#5361 - General Anti Avoidance Rule - Tax Law

What is GAAR

• Context

  • Public reaction to tax avoidance in times of austerity

• GAAR is in Finance Bill 2013

  • Policy issue

    • Based on the premise that all taxpayers should pay their fair contribution. This same premise underlies the GAAR.

      • Rejects the approach taken by the Courts in a number of old cases to the effect that taxpayers are free to use their ingenuity to reduce their tax bills by any lawful means, however contrived those means might be and however far the tax consequences might diverge from the real economic position Duke of Westminster v IRC (1936)

    • Parliament has decisively rejected this approach, and has imposed an overriding statutory limit on the extent to which taxpayers can go in trying to reduce their tax bill.

      • That limit is reached when the arrangements put in place by the taxpayer to achieve that purpose go beyond anything which could reasonably be regarded as a reasonable course of action

• How does it work?

  • A residual catch all when TAARs and other anti-avoidance rules fail

  • Applies to

    • “Tax arrangements” that are “abusive”

    • Double reasonableness test “cannot reasonably be regarded as a reasonable course of action”

    • Indicators of abusiveness

      • S.2(4)

• EFFECT

  • a tax adjustment which is just and reasonable in all the circumstances. The appropriate tax adjustment is not necessarily the one that raises the most tax.

    • When taxpayer may have carried out any one of several alternative non-abusive transactions to achieve the best result – select the one that the taxpayer would most likely have carried out

• International rules

  • International treaties on double taxation and the attribution of profits

  • But there is work underway in the OECD to counteract the erosion of the tax base and profit shiftin

Assessment of GAAR

• Benefits

  • Freedman (2012) Legitimise the discretion, after half a century of soul searching from the courts between Duke of Westminster and BMBF

    • Ramsay Principle was diluted by MacNiven v Westmoreland (2001) which reduced it to a principle of judicial construction and in BMBF v Mawson (2005) the idea that the courts might take an anti-avoidance approach to legislative construction was rejected.

    • We are back to the dictum of Rowlatt J in Cape Brandy Syndicate (!921) “no room for intendment. There is no equity about a tax. Nothing is to be read in, nothing is to be implied”

    • A legislative GAAR would form the basis of the development of a judicial GAAR

  • As a result we have a string of cases where the revenue lost where a GAAR would have helped

    • RC v Bank of Ireland (2008)

      • Said relevant legislation has only one construction and the courts were bound to follow it

      • They did not claim that there was anu fiscal or economic merit in what they were doig

    • D’Arcy (2007)

      • There was a gap in the rules and HMRC wanted s.710 construed differently to fill it

      • No

    • Mayes (2011)

      • Cited Hoffmann (2005) tax avoidance. If tax legislation too prescriptive then courts canno avoid narrow interpretation

  • GAAR is a general legislative provision intended to apply certain principles to the interpretation of specific tax legislation

    • So not detailed drafting but policy based, principles based drafting

Criticisms of GAAR

• Judges may go back to black letter interpretations

  • It may in fact prove counterproductive from HMRC's perspective

  • an inevitable corollary of moving from what is effectively a judicial GAAR to a legislative GAAR is that the courts will no longer feel compelled to push the boundaries of purposive construction and, accordingly, judges sympathetic to the taxpayer may feel emboldened in adhering to a literalist approach and uphold the planning as a “reasonable exercise of choices”

• Unclear

  • Lethaby (2011) applies the proposed GAAR to different categories of cases and finds disparities

  • Counterargument

    • But we are a long way from the beginnings of tax avoidance in Campbell (1967) smells a little of the lamp, LJ Harman

  • GAAR has got around this with a double reasonableness test – is this clear? Practitioners and judges alike know when tax avoidance is occurring, note the “commercial reality” doctrine in the case law

  • Raz’s theory on the rule of law is that it is analogous to the sharpness of a knife

    • he says the facets of the rule of law i.e. law’s ability to guide conduct are present to a varying extent in all legal systems, just because one law is not as clear as another, it does not deprive it of legal force, unless the entire system is deficient in the rule of law – by analogy, a knife that is so blunt it cannot function as a knife cannot be considered a knife.

    • So even if GAAR is not as clear as we might like, it doesn’t necessarily prevent a GAAR from working in our UK legal system.

• Breaches Adam Smith’s second canon in terms of the quantification of tax adjustment

  • Wheatcroft (1988)

    • It is fairly easy to make the case against tax avoidance. The trouble comes in suggesting any remedy which is not completely contrary to Adam Smith’s second canon of taxation: ‘the tax which each individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, the quantity to be paid ought all to be plain and clear to the contributory and to every other person

• Morality of tax avoidance – relevance of the shift

  • The shit in the morality of tax from the DOW’s case: there, tax seen as expropriation of property but now, paying tax is form of social responsibility

  • We now implicitly assume there is an objective “wrongness” to avoiding tax?

  • This may be true in the very basic sense of it is immoral to avoid all tax liability but note the case Duke of Westminster there is no obligation for a man to maximize his tax liability.

  • Further note the comments of Honore – morality is “incomplete” – he uses tax as his example – morality can tell us to pay some tax but it is silent on the question of “how much”.

    • Honore’s example

    • Tax on crossing a bridge – morally required that each person crossing in a car should pay tax. However morality cannot specify without more whether it would be immoral for 3 passengers to get out of the car, cross on foot, leaving only the driver to pay to cross in the car.

• Pitched too high

  • Richard Murphy (2013), combats only egregious or intolerable schemes

  • As a resut of the last attempt towards a GAAR

    • Last mooted in 1998, Tax Law Review Committee put forward the idea (no coincidence that the Chairman at the time was Graham Aaronson,

    • Stimulated the production of a paper from the Inland Revenue (as it then was) on the same topic, but the result was a proposal from the Inland Revenue that many, including the TLRC, considered did not contain the necessary checks and balances to safeguard the taxpayer and the idea was rejected

  • So now very cautious

CASES

• Old approach IRC v Duke of Westminster (1936)

  • Choice principle espousd by Lord Tomlin amongst other. Every man is entitled if he can to arrange his afairs so that the tax is less than it would otherwise be.

• New approach

  • Beginnings in Campbell where LJ Harman said that a tax avoidance scheme “smells a little of the lamp”

  • Ascertain the legal nature of a composite transaction in Ramsay v IRC (1981)

    • Circular, self-cancelling transaction

    • Court is allowed to look at the whole transaction

    • LImitation

      • Taxed on clear words of the act NOT intendment

        • But the court is not confiened to a literal transaction

      • If the document or transaction is genuine, the court cannot go behind it to some supposed underlying substance

        • But this does not compel the court to look at it with...