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Why the UK GAAR Report Raises Issues of Complexity and Certainty
The report into the proposed UK general anti-avoidance rule (GAAR) has been submitted to the government. The report raises various concerns and most stakeholders have reacted by speaking out against the GAAR's introduction.
The report, which recommends a moderate, well-targeted GAAR to attack abusive planning, rather than a broad spectrum rule, has highlighted a number of concerns.
Stakeholders have welcomed the report, lauding report author Graham Aaronson QC and his team for making significant progress on the issue, but concerns have been raised over complexity, certainty and scope.
"While we think that Graham Aaronson has made a decent fist of it, we question whether the complexity of a new set of tax rules is justified given we already have over 17,000 pages of tax legislation," said Dan Neidle, partner at Clifford Chance LLP.
There are fears that if a GAAR was to be introduced, legitimate tax planning could be caught by its scope and some taxpayers would therefore be punished unfairly.
"The acid test will be whether a GAAR can really focus on the egregious tax schemes that Graham Aaronson rightly has in mind, while not worrying those businesses and advisers that undertake routine transactions," said Anthony Thomas, president of the Chartered Institute of Taxation (CIOT).
Other concerns include the increased power a GAAR would hand to the tax authorities, with worries over HMRC officials using the GAAR in cases for which it was not designed.
"In particular there was a fear that the use of the GAAR might in some cases be threatened as a means of applying pressure in tax disputes over non-abusive tax planning," said Aaronson.
So-called mission creep, where the intention of the legislation is altered over time, was also highlighted by the report as something to be wary of, with Aaronson's team raising the point that the safeguards written into the GAAR may not survive, either because of pre-enactment amendment or subsequent amendment.
"To use the expression currently in vogue, there was a palpable fear of mission creep after the GAAR reached the statute book," said Aaronson.
Regardless of such mission creep, even unaltered, the proposed legislation could cause a decline in UK investment.
"The real fear is that those companies whose tax planning may be assessed more subjectively will be put off by the uncertainty. They will simply shift their profits out of the UK to achieve the same savings," said Jonathan Hornby, of Taxand UK. "This could cost the country billions in lost investment and will hit UK jobs at a time when unemployment is at its highest level for 17 years."
If the legislation only serves to add more uncertainty to the tax code, not only could we see profit-shifting away from the UK, but also in a domestic context we could see an increase in disputes arising purely because of the GAAR legislation, especially if its application is not universal.
"Our concern is that these proposals, if implemented, will generate more disputes between taxpayers and HMRC about whether or not the GAAR applies to their circumstances," said Adam Craggs, partner at Reynolds Porter Chamberlain.
Further consultation will now be sought before the government responds fully in next year's budget.
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First published in the International Tax Review, 21 November 2011