It's a new year, but tackling tax evasion and avoidance remains at the top of the government's agenda, says Lucy Edwards

We have all seen the headlines: global companies with household brands exposed for paying little or no UK corporation tax, celebrities branded ‘immoral’ for their personal tax arrangements and The Guardian’s recent exposé of the ‘real’ owners of high-end properties held through offshore companies.

Most agree that paying tax is a necessary and appropriate contribution to the good of society. While we may wish rates were lower or disagree how the government should use the revenue collected, we are generally in support of each person paying their fair share. But what is the ‘fair’ amount?

Should we all hire a professional adviser to ensure that we maximise our tax liability each year, or are we imprudent not to make full use of available allowances, reliefs and even loopholes to reduce that liability? The general opinion is that planning to mitigate tax is permissible up to a point (legitimate tax planning) but can be taken too far (unacceptable tax avoidance or tax evasion).

Tax avoidance, where a person takes advantage of gaps and inadequacies in tax legislation or uses the interaction between the jurisdictions of UK and foreign laws to his or her advantage is not, generally speaking, illegal. However, the extent of the public outcry and media criticism of those who undertake ‘aggressive’ tax planning shows that sentiment about morality does not always align with legality.

Middle ground

For many, a moral line is crossed when a person appears to have acted duplicitously and conceals their real circumstances to avoid paying tax (behaviour that seems particularly distasteful when that person has more financial resources than most). Between acceptable planning and tax abuse, there is the middle category of tax avoidance, which is within the law but generally considered to be unfair or unacceptable.

The question legislators face is how to tackle such tax arrangements – should HM Revenue and Customs (HMRC) be able to look through the arrangement to identify the true nature of the transaction, counteract the tax advantage and so enforce the ‘spirit’ of the tax legislation? Would that be a welcome step or would it do more harm than good by creating confusion and preventing responsible taxpayers from planning their affairs with an adequate degree of certainty? The headlines may be black and white, but the legal solution is not.

Following the June 2010 Budget, a study group led by Graham Aaronson QC was established to consider the benefit of a general tax anti-avoidance rule. The group published its report in November 2011, and proposed the introduction of a rule targeted at abusive arrangements – a general anti-abuse rule (GAAR).

The GAAR’s objective would be to tackle “highly abusive contrived and artificial schemes which are widely regarded as intolerable” while permitting responsible tax planning. The government accepted many of the group’s recommendations and in June 2012, HMRC published a consultation paper on the new GAAR’s proposals. Revised draft legislation was published in December 2012 with a view to the rules taking effect from April.

Think twice

In summary, the GAAR empowers HMRC to counteract the tax advantages of arrangements that are considered to be abusive by making such adjustments as are just and reasonable. The draft legislation adopts a double-reasonableness test to define the term ‘abusive’, namely ‘the entering into or carrying out of which cannot reasonably be regarded as a reasonable course of action, having regard to all the circumstances…’ The draft legislation then lists some of the circumstances to which regard must be had and provides features that indicate an arrangement might be abusive.

The GAAR’s scope covers a variety of taxes, including income tax, capital gains tax and stamp duty land tax. Despite objections raised by almost a third of respondents to the summer 2012 consultation, the rules will also encompass inheritance tax planning.

Draft guidance on the rules has also been published for consultation and no doubt there will be a great deal more discussion on the new rules before the Finance Bill 2013 (which will contain the GAAR) receives royal assent. In particular, it will be interesting to see how commentators believe the double-reasonableness test will operate in practice. Current published opinions suggest many tax practitioners doubt that the test offers sufficient certainty to taxpayers and will likely produce endless debates about what measures are considered ‘reasonable’ (a concern increased by the government’s confirmation that no clearance process will be available under the GAAR).

Future-proof

The GAAR is one of a diverse combination of new measures added to HMRC’s toolkit for tackling tax evasion. On 3 December 2012, HMRC set out its current and future approach to enforcement in a report entitled Closing in on Tax Evasion, which includes plans to conclude enhanced tax information sharing agreements with other countries.

Furthermore, in the Autumn Statement the government promised an additional £77 million to HMRC to expand its avoidance and evasion activities, focusing on the use of offshore entities and wealthy multinationals. It also confirmed that the disclosure of tax avoidance schemes (DOTAS) rules will be strengthened to improve the information that HMRC obtains about such schemes and the individuals who use them (under DOTAS, the promoter of a tax avoidance scheme is required to notify HMRC of the scheme’s main elements).

As we begin a new year that will see budgets squeezed, the government will be under both moral and financial pressure to keep the subject of tackling both tax evasion and avoidance at the forefront of its agenda.

Lucy Edwards is a solicitor at Penningtons