On 28 March HM Revenue & Customs (HMRC) updated its guidance for the general anti-abuse rule (GAAR) and it is a good reminder on the current status of UK tax avoidance and how much things have changed.
My first job in tax was with Arthur Andersen in Edinburgh in 1997. As a chartered surveyor and new to the world of tax I was soon immersed in tax lectures, training and exams to get up to speed. The firm prided itself on technical excellence and a sound knowledge of statute, case law and official guidance.
Emphasis was placed on well thought, structured, legally supportable and commercially driven advice reflective of a growingly complex tax system that was not always seen as fair or clear. The tax training was awash with quotes to both highlight and demonstrate the crucial difference between tax avoidance (legal) and tax evasion (illegal) with quotes like:
Every man is entitled if he can to order his affairs so that the tax attracted under the appropriate Act is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax. [1]
At that time, one of the key control arguments was found in what was known as ‘the Ramsay principle’ [2]. This challenged pre-ordained transactions with steps inserted that have no commercial purpose apart from tax avoidance.
Nowadays, both the perception and legality of tax avoidance has changed substantially. Anyone who thinks otherwise would do well to check their legislation and take note of the array of measures now open to HM Revenue & Customs which include:
Targeted anti-avoidance rules
Disclosure of tax avoidance schemes (DOTAS)
Code of Practice on Taxation for Banks
General anti-abuse rules (GAAR)
Serial tax avoidance regime
Stiffer penalties and compliance
More targeted teams and IT resources to spot irregularities
It is worth noting that a fundamental premise of the GAAR is that it rejects the approach taken by the Courts in a number of old cases (including [1] above) to the effect that taxpayers are free to use their ingenuity to reduce their tax bills by any lawful means.
Taxation is not to be treated as a game where taxpayers can indulge in inventive schemes in order to eliminate or reduce their tax liability.
To help taxpayers and their advisors understand the types of arrangements which the GAAR (and related legislation) is aiming to catch, the guidance also contains some examples on both targeted and untargeted tax arrangements.
As you would expect an untargeted arrangement includes using statutory incentives and reliefs to support legitimate business activity and investment in a straightforward way (for example business property relief, Enterprise Investment Scheme (EIS), capital allowances, Patent Box) – provided of course the statutory entitlements to claim are met.
Other examples include a taxpayer who decides to carry on a trade as either a sole trader, or through a limited company whose shares the taxpayer owns and where the taxpayer works as an employee. Or, decisions to invest in an Individual Savings Account (ISA) to take advantage of the Income Tax relief which such investments carry, or to give away assets to a son or daughter without retaining a benefit in the gifted asset, with a view to reducing the amount of Inheritance Tax payable on the transferor’s death.
The tax landscape may have changed but the importance of well thought, structured, legally supportable and commercially driven advice remains as valid today as it did all those years ago.
If you have any questions or concerns, please do not hesitate to contact me.
Lord Tomlin in Duke of Westminster v CIR [1936] AC1
WT Ramsay v Inland Revenue Commissioners; Eilbeck (Inspector of Taxes) v Rawling [1981] STC 174 and Furniss (Inspector of Taxes) v Dawson [1982] STC 267