Narrow GAAR risks 'facilitating tax avoidance'

A narrowly targeted General Anti-Abuse rule risks encouraging the very behaviour it was designed to tackle by implying that any activity outside its scope is legitimate tax planning, the union for HMRC says.

On behalf of tax inspectors and senior HMRC officials, the Association of Revenue & Customs warned that targeting only the most artificial tax practices with a GAAR, as the government proposes, would be counterproductive.

Restricting the rule’s focus, as Graham Aaronson QC recommends, would “encourage the view that any arrangement not caught by the ‘narrow’ GAAR is responsible tax planning,” potentially “facilitating avoidance.”

Moreover, the association added that it hopes that the GAAR’s language and operation will be “capable of being incorporated into primary legislation on taxation,” apparently in pursuit of a “simpler tax code.”

It also rejected Mr Aaronson’s finding that avoidance is the result of high tax rates or complex regulations, by countering that abusive tax planning “can arise from opportunity and a desire to play less tax.”

“Businesses or individuals who engage in avoidance must pay, and be seen to pay, their fair share of taxes,” the ARC said.

“We suggest that a more general GAAR, with a properly resourced clearance system, allows avoidance to be identified and tackled, whilst leaving responsible tax planning untouched.”

Without a wider framing, the GAAR will effectively be “Trojan Horse”, ARC president Graham Black argued, as it “suggests touch action while actually facilitating avoidance.”

Apr 13, 2012