Don't fear the GAAR, says Lucy Brennan

Newspapers have devoted a lot of attention to the tax affairs of a number of high-profile individuals over the past few weeks. While the media spotlight has only intensified recently, officials behind the scenes have been working hard for years to clamp down on ‘dodgy’ schemes and structures. One outcome of this has been growing calls for a general anti-abuse rule, or ‘GAAR’.

Tail end

While countries such as Australia already have a GAAR in place, the UK has been considering one for a number of years now, yet has failed to take much action. This is changing.

A report from Graham Aaronson QC on the working of a GAAR in this country published towards the tail end of 2011 seems to have set the wheels in motion, with it culminating in the publication of a consultation on the subject this summer. The consultation paper confirmed the government’s plans to push ahead with the GAAR and gave us all a flavour of how the finished article is likely to look.

So how will this affect you?

The logic behind a GAAR is clear. It is politically agreeable for a number of reasons, not least because of the additional revenue it is predicted to plough into Treasury coffers. It will also allow the government to be seen to be doing something about dodgy tax deals. One of the main problems, however, is the very generalness of the rule, which some fear could unintentionally trap a number of completely innocuous structures and the people using them.

The language used in the consultation exposes a number of weaknesses in the GAAR’s foundations. In its current form, even such a simple action as forming a limited company to help run a profitable business (by paying corporation tax at far lower rates than income tax) could qualify as an abusive arrangement.

Furthermore, subjective wording and the burden of proof being on HMRC to demonstrate that a particular arrangement is ‘abusive’ is likely to produce a pile of legal challenges.

Scale of acceptability

The consultation has introduced considerable uncertainty into the advisory community as to where certain structures sit on the scale of acceptability, and the onus is now on the government to clearly draw the boundaries so that people can continue to manage their wealth tax-efficiently without fear of a GAAR-based investigation.

Perfectly reasonable tax planning undertaken by individuals, including inheritance tax structuring as well as income tax planning, could easily fall within the clutches of the GAAR in its current form, and stifle the ability of people to best look after their financial interests.

However, I have a feeling that common sense will prevail. Individuals have a right to protect, grow and distribute their wealth in the most tax-efficient way possible and accountants and other advisers have a right to help them do this within the existing legal framework.

It is right that the government does something about the abuse of tax laws, and a GAAR or similar instrument is sorely needed. Let’s just hope that the powers that be can see the frailties that exist in the system in its current form and propose something that is both workable and practical.

Lucy Brennan is a partner in the private wealth team at accountancy firm Saffery Champness