This article first appeared in a slightly different form in International Tax Review, March 2011
During the previous government's time in office, the volume of tax legislation increased dramatically and a high proportion of that new legislation took the form of anti-avoidance provisions. The new Coalition government set out its stall on tax avoidance in its earliest pronouncements. Within two weeks of entering office, the Coalition revealed its programme for government over its five year term in which it broadly stated, "we will make every effort to tackle tax avoidance, including detailed development of Liberal Democrat proposals". A month later, in the Emergency Budget, the Coalition government published two documents: first, Press Notice 3 on "Tackling Tax Avoidance" which broadly restated the aims of the Coalition agreement; and "Tax Policy Making: a new approach" which, to an extent, fleshed out these general proposals. In this latter document, the Coalition government asserted that the approaches to tackling tax avoidance of the previous administration, including frequent legislative changes and detailed targeted anti-avoidance rules, had led to "instability and complexity", and an ensuing lack of public confidence, in the tax system. The Coalition government proposed a more strategic, measured approach against tax avoidance:
- through legislative approaches that clearly set out the intended objectives;
- through reviewing and strengthen areas of the existing legislation where repeated changes have been made to close loopholes;
- by considering the introduction of a general anti-avoidance rule (GAAR); and
- by considering whether certain legislative changes should take immediate effect outside of the Budget.
The cornerstones of this new approach are public scrutiny and consultation prior to the enactment of legislation and an improved dialogue between the taxpayer and the state. It is the government's stated intention that the frequency of legislative change (which can lead to a sense of instability in the tax system) will be substantially reduced by this more focused, considered approach and it is the government's overriding intention that anti-avoidance legislation will, so far as possible, be enacted in the Finance Bill and will be published significantly (generally, at least three months) in advance of its enactment. The government does, however, recognise that there will remain occasions in which reactive and immediate legislation will be required to address significant risks to the Exchequer. A protocol, published on 9 December 2010, states that extra-budgetary amendments will only be made where there would otherwise be a significant risk to the Exchequer and significant new information has emerged to identify the risk. Where it is considered that an immediate change to the law is necessary, a public announcement will be made of the intention to change the law and this will amount to a clear warning of the nature and timing of the change. HMRC will then publish a ministerial statement and the draft clauses as soon as practicable and, if the actual clauses cannot be published on the same day as the announcement, a detailed technical note will accompany the announcement.
Although a measured, considered approach to tax avoidance is promised, any general statements must be viewed in the context of recent public demonstrations of anger and dissatisfaction against perceived tax avoidance by certain high net worth individuals and certain UK corporate and financial institutions. In an environment of severe public spending cuts and higher tax burdens for individuals, there is growing public unrest at what is viewed as unacceptable (though not illegal) tax avoidance by certain sectors. Against this background, there is considerable pressure on the Coalition government to address this apparent inequality, where those with the means to avoid a significant tax bill are perceived to prosper at the expense of the taxpaying majority.
A new approach
Having made these widely drawn, attractive announcements, has the Coalition government sought to apply them to its first attempts at law-making? The Coalition's first Budget in June 2010 was consistent with these overriding principals, with little specific anti-avoidance legislation contained in the Finance (No 3) Act 2010. Since then, the Coalition government has published draft legislation on a number of areas of tax legislation, including group mismatches and disguised remuneration, some of which is consistent with the approach of the previous government and other aspects of which demonstrate some degree of departure in approach.
The group mismatches legislation, which started life as a discussion document in March 2010, is to be enacted in Finance Bill 2011 and uses a principles-based approach to drafting anti-avoidance legislation. The use of principles or purpose-based legislation, in which a fundamental anti-avoidance principle is established from which certain exceptions are carved out, was first used in 2009 with the Disguised Interest and Transfers of Income Streams rules. They were developed as an alternative to the widely used targeted anti-avoidance rules (TAARs), so favoured during the last decade, which focus on a taxpayer's subjective purpose for entering into a transaction. HMRC initially attempted to tackle avoidance arising from mismatches in loan relationships and derivative contracts by introducing TAARs aimed at specific schemes which had been notified to them under the Disclosure of Tax Avoidance Schemes (DOTAS) regulations. Schemes to circumvent these rules persisted, however, and it was felt that a principles-based approach would prove a more effective tool. The legislation is designed to simplify and shorten the current legislation, reduce the number of TAARs and (it is hoped) make further amendments less frequent.
Another example of this purposive approach to anti-avoidance legislation can be seen in the changes to the value shifting capital gains legislation. In an attempt to simplify what are perceived as overly complicated rules, the government has replaced a number of anti-avoidance provisions with a considerably shorter purpose-based rule. The changes are designed to ensure that only those transactions which have tax as one of their principal motivations fall within the scope of the rules. It is hoped that this new approach will reduce compliance costs and burden, since taxpayers will no longer need to consider the effect of these rules where transactions are wholly commercially driven. However, it remains to be seen whether, in practice, the principles-based approach will provide greater clarity to taxpayers and reduce their ever-increasing compliance burden. Some critics feel that, given the complexity of the concepts underlying tax anti-avoidance legislation, it is often difficult to draft clauses in the succinct and clear manner that principles-based legislation requires. Practical experience of this may cause the Coalition government to revert to TAARs in its approach to anti-avoidance.
