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IT HAS BEEN nearly ten years since the last serious review took place regarding some form of general anti-avoidance rule for direct taxes. In particular, the discussions centred around the Tax Law Review Committee's November 1997 report on 'Tax avoidance', the Inland Revenue's October 1998 consultative document on a 'General anti-avoidance rule for direct taxes', and the TLRC's February 1999 response to the Revenue's consultative document. The consultations concluded that the UK tax system did not need, or perhaps could not cope with, the implementation of the legislative framework being suggested. The Treasury decided that it would be better to persevere with its tried and tested policy of dealing with anti-avoidance on an issue by issue basis, bringing in specific rules to deal with each perceived abuse.
However, after nearly a decade of relentlessly identifying and legislating against particular schemes and arrangements, is our tax law in danger of becoming weighed down with complex and cumbersome rules that exist principally to deal with transactions that will, because of the rules, most likely never be undertaken?
The Varney review
Much is said about the need to make the UK more business friendly. We are told that the multitude of regulatory burdens on business must be reduced and made less onerous. Tax is increasingly seen as one of the areas presenting the most significant and costly compliance difficulties, both for small and large businesses. These issues are frequently aired, without much action being taken. The tendency to comment, without any commitment to change may to some degree be addressed in the '2006 Review of Links with Large Business', issued by HMRC in November 2006. In that document the chairman, Sir David Varney, of the review states that:
'Government and business have a common goal of maintaining and enhancing the attractiveness of the UK as a place to do business in and to do business from. The relationship between large business and HMRC and the efficiency and effectiveness of the administration of the tax system is important in achieving this goal.
'Globalisation and technology are accelerating the pace of world economic change. Business and HMRC, together with their policy partners in HM Treasury, need to share perspectives on these changes, and engage in an open and transparent dialogue about their implications for UK business. This will enable continued modernisation to ensure the global competitiveness of UK business on a long term, sustainable basis.'
The response from the businesses consulted highlights the point that:
'Vital elements of a fair, equitable and competitive tax system are certainty, stability and predictability. These elements promote and support sustainable growth both domestically and internationally.'
Commitment to change
The Chancellor issued an immediate statement confirming that the principal recommendations of the Varney Review would be implemented, without unnecessary delay. The first two key recommendations were that:
- from autumn 2007, a system of binding 'advance rulings' would be introduced to give businesses certainty about the tax consequences of particular types of investment and reconstruction related transactions; and
- by spring 2008, at the latest; the existing clearance regime would be extended so that HMRC will provide businesses with their view of the tax consequences of significant commercial issues both pre and post transaction and businesses will receive a binding HMRC view within 28 days as the norm.
The report recognises that these proposals build on and extend the present, limited, scheme for post-transaction advice provided under Code of Practice 10 and the existing statutory framework for advance clearances. Such extensions are welcome although (before taxpayers and tax advisers celebrate too enthusiastically) note that it is not entirely clear whether all businesses and taxpayers in general are to benefit or whether these changes are to be restricted to 'large businesses' dealt with by HMRC's Large Business Service. The committee's terms of reference and its makeup seem to suggest that the report's recommendations will apply to 'large businesses' only.
More flexible policy?
The Treasury response to the Varney Review suggests that there is the possibility of a more flexible approach to issues such as pre-transaction rulings, which most commentators consider an essential part of any general anti avoidance rule. If there is, indeed, some flexibility currently flowing through the tax policy-making corridors of power, perhaps now would be an opportune moment to reconsider the UK's stance regarding a GAAR, at least to replace some of the myriad of specific anti-avoidance rules. There are other reasons why a comprehensive GAAR review could well be considered now. For example, it could be integrated into the forthcoming rewrite exercise for corporation tax (assuming that any anti-avoidance rule would initially cover corporation tax before moving on to deal with income tax and other personal taxes).
