Tax avoidance refers to the legal practice of exploiting loopholes within tax laws to reduce a taxpayer’s liability without violating the law. In the UK, tax avoidance has been a subject of considerable debate, leading to the development of various mechanisms aimed at countering these practices. This article provides an overview of the primary strategies employed in tax avoidance, the tools used by the UK government to combat these practices, and the evolving role of judicial doctrines, targeted anti-avoidance rules (TAARs), general anti-abuse rules (GAARs), and other regulatory measures. [1]Various techniques to combat tax-avoidance are:
A. Judicial-Doctrines: To counter avoidance, revenue has used artificiality/sham[2]/ abuse[3]/economic-substance/step-transaction doctrines. For instance, tax-avoidance schemes like dividend-stripping leading to artificial-structures were challenged as non-trading activities.[4]Moreover, revenue has used Ramsey as a rule of purposive-interpretation of statutes to combat avoidance.[5]
B. Targeted anti-avoidance rules(TAARs) were legislated to address specific tax-loopholes. (eg. TAARs on loan-relationships[6],derivative-contracts).
C. General anti-abuse rules(GAARs),enacted in 2013,are triggered when main-purpose of an arrangement[7]is to obtain a tax-advantage(objective-test).[8]The arrangement is abusive if it cannot reasonably be regarded as a reasonable course of action(double-reasonable test).[9]Burden on proof is on HMRC, who must notify the taxpayer within 45-days.GAAR advisory-panel then determines if the arrangement is reasonable. Adjustments can be made within 12-months of final-GAAR decision. HMRC-guidance provides detailed examples of abusive-arrangements. Since 2016, a 60% penalty applies if GAAR is successful.[10]
D. Disclosure of Tax Avoidance Schemes(DOTAS)is an early-warning system, which enables revenue to receive notice of tax-schemes, so that they may be blocked through TAAR. It requires scheme-promoters to notify HMRC within 5-days,which in-turn provides a scheme reference-number to be quoted on use.[11]Non-disclosure results in penalties. Despite effectiveness of DOTAS, its administration entails sifting through numerous disclosures, akin to finding a needle in a haystack. Additionally, lawyers often employ privilege-defense to avoid disclosure.
E. Follower-notices are blunt-instruments used by HMRC to bring about early-settlement of cases where it considers that final judicial-ruling against a taxpayer is relevant to a tax-arrangement used by another. Such other taxpayer has 90-days to amend return, settle or appeal but if unsuccessful, he may be subject to 30%-50% penalty. Follower-notices can only be challenged in administrative-courts not tax-tribunals. R(Howarth)clarified that a follower-notice can only be issued when there is no room for a reasonable-person to disagree that the earlier final-ruling negates the tax-advantage.
F. Accelerated Payment Notices(APNs)expedite tax-collection in avoidance-cases. They can be issued if a taxpayer claims a tax-avoidance benefit under DOTAS, receives a follower-notice, or faces 2:5 adverse GAAR-ruling.[12]APNs require taxpayers to pay disputed-tax upfront pending the appeal’s outcome. Non-compliance incurs penalties. There is no direct-appeal against APNs, but taxpayers can make representations to HMRC or seek judicial-review.
G. Other-Tools: HMRC requires Senior Accounting-Officer of qualifying-companies to provide annual-certificates confirming proper tax-accounting arrangements.[13]Also,FA,2016 mandates them to publish their tax-strategy/tax-planning online with sanctions for non-compliance. Moreover, banks under the UK Bank Code-of-Conduct and multinationals under BEPS(country-by-country)reporting are required to share information which deter tax-avoidance. Large-companies/partnerships are required to disclose tax-uncertainties to HMRC over £5 million in relation to an accounting-provision, a position contrary to HMRC-guidance, or where there is a substantial chance that a court would disagree with its position.[14]
Ramsey:Avoid Over-reliance
Ramsey is a valuable-tool against tax-avoidance but is not the most important and over-reliance can harm both revenue and taxpayers.Ramsey grants broad judicial-discretion, verging on judicial-overreach, and has a history of inconsistent-application.For instance,initially,it was believed Ramsey only applied to self-canceling transactions (Burmah-Oil),but this was not upheld in MacNiven/BMBF.Courts have also debated Ramsey’s scope, such as its application to single-step versus multi-step avoidance-schemes.[15]In Craven,multi-step transactions with genuine-interruptions did not trigger Ramsey, while contradictory observations were made in Rossendale. In Fitzwilliam,debate centered on whether Ramsey applied where each step had some tax-effect. Additionally, applying Ramsey sometimes led to side effects like double-taxation in Furniss.
For revenue, relying on Ramsay means entrusting judges with the task of creating deterrence against tax-avoidance. It also means accepting inconsistent and anti-revenue rulings like in Mayes, where tax-payer won due to unclear legislative-intent. Also, Ramsey is not as extensive as the American economic-substance rule which means that extensive-recharacterisation is not possible. For taxpayers, purposive-interpretation of Ramsey has been detrimental, evident in UBS AG/Clipperton/Khan.[16]Its retrospective-effect and evolving interpretations by future courts create uncertainty, complicating genuine commercial transactions without a pre-clearance route. Moreover, Ramsey places burden of proof on the taxpayer, with no built-in safeguards to recognise legitimate transactions. However, there is no special penalty on application of Ramsey, which is a respite for taxpayers.