The DOTAS regulations continue to remain at the forefront of the government's battle against tax avoidance. Under the previous government, the DOTAS rules were less effective than they might have been, due principally to drafting deficiencies in the implementing legislation which meant that some 'offensive' schemes did not have to be notified and the (sometimes considerable) period of time between notification of a scheme by a user and the implementation of remedial legislation. The Coalition government clearly views these rules as a key tax anti-avoidance tool and appears keen to improve the effectiveness of these rules. As of 1 January 2011, the rules have been extended such that the time by which a scheme must be disclosed has been brought forward, the identities of users of schemes are required to be provided by the scheme promoter and intermediaries who market schemes are required to provide information which identifies the promoter. In addition, the Coalition government has recently published the Inheritance Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations which extend the DOTAS rules to certain inheritance tax avoidance arrangements in which individuals make lifetime transfers of property into trusts. This follows an announcement in the Emergency Budget and a consultation which was begun in Autumn 2010. The regulations come into force on 6 April 2011.
A different and seemingly inconsistent approach has been taken in other areas of anti-avoidance legislation, notably the disguised remuneration legislation published in December 2010. These rules target arrangements in which amounts which are "in essence" (it will be interesting to see how judges interpret this surprising piece of legislative drafting) employee remuneration are paid to employees by way of a third party, such as an employee benefit trust, with the result that no income tax or national insurance contributions are payable. The new legislation is complex, lengthy and, in places, heavy-handed and sits uncomfortably with the overriding principles of clarity and simplicity set out by the Coalition government in their early statements. The legislation has also been criticised for being so widely drawn that it may bring within its scope many unintended targets. This raises the undesirable possibility that taxpayers will have to rely on guidance published by HMRC to ensure that they fall outside the ambit of the rules. It may be the case that, in order to make the rules acceptable, the government will (amongst other things) need to exclude those arrangements which do not have a tax avoidance motive from the scope of the final legislation to be published in the Finance Bill 2011. The approach taken in drafting this piece of legislation shows many similarities to much of the anti-avoidance legislation enacted by the previous government.
Is a GAAR a solution?
What, then, are the solutions to the problems inherent in the government's current approach to anti-avoidance legislation? While the use of principles-based legislation may, to an extent, provide greater certainty to taxpayers and meet the government's objectives of simplicity and clarity, it is not without its critics. The most widely publicised and most controversial of the anti-avoidance announcements in the Emergency Budget 2010 was the statement that the Coalition government was considering the introduction of a GAAR. This was a key tax policy of the Liberal Democrats prior to the formation of the Coalition government and it might appear to some that the appearance of a GAAR on the tax anti-avoidance agenda represents no more than a political compromise between the two members of the Coalition. It is interesting to note that the commitment to a GAAR is only at the level of an "informal engagement". This is not a new idea in the UK but no real consideration has been given to the proposal since the first years of the previous Labour government. GAARs have been implemented in various jurisdictions around the world, such as Australia, Canada and New Zealand, and have not been without their teething troubles and have not escaped being pored over at length by their judiciary. General approaches to anti-avoidance legislation have often been condemned for their lack of clarity and the uncertainty they cause to taxpayers. The proposal would appear to run counter to the Coalition government's desire for clarity and simplicity, given that the broad scope of any GAAR is highly likely to need clarification by guidance or from the courts.
It has also been argued that a GAAR would contravene the rule of law, especially one of its principal tenets of legal certainty, in that it might prevent taxpayers from being certain about the legal effects of their actions before they carry them through. It is thought by some that the GAAR would effectively permit retrospective taxation in circumstances where the operative legislation has been unsuccessful in meeting its objectives. In other words, HMRC, with the benefit of hindsight, may be able to point to the GAAR in order to challenge the tax effects of certain transactions, where it had previously been thought that the tax treatment was sufficiently clear from the general legislation.
Moreover, there is an argument that a GAAR is unnecessary, since the courts already deal with tax avoidance. The courts have become noticeably weary and frustrated with attempts at tax avoidance and have, at times, in cases such as DCC Holdings (UK) Ltd v HMRC and Astall & Another v HMRC, appeared keen to impose a purposive interpretation on certain legislative provisions in order to frustrate tax avoidance schemes. It is difficult, however, to sustain an argument that the anti-avoidance case law is sufficiently consistent and clear in order to be able to discern an identifiable judicial anti-avoidance principle. If a GAAR is to be introduced, it would seem unpalatable without an efficient and comprehensive advance clearance procedure. That, however, raises the important question of how HMRC would provide the necessary resources to administer the clearance procedure; and with recently announced cuts to the headcount at HMRC (supposedly 15% of HMRC's budget is to be slashed), it would be surprising if sufficient resources were able to be challenged into this area. Any such rule would not, however, be introduced for some time yet; the group of experts chosen to undertake the study into its possible introduction (headed by Graham Aaronson QC) will not deliver their recommendations until 31 October 2011. It is to be hoped that the practical concerns of taxpayers will be taken into account in formulating a workable proposal.
In the current times of austerity, the Coalition government is under some pressure to act on tax avoidance and to remedy what some consider to be an unlevel playing field. There is a view that a clampdown on tax avoidance is an efficient and fair means of refilling the depleted coffers of the UK Exchequer (some estimate the yearly cost of tax avoidance to the UK economy at as high as £25 billion). The message put across by the Coalition government in the first eight or so months of its administration is that it will be taking a firm stance against tax avoidance but it will approach its task in a measured, strategic manner. The implementation of its proposals is not, however, without its contradictions; some of its early attempts at legislation display an adherence to the Coalition government's core principles of clarity, simplicity and certainty while others show a worrying similarity to the often heavy-handed approach of the previous government. While the "informal engagement" on the possible introduction of a GAAR may represent nothing more than a forced compromise between the Coalition members, some support is discernible for the introduction of a broad statutory anti-avoidance rule. Given its inevitably broad scope, any acceptable rule would, however, require the introduction of considerable protections and assurances for the taxpayer and it is an unfortunate consequence of the times that the resources necessary to make the proposal viable may not be available.