Tax rule is back - this time it’s serious

We have been here before, but this time it looks serious. The Coalition Government has reopened the debate about whether there should be a general anti-avoidance rule to combat unacceptable tax avoidance.

In December 2010, leading tax counsel Graham Aaronson QC was appointed to conduct a study that would consider whether the rule should be introduced. The cynical might have thought that this was an attempt to kick the idea into the long grass. However the final report was published on 21 November 2011 and it recommended the introduction of an anti-avoidance rule specifically targeted at artificial and abusive tax schemes.

The idea of a general anti-avoidance rule was proposed about 12 years ago and roundly rejected by business on the grounds that it would lead to greater uncertainty without the inclusion of a comprehensive clearance regime. There was no great appetite from the Inland Revenue, as it was then, for such a clearance regime and the proposal did not proceed.

So what has changed this time? Most importantly there has been a change in the political climate which has moved tax avoidance up the agenda. HM Revenue & Customs should take some of the credit for this as a result of its long-standing strategy to highlight the moral obligation to pay tax. It is now accepted that tax avoidance is part of the ‘tax gap’, the difference between the tax collected and the tax that ought to be collected. However it has taken the economic crisis and publicity campaigns aimed at highlighting perceived tax avoidance by businesses and high-profile individuals for an anti-avoidance rule to be seen in a more politically-attractive light.

The other reason why a rule is much more likely this time around is the dramatically different approach taken by Mr Aaronson’s report.

The report rejected a broad spectrum general anti-avoidance rule, but concluded that a rule targeted at abusive arrangements, which does not apply to responsible tax planning, would be beneficial for the UK tax system.

The change in terminology from an anti-avoidance rule to an anti-abuse rule is indicative of the report’s move to a more targeted rule. It is aimed particularly at tax schemes which might constitute legal tax avoidance – in that they could not be defeated by applying a purposive interpretation of the legislation – but are egregious in exploiting the tax system in a way which would be judged unacceptable. This is not about what is lawful and unlawful, but about what is morally and socially acceptable. Some tax planning is to be allowed

The tricky part is defining that elusive boundary. The anti-avoidance rule recognises that there is a centre ground of arrangements which are tax-motivated, but constitute an acceptable way to plan one’s affairs.