In some other jurisdictions which have a GAAR, decisions and reviews seem to suggest that their established rules may be 'coming of age'. A UK review could consider these countries' rules, which might mean that we could learn from the experiences of others and perhaps avoid some of the teething problems on implementation that they have experienced.
The overseas' experience
In Canada, the GAAR (see Canadian Income Tax Act, s 245) seeks to prevent 'abusive' tax avoidance schemes that might technically be permissible under a literal interpretation of tax legislation; but which could reasonably be considered to frustrate the proper application of the Tax Act when read as a whole. Recent decisions of the Canadian Supreme Court have set down significant interpretive guidelines for key elements of the rule (particularly focusing on the issue of what constitutes 'abusive' tax avoidance). For example Canada Trustco, involved the cross-border sale and leaseback of trucking equipment (trailers), complex loan, guarantee and option arrangements that effectively eliminated the risks normally associated with economic ownership of assets and corresponding claims for capital cost allowance by Canada Trustco, and Kaulius et al, involved the transfer of business losses from one business entity to another, unconnected, person via a partnership arrangement.
Other jurisdictions have been reviewing their existing general anti avoidance rules. In New Zealand, a consultative committee on tax compliance has considered the workings of a GAAR that, in part, is related to UK case law concepts derived from decisions such as Ramsay v CIR [1981] STC 174 and CIR v Burmah Oil Co Ltd [1982] STC 30. The committee recommended a number of relatively minor amendments to the rule before commenting on the need for a wide ranging GAAR, that:
'If a general anti-avoidance provision is to be effective, it cannot be precise [in defining the term 'tax avoidance'] … this feature of an anti-avoidance provision means less certainty for taxpayers … this cost is outweighed by the benefit provided by the flexible wording of the general anti-avoidance rule, allowing the court to address new and different types of tax avoidance arrangements … this helps to preserve the robustness of the tax system.'
This perceived lack of precision is generally dealt with by forms of 'official clearances' and pre-transaction 'rulings' not unlike those suggested by the Varney review.
South Africa and Australia also reviewed their general anti avoidance rules in recent years. There is, in fact, no shortage of recent scrutiny of GAARs in jurisdictions that have legal systems that are similar or related to that of the UK.
Calls for a change
Much has changed since 1997, when the UK last seriously began to consider the introduction of a GAAR. Since then, other countries have developed considerable experience with the legal format, structure, and implementation of such rules. Many of them have reviewed and consulted on reform for their GAARs to improve their effectiveness and ensure that they continue to meet the needs of taxpayers and tax collectors. None, to the best of my knowledge has abandoned it. Even organisations such as the Institute of Chartered Accountants of Scotland, that were relatively hostile to the concept of a UK GAAR in 1998, have reconsidered the idea and seem to think that a further review is merited. For example, in July 2005, Ian Dewar, of the ICAS Taxation Committee, was reported as saying that:
'The growing complexity of the tax system denies the average taxpayer the ability to comply with the legal obligation to self assess their tax liabilities. The sheer complexities of anti-avoidance rules, particularly those that have retrospective effect, create uncertainty for businesses.'
He said further:
'It is important that businesses and other taxpayers who are not engaged in unacceptable avoidance should have the benefit of certainty in their tax affairs, and this could be achieved by a new ruling system — enabling taxpayers to confirm that they are not breaching the [new] GAAR.'
The time for a serious review of a UK GAAR may be ripe. Avoiding the issue now may mean that it could easily be another ten years before a suitable moment occurs. That would be another ten years of highly complex, specific anti-avoidance rules bloating our, already extensive, tax statutes. As Shakespeare put it in Julius Caesar (IV, iii, 216):
'There is a tide in the affairs of men
Which, taken at the flood, leads on to fortune;
Omitted, all the voyage of their life
Is bound in shallows and in miseries.'
Martin Edhouse is a tax consultant with Francis Clark, Chartered Accountants, www.francisclark.co.uk, tel: 01626 206206, e-mail: mte@francisclark.co.uk.
