Pragmatism, politics and principle: tax practitioners consider the GAAR

Practical Law UK Articles 6-513-8928 (Approx. 16 pages)

Pragmatism, politics and principle: tax practitioners consider the GAAR

by PLC Tax

Is everyone looking at the same report?

Given the lack of unity at ministerial level, it is understood that Graham Aaronson QC believes that the ultimate fate of the report will, in part, depend on the reaction of the tax industry. In fact, the diversity of opinion offered for this article has been startling.

Some commentators have been positively glowing in their praise. Simon Yates, Travers Smith LLP described the proposals as "ingenious" and Neil Woodgate, White & Case LLP thought that "the report is to be much commended for its refreshed, new approach to a tired, old problem". Chris Bates, Norton Rose LLP described the proposals as a "good foundation for a wider consultation on this issue".

By contrast Stephen Hoyle, DLA Piper LLP and Eloise Walker, Pinsent Masons LLP found a number of aspects of the proposals very troubling (see further The advisory panel and the rule of law).

A number of other advisers have noted that, although they had initially opposed a GAAR, they have since been convinced otherwise. For example, James Bullock, McGrigors LLP has previously argued against a GAAR, but is now in favour, noting that the "proposed measure is limited in scope to "contrived and artificial schemes" and contains various safeguards to ensure that "responsible tax planning" is not caught".

This is no doubt in part a pragmatic shift in response to political and economic realities of recent times. But it is also a reflection of the powers of persuasion of Graham Aaronson QC (described by Stephen Hoyle, DLA Piper LLP as "the leading tax advocate of his generation"). Apparently David Taylor, Freshfields Bruckhaus Deringer agrees:

"Coalition policies and the general political climate, as well as the talents brought together for the GAAR report, have already led us to assume that this time it's serious."

The certainty of reasonable reasonableness

If we are to have a GAAR, then clearly it should increase rather than decrease certainty. The scope of the GAAR suggested by Mr Aaronson's report is limited to abnormal tax planning arrangements that cannot reasonably be regarded as a reasonable exercise of conduct choices afforded by the relevant rules. But this concept is not necessarily clear. Yash Rupal, Linklaters observes:

"The notion of a reasonable exercise of choices of conduct afforded by the legislation to define the safeguard for reasonable tax planning will be difficult to apply. Invariably, tax legislation does not provide that a taxpayer may do A or B. In many cases whether or not a choice is available and the parameters within which it may legitimately be exercised will be subtle matters of inference and judgement ... ... the challenge is to define the elephant, the boundary between the centre ground of "responsible" tax planning and unacceptable tax avoidance without creating too much uncertainty. In practice, there will be some clear cut cases where the illustrative GAAR, rightly, will apply but there will be many normal commercial transactions where doubts as to its applicability will linger."

As Philip Harle, Hogan Lovells International LLP puts it: "Although the "offensive" schemes can generally be spotted, drafting language to capture only these is notoriously hard".

The difficulty of drawing the distinction should not be underestimated. It represents the interface of law and morality, and in this context objectivity is near impossible. What is, or is not, the acceptable face of tax planning can only be understood within the wider arena of the current economic and political climate. According to David Harkness, Clifford Chance:

"The problem is that the question of what is acceptable tax planning and what is avoidance is as political and philosophical as much as it is legal. There are some who still hold to the traditional view that a taxpayer has the absolute right to arrange his or her affairs to minimise tax. There are others who believe that we all have a duty to contribute to society by paying the "right" amount of tax (whatever that is)."

As Tom Scott, Chairman of the UK Branch of the International Fiscal Association put it, "does the test to be applied in determining ... "reasonable tax planning", involve too great a value judgment?". Tom also points out a further problem, specifically:

"And is the first adopter of a scheme at an advantage (because at that stage there is insufficient awareness of the scheme for it be "widely regarded" as anything)? Or is it better to wait until the scheme is being widely adopted in the marketplace, so the scheme is demonstrably regarded, at least by its adopters, as a reasonable "choice of conduct?"

Bradley Phillips, Herbert Smith LLP made a related point:

".. although there may be a case for another weapon against "egregious" tax schemes, it is of concern if the GAAR does cause additional uncertainty and costs in practice for UK and international business, individuals and advisers ... we suggest that the existence of the GAAR and the Advisory Panel will only act to increase the costs of tax disputes which may be good for advisers but adds to the unattractiveness of the UK tax system for taxpayers."

