RESPONSE TO HMRC CONSULTATION DOCUMENT: A General Anti-Abuse Rule
1. INTRODUCTION
1.1 The AAT is pleased to comment on the issues raised in the HMRC consultation document “A General Anti-Abuse Rule” (the condoc)”.
1.2 We have over 50,000 full and fellow members and 68,200 student and affiliate members worldwide. Of the full and fellow members, there are approximately 3,650 Members in Practice (MiP) who provide accountancy and taxation services to individuals, not-for-profit organisations and the full range of business types.
1.3 The AAT is a registered charity whose objectives are to advance public education and promote the study of the practice, theory and techniques of accountancy and the prevention of crime and promotion of the sound administration of the law.
1.4 In pursuance of those objectives the AAT provides a membership body. We are participating in this consultation as part of our contribution towards the public benefit of achieving sound and effective administration of taxes.
2. GENERAL
2.1 We always endeavour to consult our membership as appropriate when gathering feedback in order to respond to public consultations that we consider relevant for us to comment upon. Recognising the significance of the proposals contained within the condoc we have, therefore, engaged with key elements of our membership to ensure that our response reflects the wider view of our internal stakeholders.
2.2 A typical MiP is engaged by their clients to provide practical, cost effective, day-to-day tax compliance services. These members play a valuable role in relieving their clients’ businesses of the burden of an ever more complex tax system and in ensuring that their clients pay the right amount of tax at the right time.
2.3 It should be noted that, whilst the activity of abusive and aggressive tax planning is something which our membership would not generally engage in, the whole area of aggressive and abusive tax avoidance is one of such significance to the wellbeing of the United Kingdom as a whole, and to those engaged in making the UK tax system work that we feel it is incumbent upon us as an organisation to respond to the condoc.
3. OBJECTIVES OF THE LEGISLATION
3.1 We note that the consultation outlines HMRC’s proposal to introduce a general anti-abuse rule (GAAR) targeted at artificial and abuse tax avoidance.
4. AAT Position
4.1 Whilst AAT remains to be convinced that there is a need for a GAAR we are keen to support the Government in its wish to tackle abusive arrangements in a targeted approach as outlined in 2.1-2.4 of the condoc.
4.2 Given our comment above that our membership is unlikely to engage in the design or provision of abusive tax avoidance schemes. As a consequence there will not be many, if any, instances where the introduction of a GAAR will directly impact on AAT members.
4.3 We support the comment made at 2.5 of the condoc “The GAAR will be one strand…to tackling avoidance.” It is vital that that this fact is communicated to, and understood by, the wider taxpaying community.
4.4 Furthermore, whilst one of the stated aims of the introduction of a GAAR is simplification, it needs to be understood and communicated accordingly that there will certainly be times when Government will still need to legislate against “schemes” that are not within the scope of the GAAR, but which are not considered desirable.
4.5 AAT strongly agrees with the entirety of 2.9 of the condoc. In particular we cannot see that the introduction of a GAAR would lead to any reduction in the number of TAARs (Targeted Anti-Avoidance Rules) in the short to medium-term. If anything we foresee another layer of statutory complexity being introduced into the administration of UK taxation through the proposed referral of schemes considered to be aggressive or abusive to the Advisory Panel (the Panel), especially in the early period post a GAAR introduction.
5. CONSULTATION QUESTIONS
“Do you agree that the GAAR should be limited to these taxes and duties initially? Are there any particular issues relating to how the GAAR would function in relation to the taxes (including NICs) that are proposed to be included?”
5.1 Generally, those that we consulted agreed that the taxes suggested within the consultation document were those that were suitable to be covered. It was also acknowledged that National Insurance (NICs) will require separate legislation. Furthermore, accepting this fact, AAT would want to be involved in any subsequent consultation covering NICs.
“Do you agree that the GAAR should be capable of countering UK tax advantages obtained under double taxation agreements?”
5.2a We recognise that the Government might like to exert primacy of the GAAR over double taxation agreements, however, the issue of double taxation agreements could impact on foreign inward investment and this is a subject that we don’t consider we have sufficient information on in order to be able to comment.
5.2b However, taking this into account, instinctively it was felt that a GAAR should apply to UK tax advantages obtained under such agreements.
“Do you agree that: (1) the proposed “main purpose” rule serves as a useful filter, when coupled with the concept that arrangements must also be “abusive”;
5.3a Provided that the test is undertaken in the way described in the consultation document, and that each test is treated as a gateway to the next, the rules should be a useful filter.
5.3b It was felt when considering this particular question that a tax advantage could almost always be construed even where there was a bona fide commercial reason for entering into an arrangement. To avoid such an occurrence we would recommend a stronger emphasis on “abusive” arrangements with the primary motivation of aggressive tax avoidance.
“and (2) a specific exclusion for arrangements without tax intent is not required? If you think a specific exclusion is required, please explain why”
5.3c From an “avoidance of doubt” perspective and in the interest of clear legislation we can only see significant merit in including a specific reference to the exclusion for arrangements without tax intent.
“Do you agree that the proposed “double reasonableness” test operates as intended to counteract only artificial and abusive schemes (such as those described in Annex B)?”
5.4a Whilst the inclusion of this test as a safeguard is commendable, AAT has a concern that this aspect represents a weak point of the legislation, our view is that it leaves great uncertainty as to how it assists in addressing the most egregious of tax avoidance schemes.
