The UK's ne General Anti-Abuse Rule

The UK’s new General Anti-Abuse Rule

We now have a draft of the legislation which will enact the new so-called “general anti-abuse rule” following on from the Aaronson report and its recent acceptance by the Government.

What’s in a name?

A new concept has emerged. Generations of tax professionals have learned the difference between straightforward tax mitigation and planning, more complex yet still legal tax avoidance and blatant tax evasion – but the word abuse has not hitherto been used. It is, of course, a word with unpleasant and nasty connotations – one needs only to think of other contexts in which it is routinely employed – and there is no doubt that its application in this context is quite deliberate. Tax avoidance is now to be bracketed, linguistically at least, with cruelty to animals, wife-beating and paedophilia.

However, in the courts and in discussions with HMRC, the import of this word is not likely to be significant. We discover that there are two types of action taken which might result in a reduction in one’s tax bill; those which are reasonable and those which are unreasonable. Unreasonable = abusive. So why not just say unreasonable in the first place?

So what’s unreasonable?

At the moment, nobody really knows. One can expect there to be guidance on the kinds of activity that HMRC will attack as unreasonable (although there is currently nothing of the sort). But even that will not necessarily provide certainty. It is well known that there are tax avoidance schemes that HMRC do not like which have succeeded when examined by the Courts. Essentially, the GAAR is to HMRC as the .44 Magnum was to “Dirty” Harry Callahan. And it appears that the question being asked of those who are unsure whether the GAAR applies to them is also “do you feel lucky, punk?”

Surely I can ask for a clearance?

No, you can’t. Too expensive, apparently. You can instead go to a tax adviser and ask them whether it will work. They may offer an opinion but in the end they are likely to say they don’t know – which is unfortunately the truth. Oh, and you can expect the fact that you sought tax advice and ever expressed any doubts about whether your proposed course of action was caught by the GAAR to be used as evidence that indeed it was. Joseph Heller could have written a book about it.

So where does that leave us?

In a world of uncertainty, at least for the time being. Clarity will be achieved in ten or fifteen years when disputes on the applicability of the GAAR will finally be settled in the highest courts. But in the meantime, the GAAR will have achieved its real purpose by discouraging, without explicitly making illegal, all kinds of activity which might or might not have been caught by it anyway.