Jonathan Hornby, Alvarez & Marsal Taxand UK drew an interesting distinction between different types of taxpayer:

"Many of the biggest multinationals build tax planning around commercial change and therefore should not be affected by a UK general anti-avoidance rule. The real fear is that those companies whose tax planning may be assessed more subjectively will be put off by the uncertainty."

Any conclusion on the question of certainty might also depend on the time frame of the analysis. The view of James Smith, Baker & McKenzie LLP is that even a narrowly drafted GAAR "is likely to increase uncertainty in the immediate term". But James also thought there was potential ultimately to end up with a shorter, simpler tax code and greater taxpayer certainty. Martin Walker, Deloitte made a similar point:

"If indeed it is the case that fewer specific anti-avoidance rules are introduced in the future, then this would be laudable and help to redress the balance back towards simplicity. It would also be (as the report mentions) a real opportunity to sweep away the complexity of many of the existing specific anti-avoidance rules – although unfortunately one which I doubt will be taken any time soon."

Mike Lane, Slaughter and May was more circumspect on this issue, saying:

" I am not at all convinced that a GAAR in the form proposed would lead to the simplification of tax legislation past or present. If the GAAR succeeds in its aim of leaving the middle ground untouched, I would expect HMRC to want to retain its current arsenal of TAARs. Why would they give those up if the GAAR really is a nuclear weapon only for use in the extremes? And is there really that much egregious planning left which is not deterred by the current hostility of the courts to anything perceived as tax avoidance or which, if it does go ahead, then survives the court process? "

Nonetheless, Greg Sinfield, Hogan Lovells International LLP thought the draft GAAR compared favourably with its indirect tax counterpart, concluding that it "probably provides more certainty" than the abuse of law provisions.

Further, David Milne QC, Pump Court Tax Chambers thought that the loss of certainty was no longer a concern stating:

"Sadly, however, in recent years we have not only lost certainty, we have got to the stage where the success or failure of a tax-avoidance scheme has become a lottery - it seems sometimes that almost everything depends on which judge or judges happen to hear the appeal ... Faced with such a lottery, a GAAR (especially a GAAR tightly focused like that recommended by Graham's committee) can only help tax advisers to predict how a scheme is going to fare in the Courts."

The advisory panel and the rule of law

One of the features of the proposals that attracted significant comment was the suggestion of an advisory panel. According to the report, the intention is that the advisory panel will provide a mechanism to resolve doubts and create certainty quickly while avoiding giving HMRC greater discretionary power. However, a number of contributors have flinched at the implications this raises for the principle of the rule of law.

According to Stephen Hoyle, DLA Piper LLP :

"The novel aspect of the GAAR will be to allow the Advisory Panel to opine on whether planning is reasonable. This will not be a judicial hearing. The expectation is that the decisions of the Panel will set practical boundaries to tax planning. It would be remarkable if a business's structuring for planning laws, competition law or employment law were made subject to a discretionary override. The GAAR really will take tax law that far out of the legal system."

Yash Rupal, Linklaters asked: "does this not usurp the role of the courts?".

Neither did Eloise Walker, Pinsent Masons LLP mince her words:

"... the real killer for me ... is the idea that some triumvirate advisory panel on which HMRC and an industry specialist sits should pronounce aye or nay. The phrases “conflict of interest”, “chance to stick the knife into your competition” and “nice little earner�� spring to mind. How is this supposed to sit beside the usual Tribunal process? Even if it is just labelled an advisory panel it’s almost bound to usurp or pervert or interfere with the judgment of the courts, and I’m not sure I like the sound of that."

Michael Cant, Nabarro LLP also commented on the advisory panel; he thought it should not include a member of HMRC.

There may be more practical issues, too. Adam Craggs, RPC said he thought that a panel, "through no fault of its own, would not be able to process expeditiously a high volume of requests and this would inevitably result in delay and consequent uncertainty for taxpayers".

Where is the clearance system?

Another area that attracted comment related to the lack of provision of a clearance system. If certainty is the goal, then surely a clearance system would be preferable. The reality, of course, is that HMRC resources do not stretch to a clearance service. According to the report, placing the burden of proof on HMRC, together with the functions of the advisory panel should make a general system of clearances unnecessary.

However, Yash Rupal, Linklaters points out that the proposals do not rule out non-statutory clearances "which presumably HMRC will continue to entertain for the "right" taxpayer". His view is that:

"We should either have a proper clearance system for the GAAR available to all with all rulings published in anonymised form or we need to ensure that no one benefits from a clearance or concession, whether official or unofficial, from HMRC on the GAAR."

