too much power to the executive with the potential also for ‘mission creep’ in later years would say, at this point, that a GAAR in the corporate sector is the solution to ‘yesterday’s problem’ and so not needed.

The answer to that must surely be to repeat that there is no political choice and also that a decision to introduce a GAAR in the individual tax sector but exempt corporates from it would be to add more fuel to an already raging fire.

Those who have more confidence in the strength (and hopefully long-term continuation) of the current compact between business and the tax administration would also say that now must surely be the best time to introduce a GAAR and start to test the administrative processes in a time of relative tax peace.

There is an understandable concern that even a limited scope GAAR of the type proposed could become a thorn in the flesh of corporate taxpayers – and those at HMRC who are keen to see peace continue will be only too aware of that. Abuse of power in this context could be just as bad as the abuses of the tax system the GAAR is intended to cure.

Aspects of the GAAR which are open to challenge

There are areas of the draft rules that one could certainly challenge:

•  the double reasonableness test has its critics (both in the original form proposed by the Aaronson committee and in its current form) – anyone who can come up with a better formula would be worthy of a big prize. As many have commentated, the position at each end of the commercial transaction to egregious tax scheme spectrum is quite clear – the difficulty is in the middle where tax planning turns into tax avoidance and then potentially becomes aggressive tax avoidance. Only time will tell whether HMRC is drawing the line in the right place;
• ‘one or main purpose’ tests have a considerable record of uncertainty and abuse or misinterpretation by the tax authorities in practice (though one can understand why HMRC rejected the notion of a ‘sole purpose’ test). There are many war stories in this area – any reference to tax in the board papers is as suspicious as not referring to tax at all in those papers because you must be trying to hide the fact that you did; and
• a number of cases have illustrated the difficulty of defining what a ‘tax advantage’ is – ranging from saying that it is the difference between the worst tax transaction you could have done and the transaction you have done to looking at ‘what commercially you might have done’ (which must surely be the right answer).

It may well be that different statutory formulae can be used for surmounting these particular hurdles as the legislation is introduced but that seems unlikely.

Often criticised guidance is likely to play an important role in fleshing out the practical expectations of the legislation – but it will surely be even more important to see the advisory panel perform a full role as a check and balance in this process.

A commitment to review (perhaps with a published advisory panel report) at a fixed point in the future would be no bad thing

Involving the advisory panel as a sense check in all parts of the process – not just the opening threshold questions – must thus be sensible. As those who have been involved in section 703 disputes in the past will testify, a discussion with HMRC as to what is the appropriate or ‘just and reasonable’ remedy can often display how unrealistic their opening position might be.

It must be right that the advisory panel should not play a judicial role – it should act as a sounding board or informal attitude regulator. That will not be an easy job but it is important that it should be done well.

Getting the balance right

In an ideal world, the GAAR would never be used against a corporate taxpayer (or even threatened to be used) in a tax dispute on ‘normal tax planning’ – in the worst conceivable world, the GAAR will be the last argument on the list in every HMRC enquiry. Getting the balance right will be a key challenge for the HMRC team piloting the GAAR’s introduction.

Even a limited scope GAAR should be used with the same care and forethought as a nuclear weapon. It should be part of the mechanism that enforces behaviour rather than something that is constantly being deployed. If there is an expectation within HMRC that the GAAR will be used regularly, then something will have gone terribly wrong here.

In the current environment, most corporates would now probably expect the GAAR to be something that controls abusive behaviour by others (particularly in the individual sector if recent press reports are to be believed) but is never quoted against them. The aspiration to be rated as low risk in almost all areas of your tax relationship with HMRC should ensure that – and should also, therefore, mean that there should be no clamour for a clearance process or complaints that the GAAR is creating uncertainty or adding burdens to business.

If that is not the case in three years’ time, then it will not only be the GAAR project that is off the rails – the current policy of an open and transparent relationship with business designed to produce not only stability and certainty but also a globally competitive tax regime will be at risk.

Time limited legislation is not a popular option in this country – but a commitment to review (perhaps with a published advisory panel report) at a fixed point in the future would be no bad thing.

As well as its likely impact on behaviour, how will a GAAR affect the legislative process? The answer to this ought to be that HMRC should be less paranoid in its drafting (because the GAAR will be there to deal with any clever tricks) – but tax law should still be clear and certain so TAARs will still be required to delineate boundaries and it is unlikely, therefore, that tax legislation will get much simpler.

But the time is right for a GAAR to be introduced and tested in the current climate.