Tax – Will the anti-avoidance rule mean a simpler future?

Matheu Smith looks at how a radical proposal to fundamentally change the UK taxation system moved closer in the 2012 budget and why this should be good news for taxpayers.

After the 2012 Budget a general anti-avoidance rule now seems likely to become law in 2013. Insofar as this has had any media coverage it has tended to focus on its most obvious and immediate objective of tackling artificial and abusive schemes to avoid tax or concerns that HMRC could use it to impose an unfair tax burden. However what may be the most important benefit for the majority of taxpayers has had surprisingly little attention – it should become the foundation stone for a simpler tax system that is easier for taxpayers and the taxman to understand and apply.

Historically taxation has been seen as a form of confiscation by the state and so could only be done in accordance with the strict letter of the law. As such tax law is usually highly prescriptive aiming to set out in black and white exactly what is and is not taxed. There are two fundamental problems with this approach:

• not every possible scenario can be envisaged by Parliament and so unintended loopholes are left for those that look hard enough to find and exploit; and

• attempts to close such unintended loopholes with black and white prescriptive rules has seen the UK’s tax code balloon to become the biggest in the world which, in truth, nobody can hope to fully understand.

A general anti-avoidance rule should help to resolve these problems by placing some emphasis on the intended consequences of the tax code by defining what constitutes lawful tax planning, limiting the need for endless pages of rules that try to specifically address every conceivable scenario.

That is not to say that there is no reason for concern at the potential problems a general anti-avoidance rule could create. Top of most people’s list is the possibility that it would give the taxman discretion to decide, rather than Parliament, what is unlawful tax evasion and what is lawful tax avoidance. However what is proposed at present should not allow that to happen.

The scope of the proposed general anti-avoidance rule is defined by the overarching principle behind it being that:

‘…it should target those highly abusive contrived and artificial schemes which are widely regarded as intolerable, but it should not affect the large centre ground of tax planning’.

So where there is genuinely a choice as to how to structure a transaction the taxpayer will remain free to choose the most tax efficient option. Further, the burden of proof will rest on the taxman. In practice this would mean that first the taxman would have to prove that a scheme has abnormal features specifically designed to achieve avoidance of tax. Then, where the tax code permits taxpayers a choice how to arrange their affairs, the taxman would have to prove that the scheme chosen cannot reasonably be regarded as a reasonable exercise of choice. In short, taxpayers would get the benefit of the doubt when the intention behind the tax code is not clear.

It should be noted that it is not only astute taxpayers (or devious ones depending on your point of view) that seek to circumvent the tax code by relying upon a literal approach to its meaning to produce an unintended beneficial result. There are many who would argue that the taxman sometimes takes this same approach. A definition of what constitutes lawful tax planning may actually help taxpayers to reign in attempts by the taxman to interpret the tax code in a manner that produces an unintended consequence in his favour.

These checks and balances together with a number of others that are proposed should satisfy most taxpayers concerns, though it is vital that they are adopted and implemented and not watered down or lost as the general anti-avoidance rule passes through the process of becoming law.

For those who still fear the introduction of the proposed rule and who are calling for the idea to be scrapped, or for complex pre-clearance approval regimes, they should consider that something similar already exists in relation to VAT. The VAT system is a creature of European law and so is subject to an overriding doctrine that rights cannot be abused. In 2006 the European Court of Justice decided that in relation to VAT this meant that a taxpayer could not use an abusive scheme the essential aim of which is to obtain a tax advantage which would be contrary to the purpose of the law. This principle is not subject to any of the explicit checks and balances of the proposed rule but has so far caused few problems for most taxpayers.

Ultimately, if the introduction of a general anti-avoidance rule helps the UK to simplify its tax code so that it is easier for taxpayers and the taxman to understand and apply, then the benefits will outweigh the risks. For the few taxpayers and tax advisors who set out to test the boundaries of what is and is not lawful it will be more difficult to gain a benefit from the unintended effects of the law that can arise in artificial and contrived circumstances not foreseen by Parliament.

For those taxpayers that do find themselves in trouble with the taxman Keystone offers an excellent fixed fee tax appeals service.