A similar point concerned John Christian, Pinsent Masons LLP, who said:

"The lack of a clearance process is inevitable, but global businesses are not going to invest on the basis that the GAAR may be looked at in 5 years time if there are problems - they will simply look at other territories where there is clarity ... HMRC will have to come up with a way to provide assurance on a real time basis that a particular transaction is outside the GAAR."

David Taylor suggested that certainty might be improved if the guidance considered previous case law. He said:

"One of the problems with a GAAR is that it can take many years for case law to develop as an aid to an understanding of its scope. The authoritative guidance might usefully seek to address this point at the outset by considering what the application of the GAAR would be to cases that have gone before. So for example: the taxpayer in Mayes would lose (for reasons that would be explained) but the taxpayer in BMBF v Mawson would still win (for reasons that would also be explained). Of course, once you start doing this many cases can be considered. The most useful approach is perhaps to address some of the modern taxpayer successes (e.g. consider First Nationwide, if it is then final, or Bank of Ireland, rather than Duke of Westminster). There aren’t that many recent taxpayer successes to work through…"

"Mission creep"

A number of commentators (these include David Harkness, Mike Lane, Andrew Loan and Simon Yates) expressed concern about potential "mission creep". That is, the potential that the proposals might be adopted by government but in a modified or extended form, or that their form may became modified or extended subsequently. The report itself identifies its potential.

In the event that the government enacts a GAAR in the form outlined in the report, many advisers will be anxious to ensure that the safeguards outlined do not become lost or subsequently emasculated.

It could be worse ...

So is the tax industry as a whole happy with the proposed GAAR? Not quite. "Happy" conveys an animation, lightness of heart and frolic not generally characteristic of the tax industry. But in relation to the question of whether there should be a GAAR at all, there is certainly a degree of acceptance (perhaps resignation) that might previously have been regarded as extraordinary.

The detail and structure of the proposed GAAR is (rightly) being subjected to rigorous analysis and debate. But Graham Aaronson QC and his team appear to have gone to great lengths and taken every care to ensure that the GAAR appears to be as narrow as possible while seeking to counteract the most extreme tax planning.

It could have been so much worse. As Andrew Loan, Macfarlanes LLP put it:

" ...if a GAAR is on the cards, the proposals in the report of Graham Aaronson's study group achieve a good balance between protecting the right of taxpayers to structure their affairs to minimise their burden of tax and the rights of the tax authorities (and, by extension, other taxpayers) to make sure that no one uses artificial structures to shirk their obligation to pay a fair share towards the public services on which we all depend."

In a similar vein, Matthew Mortimer, Milbank said: "If we must have a GAAR, Graham Aaronson's narrowly-honed formulation is obviously better than some of the broader-brush alternatives he might have unveiled".

The issue can be put in a seasonal context: you may eat too much, you will drink too much, and you are going to receive a jumper from granny for Christmas that you will have to wear until the New Year. Pragmatism is a life skill, so send granny to Harvey Nichols, and make sure the jumper is the right size.

Comments in full

Chris Bates, Norton Rose LLP

"Any GAAR has to balance the need for taxpayer confidence in the predictability of the tax system with the need to counter egregious tax avoidance carried out for the benefit of a small minority of tax payers at the the expense of the majority. Graham Aaronson's proposal for a targeted GAAR is a good foundation for a wider consultation on this issue. However the suggestion that the GAAR might have some retrospective effect will be source of concern and uncertainty."

James Bullock, McGrigors LLP

A cautious welcome for the GAAR

"I welcome the recommendation of the GAAR study group of a "General Anti-Abuse Rule" as opposed to a "General Anti-Avoidance Rule". The proposed provision has a much narrower focus than a General Anti-Avoidance Rule and is intended to permit "responsible tax planning" to continue.

The report is a powerful reminder that the right of a taxpayer to arrange his tax affairs efficiently is a fundamental principle of UK tax law. This is a welcome clarification, given perceived attempts by HMRC at blurring the line between tax avoidance and tax evasion. It is this kind of blurring that leads the man on the street to think that "if big businesses can engage in tax evasion (sic) then so can I" - and that in turn lends support to the propaganda of activist groups.

I have previously spoken out against a GAAR, fearing that it would increase uncertainty for business, thus potentially hampering the fragile economic recovery. However, the proposed measure is limited in scope to "contrived and artificial schemes" and contains various safeguards to ensure that "responsible tax planning" is not caught. I urge HMRC and HM Treasury to follow the recommendations of the study group in relation to those safeguards. In particular, the recommendation that the onus should be on HMRC to prove that the Rule applies is, in my view, fundamental. A Rule without those safeguards would be much worse than no Rule at all."

