Towards a General Anti-Abuse Rule

Graham Chase, Tax Partner, CMS

Following recent publicity surrounding a certain UK bank avoiding tax on a purchase of  own debt the odds could only have shortened on the introduction of a GAAR.  But it might be that the die was cast somewhat earlier when the Court of Appeal found for the taxpayer in the case of Mayes. In the context of a highly engineered structure designed to avoid tax Lord Justice Toulson commented:

 “Unattractive as the result is for other taxpayers and the rest of society … the court cannot lawfully hold, as a matter of proper construction of the statute, that because the sole purpose of [the relevant steps] was to avoid tax … unrelated to any underlying commercial loss, those events are therefore to be treated as if they had not occurred.”

In other words, the court felt that it could not stretch and apply the words of the statute in such a way as to defeat the taxpayer.  A new tool is needed to achieve this.

The Budget Report simply states that the Aaronson Report recommendation is accepted  by the Government and that there will now be a period of consultation with a view to legislation in Finance Bill 2013. Whilst the Government is committed to providing a new general purpose tool to defeat tax schemes the implication is that the new rule must work properly first time; a period of consultation to ensure that it does must therefore be welcomed.

This is not to say that a consensus will be easily reached. It will not. There are many views on the relative merits of a GAAR and, if one is to be introduced, what it should say. If a GAAR could be introduced and at the same time the over-complex UK tax system simplified then that would be a widely welcomed result. However, I doubt that this will be the result. The Aaronson report itself is careful to strike a balance between taxpayer and State, so as to exclude reasonable tax planning and non-tax motivated transactions amongst other features. The report itself contemplates that the existing complex system will continue and clearly, this is a pragmatic if somewhat depressing approach. Overall it is difficult to criticise the Government for seeking to tackle this very difficult area, but looking forward the introduction of the rule will, for most taxpayers, be yet another area of potential uncertainty and cost. So a qualified yes to a GAAR but I would be more enthusiastic about a real commitment to simplify the operation of the system itself (and yes I know all about the Office for Tax Simplification but tax legislation still grows).

2 thoughts on “Towards a General Anti-Abuse Rule”

  1. With reference to your second sentence, did not the Court of Appeal find in favour of the taxpayer in Mayes?

    1. David – Quite correct, typo on my part but now corrected. Thank you.

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