A one-to-watch outcome of the Budget was the coalition’s announcement to start a consultation with a view to introduce a General Anti-Avoidance Rule. Osborne has not yet made his intentions clear as to whether he will follow the advice of QC Graham Aaronson (commissioned by the Treasury to report on the best GAAR structure) and introduce a simple anti-abuse measure. Two options are open to him. The first sees the new rule become a heavy-handed instrument, as recommended by Lib Dem Lord Oakshott, giving much more power to the government, and causing confusion within the tax and business community around whether standard transactions equate to avoidance. The second option conforms more to Aaronson’s advice, with the rule becoming a simple anti-abuse measure without much bite.
GAARs are often seen as controversial by tax professionals as the former version can include standard commercial transactions not intended to evade or avoid. Such transactions can affect pension schemes, or capital allowances. This outcome would result not only in unfair penalties and over-cautious tax planning, but affect the overall relationship between HMRC and taxpayers, and increase the UK’s competitive disadvantage. Though the chances of HMRC using its powers within a general rule are slim, the balance would still shift in its favour, and taxpayers and businesses would depend more on the HMRC’s discretion. This kind of uncertainty is not conducive to growth in a stagnant economy, with current perceptions of the UK tax system already branding it confusing, complex and cumbersome.
Aaronson had a hand in much of the construction of the General Anti-Avoidance rule, by setting up an independent advisory panel (which could be heavily biased towards the tax profession), narrowing down its scope to particular transactions, and laying the burden of proof at HMRC’s door. Aaronson himself admitted that further along the line, the intentions behind the rule could ultimately be watered down by these safeguards. However, Osborne has hinted that he will err on the side of Aronson’s recommendations. With tax avoidance in the headlines on a daily basis, the government would benefit from a public perception that is tough on avoidance.
Given the success of the disclosure rules, some have voiced that the GAAR could be a needless measure adding extra complexity, introduced to pacify the Lib Dems. The result of the consultation needs to be a proposal that avoids the potential pitfalls of a heavy-handed, red-tape heavy regime, making it easy to invest and build business in the UK, whilst at the same time generating revenue from deliberate contrived schemes to avoid paying what is owed.
Legislation on a GAAR is due to be included in the Finance Bill 2013.
Melissa Higgs is a member of the Young Fabians Future of Finance Steering Group