General Anti-Avoidance Rule 04/07/2010

Although the Coalition government and its Labour predecessor would probably not like to spoken together of in the same breadth, in one area of tax they do seem to be united – namely, continuing the drive to root out tax evasion by way of counter-avoidance tactics.

In the Emergency Budget on 22 June 2010, it was announced further detailed consideration would be given to a general anti-avoidance rule (GAAR). A GAAR was last proposed in 1998 but rejected following consultation. However, it seems particularly given the current economic circumstances and new ‘austerity’ mindset that now the time is appropriate, if not right, for a GAAR.

Since the original GAAR proposals in 1998, the volume of tax legislation has almost doubled and, with a commitment by the Coalition government to simply the tax system, a GAAR may be one way of achieving this. Some commentators argue that, where existing anti-avoidance legislation duplicates the GAAR, the former should be repealed whereas others point out that if various pieces of targeted anti-avoidance are abolished, the Treasury would face the uncertainty that a GAAR will not stop the undesired behaviour.

In the past, HM Revenue & Customs have steered clear of introducing a GAAR, given the perceived need for and costs of a pre-transaction clearance service. Furthermore, a clearance mechanism may add delay to the process and would perhaps fail to provide consistency of approach given the wide range of transactions it could cover. It seems now that such concerns may be resolved by either simply not having such pre-clearances or, alternatively, taxpayers may have to pay to obtain a clearance which may be a price worth paying if it achieved a high level of certainty.

At present, the Government has merely flagged up that it will examine the case for developing a GAAR as part of wider work on improvements to tax policy-making. No timescales have been given for making a decision nor when a GAAR might be introduced.

Whatever the outcome of the consultation in relation to the GAAR, it may be that tax avoidance over the next few years is less widespread than it once was. The current climate means it can be quite difficult for a party to a proposed transaction to be comfortable with the credit exposure that it might then face. Furthermore, a substantial number of taxpayers have more than adequate carried-forward losses to shelter taxable income without needing to engage in avoidance transactions. And finally the disclosure rules have been effective in limiting the number of long-term avoidance transactions due to the quick introduction of amending legislation.