TAAR: Limited Scope
TAARs prove highly effective in addressing established tax-avoidance strategies as is clear from Blackrock, Kwikfix, Travel-Document Service, Fidex, and Oxford but fall short against emerging novel tax-schemes, reducing their status as the most important anti-avoidance tool. Moreover, the proliferation of TAARs has led to a complicated tax-framework, posing compliance-challenges for taxpayers and administrative-hurdles for tax-authorities.
Also, TAARs are mostly based on subjective-intention of parties which are difficult to prove and are susceptible to human-bias(See, ‘Unallowable-purpose u/s441,CTA,2009).Certain TAARs, such as stamp-duty land tax(u/s75A-CFA,2003)are triggered even without tax-avoidance purpose, solely based on a reduction, resulting in a one-sided application.[17]Also, TAARs like Ramsey give limited scope for getting advance clearance, creating uncertainty.
Conversely, certain TAARs have been rendered objective by incorporating a reasonableness-standard, as seen in Section-455D,CTA,2009.Additionally,some TAARs permit just and reasonable adjustments(Section-441,455B,CTA,2009)instead of outright denial of tax-benefits, serving as safe-harbors. Moreover, no special-penalty applies upon the activation of TAARs.
GAAR v. Ramsey/TAAR
GAAR was introduced to reduce reliance on Ramsey and TAAR(Aaronson-Study).Instead of vague Ramsey, GAAR directly addresses abuse, offering a definite/foreseeable framework. It recognizes taxpayers’ rights and includes safeguards against misuse through the GAAR-Panel(consisting of independent tax-experts, excluding HMRC-members) and double-reasonableness test.[18]Moreover, GAAR leads to just and reasonable tax-adjustments affecting only the tainted-transaction.[19]Taxpayers can request consequential amendments to avoid double-taxation, addressing issues not fully resolved by Ramsey.[20]
GAAR-Panel has published 26-opinions(except one all are pro-revenue)which serve as deterrents. Limited emergence of new marketed-schemes supports this hypothesis. Furthermore, GAAR allows for extensive recharacterization in instances of tax-avoidance, bringing transactions in line with economic-reality. The mere prospect of this has contributed to deterrence. [21]
However, GAAR does not encompass stamp-duty, SDRT, or VAT, whereas Ramsey does. An adverse-decision by the GAAR-Panel triggers APNs, activating promoters of tax-avoidance schemes regime and potential-penalties of 60%.This incentivizes HMRC to prioritize the GAAR over TAAR.[22]The financial strain of APNs and hefty-penalties often compels taxpayers to settle, as they cannot afford the burden of an appeal. GAAR-panel, intended as a safeguard, only assesses whether an arrangement is reasonable and does not apply the full double-reasonable test, allowing APNs/penalties to be imposed without adequate-safeguards. Furthermore, GAAR-panel lacks proper-hearings and makes decisions solely based on written responses.
UK-GAAR was introduced later compared to its Canadian and Australian counterparts, allowing Ramsey to develop. Limited GAAR-litigation ensued due to sustained Ramsey use. With no GAAR-cases reaching the courts, it is difficult to predict how courts will interpret GAAR.[23]Experience from other countries(Australia/New-Zealand) suggests that GAAR’s scope can fluctuate significantly over time with evolving judicial-interpretations posing challenges for transactions, especially as no pre-clearance system is available.
Conclusion
Ramsey and TAAR stand as proven anti-avoidance tools, while GAAR is still untested. However, despite the presence of Ramsey and TAAR, there remains scope for GAAR to operate. Although GAAR hasn’t entirely fulfilled its initial purpose of establishing a more stable and predictable tax-avoidance regime, it serves a crucial role in deterrence. Moreover, GAAR holds potential for creating a balanced regime that considers both taxpayer and revenue interests. A pre-clearance mechanism could further fortify GAAR by ensuring that taxpayers engaged in legitimate commercial activities aren’t inadvertently ensnared.
[1]Willoughby; Furniss(Lord-Templeman)
[2]Snook-v. London-and-West-Riding
[3]Halifax
[4]Flanagan, Lupton, Samarkand
[5]McGuckian
[6]Sections-441-2,455B-D(Regime-TAAR),CTA,2009
[7]Section-207(1),FA2013
[8]Section-208,FA,2013
[9]Section-207(2),Finance-Act,2013
[10] Section-212A,Schedule-43C,FA
[11]Part-7,Finance-Act,2004;Section-98C,TMA,1970
[12]Section-219,Part4,Ch-3,FA,2014
[13]Section-93,Schedule-46,FA,2009;HMRC-Guidance(SAOG15100)
[14]Section-96,Schedule-17,FA,2022
[15] Fairpo/Salter.p.26
[16] Khan-v. HMRC
[17]Project-Blue
[18]Judith-Freedman(Journal-Article)
[19]Section-209,FA,2013.
[20] Section-210,FA
[21]Zimmer(Journal-Article)
[22]Supra(18)
[23]Supra(18)
Author Bio
