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Tax avoidance may be considered a legal grey area between tax mitigation and tax evasion. One end of the spectrum is legal and enables taxpayers to obtain fiscal advantages and the other end is escaping the tax liabilities and a criminal offence. UK courts and tax authorities have struggled to define it and approach it on a factual basis regarding the case to find what constitutes avoidance. It is worth noting that the main distinction between tax avoidance and evasion is legality, though the boundary between them is obscure.

Ramsay doctrine is an approach arising from a court’s decision with regards to statutory interpretation on tax avoidance. The doctrine’s application is examining the legal and factual matter and analysing the function of the law with regards to the statute. It was novel in cases where the taxpayer as part of a broader, composite transaction enabling courts to take the parliament into consideration (MCashback) and adopt a ‘purposive’ approach. Although courts initially believed that it was only applicable to circular transactions, Furniss v Dawson extended it to linear transactions. After that decision, the Ramsay principle was thought to be an anti-avoidance rule that had the same effect as a statutory provision. Following McGuckian, courts interpreted the principle as a ‘purposive rule of statutory interpretation’ instead of an anti-avoidance rule. This raised further issues in MacNiven with a requirement of a legal or commercial dichotomy to apply the principle. It was further elucidated as a rule of ‘purposive construction’ by the courts in BMBF. However, the Bank of Ireland was a case where the scheme exploited the repurchase agreement rules to claim a loss when it had in fact realised a gain. Similarly, Mayes case was a reminder of the limitation of the doctrine. The taxpayer in the case had circumvented the law perfectly and a purposive interpretation was unable to overthrow the scheme.

HMRC realised the need for a GAAR, and it was enacted as Part 5 of FA 2013. It enabled the HMRC to legally dispute any arrangements that would go outside the limits of the legislation to gain a tax advantage. Hence, they are applicable to any tax arrangements which give rise to ‘tax advantage’ and are ‘abusive’ [S207(2) FA 2013]. The test of ‘abuse’ along with the ‘double reasonableness’ appears to be of a high threshold, and it may be meant to identify selective individuals. An independent body (not consisting of HMRC members) compromised of tax experts form the GAAR Advisory Panel and provides an opinion of taxpayer’s reasonableness (Para 11 Sch 43) before HMRC is able to apply GAAR on the arrangement and also presents guidance on GAAR over time. While the HMRC is not bound by the opinion, courts take them into consideration. It functions much like a scrutiny panel with every intention of regulating the legislation and making sure that HMRC only uses GAAR as a deterrent in cases involving an exceedingly artificial arrangement.

However, even with the existence of GAARs, TAARs are still in the picture. In fact, the procedural safeguards in comparison to GAAR are significantly lower. One of the main controversies regarding GAAR is that tax areas concerning transfer pricing, digital services tax and diverted profits tax still require relevant rules and regulations as GAAR is peripheral. The rules regarding them dictate systematically relevant provisions that realise essential characteristics among different tax jurisdictions. The double reasonable test is also more of a safeguard as it protects the general taxpayer from invoking the legislation as a general argument would be that the person had a reasonably held view and engaged in a reasonable course of action. In case, GAAR is invoked, a heavy penalty of 60% of the ‘counteracted advantage’ is held (S212A FA 2013).

Targeted anti-avoidance rules (TAARs) was proposed originally by the HMRC in 2013 in response to the modernization of derivative contract rules and loan relationships (S441-2 & S445B-D CTA). It may be more likely to find a ‘reasonable and just’ adjustment regarding the application of TAAR and in case there is none then the amount applicable for the special penalty is nil. It is worth noting that only tax administrations can avail TAAR, and it is applicable by self-assessment. Following, Project Blue v HMRC, we can affirm the judiciary has adopted a far-reaching and encompassing approach as S75A-C FA 2003 was invoked regardless of tax-avoidance purposes. Disclosure of tax avoidance schemes (DOTAS) was introduced by FA 2004 to assist HMRC to gather intelligence through an “arranger” on loopholes or challenge schemes regarding avoidance in general. It is quite ingenious as the tax authority can gain information in real-time about the scheme and counteract it immediately. This is a flexible approach as it strengthens the statutory instrument over time and enhances it in the process.

Historically, taxpayers in cases involving the Ramsay principle have had positive judgements, while there is no advance clearance before its use, many of its restrictions have been abandoned and it suggests being elective. It is still refined enough to deal with tax arrangements. Although GAAR is still useful in the case of complicated provisions, it is too restrictive. The definition of tax abuse and application of the rule is contrary to its purpose as it acts more as a deterrent. The burden of proof rests with the HMRC and only an agreement of the panel allows the use of GAAR making it even harder to use. Furthermore, there is no guidance by the HMRC relating the scheme likely to be abusive i.e., there is no incentive to change the current schemes as a result. While GAAR has become a sleeping dragon, we must appreciate DOTAS and TAAR. In a roundabout way, DOTAS could be said to be responsible for the updates in statutory provisions and possible improvements to the current legislation. Not only does it support the tax administration to keep one step ahead, but it also saves valuable time, capital and workforce that would be required to find and document schemes on a daily basis. Finally, TAAR is equally significant as it can prevent an expansive number of avoidance schemes with relation to loan relationships (more relevant than GAAR in this case).

It is likely that as soon any one of these instruments/provisions become redundant, it would open a floodgate of disputes related to tax avoidance, and it could be said that they are cogs in a wheel (functional tax administration).

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April 2024