5.4b AAT has concerns over the usage of the term “significantly” in clause 2(4) (a), (b) & (d) on page 14. Our concern is based around the challenge of being able to define whether something is significant in a non-subjective way?
5.4c. In an attempt at answering this particular question we are responding to its spirit i.e. by reference to an arrangement being “abusive” and not by considering the additional word “artificial”. We respectfully point out that most elements of taxation legislation give rise to artificiality.
“Do you agree that the counteraction provision in the draft GAAR is appropriate?”
5.5 We consider counteraction on a “just and reasonable basis” to be entirely appropriate. It is presumed the employment of this basis will be by reference to the underlying statute(s).
The Government is continuing to develop its analysis regarding the appeals process in relation to counteraction and consequential adjustments under the GAAR, and welcomes view which may inform detailed proposals to be published later in the year.”
5.6 We foresee that a recurring theme in the future will be a debate over what is just and reasonable. Especially in the early years of the GAAR when there will be a complete lack of prior cases. To help minimise the subjectivity of “just and reasonable” we recommend that HMRC works with the leading accountancy and taxation bodies, who engage with HMRC on a regular basis through their involvement in the Joint Steering Group, the Agent Engagement Group and the Working Together Steering Group.
“The Government would welcome views on these commencement options, how transitional arrangements should be dealt with, and whether there should be different rules for different taxes where appropriate.”
5.7 We agree, only in part, with 3.38 of the condoc – our position is as below:
1. All arrangements that commenced prior to the 2011 Autumn Statement should be allowed to stand, including those that are not capable of completion until after the 31 March 2013.
2. Arrangements commenced post the 2011 Autumn Statement should fall under the new GAAR regime.
“The Government welcomes views on clause 5(1) of the draft GAAR.”
5.8 We support clause 5(1); it is entirely appropriate for the onus to be on HMRC to have to demonstrate that the key requirements for the GAAR to apply have been met, and that counteraction is both just and reasonable.
“Do you agree that it is appropriate for particular weight to be given in the legislation to the GAAR guidance and the opinion(s) of the Advisory Panel on the arrangements?”
5.9a AAT believes strongly that particular weight should be given to GAAR guidance, particularly in the early years of the Advisory Panel when there will be a complete absence, to start with, of opinions to give historical context.
5.9b AAT recognises that, whilst guidance cannot be a substitute for well drafted legislation, it could play an extremely helpful role at the outset when there will be a complete absence of reference points that can only come into being in the longer term, for example as a result of the outcome of a Tribunal Hearing.
5.9c At this stage we would like to reiterate our earlier recommendation (5.6), that HMRC should work with the leading professional accountancy and taxation bodies to create and publish draft guidance.
“The Government welcomes comments on whether particular issues arise in relation to Self Assessment (where the relevant taxes operate within a Self Assessment regime) or within the existing administrative rules for those taxes that do not operate within the Self Assessment regime.”
5.10a In our view there are two distinct and separate aspects to the above question.
i. In the earlier years, as previously observed, other than guidance issued with the GAAR there will be little contextual information and an absence of Advisory Panel or Tribunal decisions to enable the taxpayers to form their opinions.
ii. In the medium to longer-term the vacuum of information will be replaced with a buildup of expert opinion, Advisory Panel and Tribunal decisions.
5.10b Our concern rests with 5.10a.i above, in that the absence of information reduces the room for a taxpayer to have complete confidence (certainty) that a reported transaction entered into for bona fide commercial reasons (in their eyes) will not be open to challenge at a later date.
5.10c This absence of confidence further undermines one of the fundaments of the Self Assessment tax regime, which is that a taxpayer should be entitled to certainty after filing their return.
5.10d AAT recognises that in general the type of taxpayer who needs to consider the implications of a GAAR is likely to have advisers and, as a consequence, the issue set out in 5.10b & 5.10c is only likely to affect a very small number of the UK taxpaying population. Furthermore, with the passage of time and the build up of opinion, the affected population will diminish further.
The Government invites comments on the general proposal that the GAAR should as far as possible operate within existing administrative rules for the taxes involved; and on what adaptations may be necessary to existing administrative rules to ensure that the GAAR operates with as little as possible additional administration cost and burden for taxpayers, advisers and HMRC. Is there a case for having a new type of assessment given the cross-regime range of the GAAR?
5.11a AAT strongly believes that any GAAR arising as a consequence of the current consultation should, where possible, operate within the existing legislative framework. Such a course of action is the only way that the administrative burden and, therefore, costs to UK plc can be kept to a minimum.
5.11b Without the benefit of hindsight it is hard for us to comment upon adaptations that might prove necessary in the future. However, it is acknowledged to be likely that adaptations in the future will be required to deal with the growth of generic schemes (not currently dreamt up), poor drafting of future legislation, or the uncovering of an existing hitherto unidentified loop-hole.
5.11c Given the Government’s stated aims to simplify taxation and to reduce the administrative burden at all levels, we cannot see any justification for the introduction of a cross-regime assessment. In our view abusive transactions should be broken down to their component parts and taxed under existing legislation as is the case for normal transactions.
“The Government invites comments on whether time limits should be set for each of stages two, three and four and if so what those time limits should be.”
5.12a Stage one: We consider that there are at least two aspects to this first question: