..:: Is there a dire need for a general (statutory) anti-avoidance rule in the UK? ::..
Is there a dire need for a general (statutory) anti-avoidance rule in the UK?
When the Labour government won the general elections in May 1997, they made it quite clear that they were unsatisfied with the current state of the law as regards tax avoidance. In his first budget the Chancellor of the Exchequer asked the Inland Revenue to look at the possibility of introducing a general (statutory) anti-avoidance rule (GAAR) in the United Kingdom. The Inland Revenue then went ahead and published a consultative document on the subject.1 The Financial Secretary to the Treasury, Dawn Primarolo has urged members of the profession, business and any interested parties to come forward and express their views. This is because the need for such legislation is questionable although it seems that the Labour government has already made up its mind on the matter.
There are many reasons why the UK is in need of a GAAR. Currently the law is confusing and complicated. The situation has become so dire that it is difficult to know whether one is avoiding tax or evading it. The distinction between evasion and avoidance appears to be breaking down. This is illustrated by the raids in October 1997 by the Inland Revenue, on the offices of Coopers and Lybrand and Ernst and Young who were suspected of selling 'illegal tax avoidance' schemes; a term which appears to be contradictory in nature.2 What is needed is the law laid down in a clear statutory framework so everyone knows where they stand.
The current practise of using specifically targeted anti-avoidance rules is flawed from the start because as soon as one scheme is stopped a new loophole is found. The law is always one step behind the clever schemes devised to help the taxpayer avoid paying tax. The courts can only apply the law as it is and therefore new schemes are unaffected and the revenue cannot recoup the tax lost to early users of these anti-avoidance schemes. It is just not possible to foresee the ingenious methods taxpayers and their advisors will formulate to get around specific provisions.3 A GAAR would act as a deterrent and stop companies from trying to get around the letter of the law by making the use of such schemes illegal. Under the current law, with each successive provision the law becomes more and more complicated. A GAAR would benefit the courts. They would find it easier to interpret than a mass of impenetrable detail.4 After the decision in Pepper v Hart5 the courts in exceptional circumstances can refer to statements made in Parliament by the minister or other person proposing the legislation to ascertain what a provision means if it is ambiguous, obscure or would lead to an absurdity.
A GAAR is needed because the current law is unsatisfactory despite recent judicial developments by the courts and the application of the Ramsay doctrine. This is because new devices for avoiding tax continue to develop. Litigation is not always the best approach for dealing with tax cases, because litigation in complex avoidance cases can take a long time to resolve and the uncertainty of the outcome can be prolonged considerably.6 Leaving the courts to decide tax avoidance cases does not provide sufficient guidance to taxpayers in the commercial world. The Tax Law Review Committee (TLRC) report on Tax Avoidance expressed concern about the uncertainty created by what it saw as "innovative judicial ant-avoidance techniques" operating retrospectively.
The Inland Revenue argues that a GAAR is needed because the tax burden should be spread fairly across all taxpayers. Artificial tax avoidance undermines the fairness of the system, making the burden fall more heavily on others. It is argued that wealthier taxpayers are more likely to avoid tax than the less wealthy because they have larger, more diversified, portfolios and access to better tax advice.7 Tax avoidance stirs emotions of inequity and unacceptability among the majority of people who cannot afford such a luxury. The Inland Revenue has indicated that it is not 'implausible' that incomes not declared for tax purposes could amount to 7.5% of GDP.8 This means that there is less money for the public purse to pay for government programmes such as healthcare and education. Taxpayers using avoidance schemes stand to gain a lot while risking little. The use of GAAR will act as a deterrent and reduce the use of such schemes thereby benefiting society on the whole. A GAAR will promote commercial competition by levelling the playing field, bigger companies won't be able to avoid paying tax while smaller companies have to. The Inland Revenue points out that complex avoidance schemes cost the exchequer a lot of money and time investigating the use of such schemes which adds to the further costs of policing and responding to such developments.9 'We assume a pre-existing obligation to pay our fair share of taxes-the price for living in a civilised society.'10 The rights of individual taxpayers must be weighed against the duty of Parliament to ensure that the economy in general and tax laws in particular are not undermined.11
Furthermore the United Kingdom is unusual among developed countries in having neither statute nor an established legal principle to counter tax avoidance in general. Countries like Canada, Australia, New Zealand, South Africa and the Netherlands all have anti-avoidance legislation of some kind. It is well known that in situations of high tax, tax avoidance schemes flourish. Out of all these countries with existing GAARs the Netherlands is the only country with a higher tax rate than the United Kingdom.12
