HMRC Studying General Anti-Avoidance Rule

by Robert Lee, Tax-News.com, London

27 June 2006

HM Revenue and Customs is reportedly studying the idea of introducing a broad anti-avoidance mechanism to combat the continually evolving world of tax avoidance.

According to a Financial Times report published on Monday, the department has launched a study of how general anti-avoidance rules (GAAR) work in other jurisdictions such as Australia, Canada and Spain.

Presently, HMRC deals with anti-avoidance schemes on a case-by-case basis, and disclosure rules introduced following the 2004 Budget require accountants and tax planners to disclose the details of new schemes that they intend to market to clients within five days of their implementation. This gives the tax man the opportunity to kill off any scheme deemed abusive or unacceptable at an early stage, without resorting to complex and lengthy legislative procedures.

However, GAAR would go one step further by introducing a catch-all law that the government hopes would outlaw abusive avoidance schemes in one fell swoop. Such a blanket approach is controversial, and can often lead to more litigation rather than less, as Bill Dodwell, a partner at Deloitte, the professional services firm, observed in the FT report, stating that: "In our view, it would lead to the worst of all worlds - a combination of a GAAR and lots of anti-avoidance legislation as well."

A proposal to introduce GAAR in the UK was studied in a consultation paper published in 1988, but the government backed off because it was thought that the rules would increase uncertainty for businesses rather than clarify what is acceptable tax avoidance.

Mr Hartnett conceded in recent evidence to a House of Lords committee that there are "very difficult issues" to be worked through, which is why a study has been commissioned to ascertain what has worked and what has failed in other jurisdictions.

As to whether the study is the first serious step towards GAAR in the UK, Mr Hartnett stated that its conclusions "may or may not" lead to advice to ministers.

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