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Will the general anti-abuse rule provide certainty for taxpayers and advisers?
KEY POINTS
- The boundary between abusive and acceptable tax planning in a shifting landscape.
- Acceptable planning today and some years down the line.
- How will GAAR interact with this developing climate?
- Where does this leave certainty?
An exciting new tax year approaches. The UK is to enact a statutory residence test which will at last give a rather greater degree of clarity as to when someone is or is not UK resident for tax purposes.
Practitioners have welcomed the test precisely for this reason: it gives a much greater measure of certainty than has been available on the vexed question of residence until now.
However, it would be hasty and optimistic to take this as meaning that the tax landscape is acquiring greater certainty overall. In the area of tax planning, particularly when trying to distinguish between avoidance and abuse, it seems we are faced with ever shifting boundaries.
Pointer or not really?
In a recent First-tier Tibunal decision, The partners of the Vaccine Research Ltd Partnership (TC2491), a number of high profile investors had their claims for loss relief denied.
They had participated in a scheme which generated a total £77m of tax losses for UK resident investors through what appears to have been a low risk investment in a partnership, of which a smaller sum was invested in developing medical vaccines.
I will not analyse the case here, but will focus on the decision as an illustration of the difficulties taxpayers and practitioners will face in assessing the outcome of participating in aggressive and less aggressive tax planning.
The scheme, which started in 2006, invested in medical research via a partnership structure with various banks playing different roles in a series of apparently interlinked transactions. As was frequently the case with such planning, much of the investment appears to have been loan-backed, and there seems to have been at least a degree of circularity to the planning.
This type of planning will be familiar to many, and a number of investment partnership structures of a similar vintage are currently under investigation. Certainly, having reviewed and advised on a number of these structures at the time, some were more commercial than others, and some more circular. The sideways loss relief legislation was also rapidly changing at the time.
The interesting point though is not so much the technical merits of the structure, but how acceptable tax planning in 2006, or 2013, will be viewed in five or ten years time. Rather than asking whether a scheme works from a technical point of view, and how aggressive it is, the question will be does it stand up to the test of time, and how has statutory, judicial and public opinion evolved?
GAAR
The introduction of a general anti abuse rule (GAAR) marks a further development in defining the sometimes all too blurry boundary between avoidance and abuse. It is worth reminding ourselves that the GAAR sits alongside, but in priority to, existing anti avoidance legislation.
The draft guidance published alongside the draft GAAR last year is helpful, but it raises more questions than it answers. Certainly, the fact that tax benefits may be denied where the economic outcome is not consistent with the tax result is hardly surprising and seems generally in line with the developing body of case law.
While also an inherently reasonable proposition, this becomes rather harder to apply in areas, such as succession planning and inheritance tax, where there is no economic or commercial underlying impetus.
It remains to be seen how the GAAR will play out in practice in this context. For instance, how will sophisticated trust structures making use of excluded property status be treated? This takes advantage, in a simple way, of statutorily prescribed reliefs, and involves no artificiality.
However, as was demonstrated with the changes to the inheritance tax treatment of trusts in Finance Act 2006, trust structures are frequently viewed with suspicion by HMRC.
It is to be hoped that the GAAR advisory panel will ensure that the rule does ensure it is used as originally envisaged by Graham Aaronson QC in the November 2011 report (see www.lexisurl.com/gaarreport).
He recommended a narrowly drafted GAAR, which would catch only “egregious” schemes. The absence of a pre-clearance procedure is a missed opportunity in this context, but there it is.
New Zealand experience
Pausing on this point, the GAAR is not intended to catch ordinary planning of which HMRC is aware. However, a recent decision concerning the New Zealand GAAR makes for cautionary reading in that context.
As highlighted by Michael L Firth in his article “Watch out”, Taxation, 21 February 2013, page 14, the decision of the New Zealand Supreme Court in Penny and Hooper v CIR [2011] NZSC 95 struck down what is seen as fairly unexciting planning.
In that case, which involved the incorporation of businesses by two orthopaedic surgeons, the receipt of dividends rather than salary was found to come within the ambit of the New Zealand GAAR. Dividends were more favourably taxed than remuneration.
The New Zealand GAAR is differently worded from the UK GAAR, but the real stumbling block appears to have been that the relative levels of remuneration as opposed to salary were not on arm’s length terms, ie the individuals concerned would not have entered into employment on equivalent salary terms with unrelated employers.
It is consistent with good practice that a reasonable level of salary should always be paid, even where there is a focus on profit extraction through dividends, and the extreme fact pattern in PA Holdings ([2012] STC 582) serves to illustrate just how abusive some profit extraction structures can be. So, the case is not as shocking on deeper analysis as at it may at first appear.
Again, it shows that what may be seen as acceptable planning at one time runs the risk of being viewed differently through the telescope of time, even without legislative change.
Where to now?
As the body of decision taken by the GAAR panel grows, and is made available, increasing guidance will be available as to what does and does not come within the ambit of the GAAR.
This though is hardly the sole question. It seems safe to assume that in a climate of austerity, high profile tax planning is going to remain high on the agenda. This goes well into the international domain too, with the UK having put tax compliance and corporate transparency at the top of its priorities for its presidency of the G8 this year.
There has been increased press focus on transfer pricing, irrespective of whether particular planning is technically valid.
Moving beyond technical considerations, even if planning itself cannot be challenged, for some businesses, public opprobrium may be sufficient to trigger contributions to the public coffer.
This may be the case, even when it is far from clear on what basis the contribution can be justified, as in the £10m donated by Starbucks. In this instance, the payment may have seemed like a small price to pay in an effort to preserve the reputation of the business in the UK.
It is also worth noting that the names of a number of individuals who participated in the unsuccessful medical investment structure ruled by the tribunal to be ineffective were mentioned in press reports.
What should the practitioner do?
The real answer is that we have to get used to futureproofing. This means that advisers must make sure clients understand the risks – technical, reputational and otherwise – that may be associated with a particular piece of planning.
The adviser must also ensure that the arrangements are as flexible as possible so that they can be modified and dismantled with maximum speed and minimum complexity if required.
We cannot look into the future, but we can use our experience of the type of planning that stands the test of time and apply this to new planning.
It is interesting that while on the one hand the ambit of traditional tax planning appears to be getting constrained to ever narrower confines, our skill sets will need to get broader if we are to be able to help our clients navigate the increasingly uncertain boundaries of what is and what is not acceptable tax planning.
What we do not have is a reliably certain tax planning environment. This can be remedied in no small measure by initial and consistently targeted use of the GAAR, very much focusing within the confines of the pernicious planning envisaged in the November 2011 report.
Let’s hope that in a year that is where we will be.