In response to the foreword by the Financial Secretary to the Treasury in the Inland Revenue's consultative document many businesses, professions and other interested parties have expressed their concern at the possibility of the government introducing a GAAR. This is partly because it is such a fundamental change in direction no one can know for certain its true implications. Some question13 what there is to gain by introducing a GAAR especially since the House of Lords held in favour of the purposive approach to taxation in IRC v McGuckian14. Introducing statute based law does not always mean that things will be clearer even if one has recourse to Hansard because there are always problems of statutory construction. Politicians are not lawyers and most of the time they don't know what they are talking about.15 Sometimes legislation, especially fiscal legislation has to be written in such haste and with so many last minute changes that the underlying structure is never satisfactorily settled.16
The Institute of Chartered Accountants in England and Wales submitted their concerns to the Financial Secretary to the Treasury concerning a GAAR. They expressed concern over the problem of defining tax avoidance and that in their opinion a GAAR would introduce more uncertainty into the system and at the same time handing an unacceptable degree of discretion to the Inland Revenue.17 In effect a GAAR would give the Inland Revenue the power to decide without reference to legislation, what is a company's correct tax bill.18 Giving too much power to the executive is unconstitutional and contrary to the British perception of how things should be done.19
There is also evidence to suggest that concerns about practicality and workability could be a serious problem for the Inland Revenue. A report in the Guardian newspaper mentioned that the Inland Revenue is buckling under the weight of the tax reforms devised by Chancellor Brown over the last 3 years as part of the Treasury's drive to influence the economy and redistribute wealth. Hundreds of staff due to switch from processing tax returns to investigating tax avoidance continue to wrestle with computer systems that have struggled to match expectations. Apparently 5.2 million records - almost 20% of the British workforce - could not be found anywhere on the computer system. Staff costs have been rising instead of falling. John Whiting, a senior tax adviser at accountant PricewaterhouseCoopers, said he questions whether the agency has the manpower to deal with all the changes. The Chartered Institute of Taxation has gone so far as to say that tax rules are now so complicated that a culture of non-compliance will become more commonplace.20 If the Inland Revenue is having so many problems surely the last thing to do is to introduce a GAAR? Perhaps what is needed is a simplification of the system rather than another set of rules. A statement made by the minority in their report for the 1955 Royal Commission springs to mind, 'The existence of widespread tax avoidance is evidence that the system, not the taxpayer, stands in need of radical reform.'21
The Tax Executives Institute expressed concern that the aim of a GAAR should not unduly harm the level of certainty of tax treatment enjoyed by businesses that are not engaged in avoidance. They were worried that bona fide transactions structured to provide substantial economic benefit to a corporation should not be subject to a GAAR merely because tax savings flow from the transaction-a taxpayer should be able to choose any alternative that is legally and ethically available.22 It is the right of taxpayers to be able to conduct their activities so as to pay as little tax as is legitimately possible: it would be crass to suggest that any sensible businessman ought to conduct his affairs in any other way.23 The TEI also expressed concern with the failings of GAARs in other parts of the world citing Canada as a particular example where many of the transactions challenged are a routine part of a taxpayer's business and as a result taxpayers are incurring considerable expense in retaining consulting professionals.24
If there were to be a GAAR then how would the Inland Revenue define tax avoidance? The problem is drafting something wide enough to be general, but providing the taxpayer with some certainty as to the tax treatment of his activities.25 How can the government justify making tax avoidance illegal and at the same time offer an ISSA which would be legal. Are they not the same-a way of ordering ones affairs so as to reduce or delay the payment of tax? How can the Inland Revenue decide what is acceptable tax avoidance and what is not? The definition provided by the Inland Revenue in its consultative document fails to satisfy these dilemmas.26
The meaning of 'dire' as defined in Collins English dictionary is 'desperate or urgent indicating disaster'. I would not say that the UK is in dire need of a general (statutory) anti-avoidance rule. On the contrary, Arthur Anderson Consulting reported that 64% of the respondents in a survey they performed were opposed to a GAAR.27 Finance acts have grown in size and complexity. Between 1990 and 1995 nearly 1700 pages of primary legislation were added to the statute book.28 What is needed is simplification of the current law rather than the introduction of a GAAR which in the current conditions will at best confuse the issue of acceptable/unacceptable tax avoidance or simply provide two tests to determine the same issue.29 The saying "if it's not broken don't fix it" comes to mind. Perhaps a better solution is a complete re-write of the tax laws in this country. A Freedom and Fairness Restoration Act with a flat rate tax for everyone would do. This way the system would be simpler, fairer, promote economic opportunity and introduce integrity into the tax system.30
The situation with regard to whether there is a dire need for a GAAR is best summed up by a Labour party leaflet entitled 'Tackling tax abuses - tackling unemployment' November 1994:
'We have rejected a general anti- avoidance provision for two reasons. Firstly, experience elsewhere reveals that it has severe limitations in its success. Secondly, as a matter of principle we believe that the citizen is entitled to know where he or she stands before the tax law. A catch-all provision that came into play when all else fails is unacceptable in a fair tax system.'
