Budget 2012: General Anti-Avoidance Rule Faces Early Test
Commenting on the announcement that the government intends to go ahead with the introduction of a General Anti-Avoidance Rule or “GAAR” on tax, Chris Morgan, head of tax policy, at KPMG in the UK, said:
“Protecting tax revenues by tackling artificial avoidance is clearly a priority for the government, and KPMG supports a fair and competitive tax system. However, while the overall aims of a GAAR are clear, it can be difficult to apply in practice.
“If it is limited to stopping transactions with no business purpose, the GAAR should be relatively easy to apply. The difficulty arises where it also affects commercial transactions which are perceived to include unacceptable tax driven steps.
“We think it is important that any GAAR has a clearance system, which can give pre-approval to business structures is a serious omission. Overall the UK has become much more attractive to corporates thanks to the declining corporate tax rate and changes to the way in which profits earned overseas are taxed. A GAAR with no system for agreeing whether a business structure is agreeable to the tax authorities prior to implementation would mean that corporates would face significant uncertainty and would be a backwards step.”
Charging for clearances?
A clearance system undoubtedly puts additional strain on the tax authorities’ resources but other countries (Germany and Canada) have introduced a charge for clearances so that businesses applying for them cover the administrative costs. Could such an approach might work here in the UK provided any potential conflicts of interest could be managed?
KPMG has long argued that a GAAR should only be introduced in the UK if it is accompanied by a fast and effective pre-clearance regime.
The report from Graham Aaronson QC, on which today’s proposals are based, dismissed the need for a clearance system on two grounds: the resource burden and the additional discretionary powers for HMRC which “would be wrong as a matter of constitutional principle” (although such an objection does not apply if the transaction happens to be one for which a statutory clearance mechanism already exists – a distinction which appears arbitrary and potentially unfair).
A clearance regime would undoubtedly place a strain on already stretched HMRC resources but some countries have addressed this issue by charging for a clearance, an option which may be worth exploring here. Such a system has operated in Germany since 2007. The fee is generally based upon the amount of tax at stake and ranges from €121 to €91,000.
Alternatively the tax authorities have the option to charge a time based fee (currently €100 per hour). In practice, the fee is rarely a deterrent for taxpayers considering whether to apply for a clearance, more common is the uncertainty over how long the tax authorities will take to respond. A statutory time limit for responding would therefore seem essential.
The GAAR could also pose uncertainty for top earners. With the 50p rate set to fall in 2013, there would be a financial advantage in accepting bonuses and other payments in later tax years.
Chris Morgan said: “The question for top earners is whether or not delaying bonus or other payments would be considered inappropriate tax planning under the terms and conditions of a GAAR.”