1'A General Anti-Avoidance Rule for Direct Taxes: A Consultative document' September 1998 p 3 2Catherine Pilkington, "A review of the proposed General Anti-Avoidance Rule" (GAAR) 3Colin Masters "Is there a need for General Anti-Avoidance Legislation in the United Kingdom?"  BTR 671 4Tax Law Rewrite: Second Technical Discussion Document, Part 3 5 (5) TC 421 6'A General Anti-Avoidance Rule for Direct Taxes: A Consultative document' September 1998 p 9 7Alan J. Auerbach, Leonard E. Burman, Jonathan M. Siegel, "The Economic Consequences of Taxing the Rich"  Cambridge University Press 8James Kirkbride & Abimbola A. Olowofoyeku, Revenue Law Principles & Practise, 402 9James Kirkbride & Abimbola A. Olowofoyeku, Revenue Law Principles & Practise, 405 10Hugh Mckay, "Tax Law Review Committee Report on Tax Avoidance" BTR (1998) 87 11Colin Masters "Is there a need for General Anti-Avoidance Legislation in the United Kingdom?"  BTR 671 12Based on World Bank World Development Report 1995, Central Government Revenue as a Percentage of GDP - Netherlands 50.7%, United Kingdom 36.2%, New Zealand 34.2%, Australia 25.3%, Canada 22.1%, South Africa (not available). 13Tax experts argue that the UK does not need a catch-all rule because the courts are more inclined-as in the recent McGuckian case- to see through taxpayers' schemes. Tax avoidance: Catch-all law offers power but uncertainty, Jim Kelly, Accountancy Correspondent, Financial Times, Friday 4th July 1997 14 S.T.C. 908 15I came to this conclusion after reading several pages of Hansard. 16Tax Law Rewrite: Second Technical Discussion Document, Part 3 17ICAEW - A General Anti-Avoidance Rule 18A General Anti-Avoidance Rule, The British Chamber of Commerce's response to the Inland Revenue, December 1998 19Colin Masters "Is there a need for General Anti-Avoidance Legislation in the United Kingdom?"  BTR 671 20The Guardian, 22nd November, 2000 21J.A. Kay "The Economics of Tax Avoidance"  B.T.R. 365 22TEI Consultative Document on a General Anti-Avoidance Rule for Direct Taxes 23Colin Masters "Is there a need for General Anti-Avoidance Legislation in the United Kingdom?"  BTR 672 24TEI meeting with representatives of Revenue Canada, 1st December 1998 25Labour to introduce a general anti-avoidance rule, UK Corporate Tax Law articles 26In section (b) of the proposed definition of tax avoidance a comparison is therefore to be made between the course of action which has actually been taken and that which 'would otherwise be the case'. It becomes apparent that the I.R. would have to identify what the course of action would otherwise have been, which might give rise to questions not capable of being answered. - Director of Taxes, Horwarth Tax, Hong Kong 27Catherine Pilkington, "A review of the proposed General Anti-Avoidance Rule" (GAAR) 28A second report - the Hansard Society Report "Making the Law: a Report of the Hansard Society Commission on the Legislative Process" 29Geoffrey Morse, "Countering Tax Avoidance-The South African and United Kingdom Experience, J.B.L. May  30The Freedom and Fairness Restoration Act - A Comprehensive Plan to Shrink the Government and Grow the Economy, March 9, 1999, Dick Armey, Richard Shelby
Books and Articles
James Kirkbride & Abimbola A. Olowofoyeku, Revenue Law Principles & Practise, New Edition, Tudor publishing
Colin Masters "Is there a need for General Anti-Avoidance Legislation in the United Kingdom?"  BTR 647
Hugh Mckay, "Tax Law Review Committee Report on Tax Avoidance" BTR (1998) 87
J.A. Kay "The Economics of Tax Avoidance"  B.T.R. 365
Geoffrey Morse, "Countering Tax Avoidance-The South African and United Kingdom Experience, J.B.L. May