Michael Cant, Nabarro LLP

"The one comment I would like to make is a structural one as to the composition of the Advisory Panel.

How appropriate is it that one of the Advisory Panel members will be a member of HMRC? I do not mean to suggest that the HMRC member will merely echo the opinions of the Designated Officer and the HMRC Officer who originally took the point but there must be a danger that, particularly to the average tax payer, this will be the appearance of what has happened if the opinion is to support counteraction.

I would agree that the Advisory Panel needs expert tax knowledge to call on but I question, if this is the intention, that a member of HMRC is best placed to provide it. Surely the role of the Advisory Panel is to inform the view of the Designated Officer as to whether his decision was reasonable, see Cl.14(2). He will not be helped in this if he merely hears advice that has already been influenced, consciously or unconsciously, by the views of HMRC.

The Advisory Panel should not be about whether the Designated Officer has got the decision to authorise counteraction "right", but whether it would be reasonable for him to so authorise. This is a straight judgement call. I think it needs to be seen as being entirely independent of the party who took the decision under review."

John Christian, Pinsent Masons LLP

"The Government will probably wish that it had not opened the GAAR box. The recommendation adds another layer of uncertainty to a tax system which is already over complex and unpredictable. The lack of a clearance process is inevitable, but global businesses are not going to invest on the basis that the GAAR may be looked at in 5 years time if there are problems - they will simply look at other territories where there is clarity. Business has embraced dialogue with HMRC through the CRM and other initiatives and HMRC will have to come up with a way to provide assurance on a real time basis that a particular transaction is outside the GAAR."

Adam Craggs, RPC

"Although it is a helpful addition to the debate of how best to deal with what the government considers to be "unacceptable" tax avoidance, I do have some concerns about how the Group's recommendations, if implemented, might work in practice. In particular, I am concerned that the proposed GAAR may introduce considerable uncertainty into what is already complex tax legislation. One of the main features of the proposed GAAR is that it will apply to abnormal arrangements that are 'contrived' to produce an "abusive" tax result and will not apply to the "centre ground of responsible tax planning". However, this begs the question of what constitutes responsible tax planning. I anticipate considerable disagreement between HMRC and taxpayers as to which arrangements constitute responsible tax planning and which do not.

David Harkness, Clifford Chance

Will the GAAR create cost and uncertainty for business?

"Businesses are keen to operate in the UK and individuals want to live here, but both are constantly being blandished by other jurisdictions with tax breaks of one kind or another. The UK has rightly responded by introducing incentives to make the UK a competitive place to live and do business. The risk is that any GAAR, however carefully crafted, will undermine the UK's attractiveness.

On the other side of the debate are those who are offended by distasteful tax planning. The pressure from this camp is for a widely drafted GAAR. The pressure is increased by the ill-informed or politically motivated who fail to understand the disaster that would follow from an uncompetitive tax system. There are also those who think that there is some morally "right" amount of tax that should be paid that is distinct from the amount legally required to be paid – this, however, is a fundamental misunderstanding of the rule of law.

Until there is a body of case law and practice, the impact of the GAAR, if introduced, is impossible to judge. The risk is that the GAAR satisfies none of the interested parties. I think Graham Aaronson QC and his study group have made a decent fist of their task, but only time will tell whether it leads to an improvement in the tax system or merely an increase in complexity.

If the GAAR remains in the limited form proposed by the Aaronson Report, it would be unlikely to affect ordinary business transactions. In that respect, we believe the Report has succeeded in its aim. However I fear "mission creep", as do the Report's authors themselves. One risk is that Parliament may "refine" the GAAR to catch wider classes of transaction. Even if that does not happen, there are elements of the proposed GAAR that make it susceptible to expansion by subsequent caselaw, for example by interpreting the definition of "arrangements" to refer to individual elements of a large transaction (and this is the kind of approach that led to the scope of the Australian GAAR expanding over time). I can also see HMRC using this kind of argument as a stick to frighten taxpayers out of tax planning that is objectively reasonable.

The Aaronson Report's proposed GAAR is designed to minimise this risk, even to the (unprecedented) extent of proposing that their guidelines be given statutory force. But the subjective nature of the reasonable tax planning safeguard means that the scope of the GAAR may become highly controversial.

The problem is that the question of what is acceptable tax planning and what is avoidance is as political and philosophical as much as it is legal. There are some who still hold to the traditional view that a taxpayer has the absolute right to arrange his or her affairs to minimise tax. There are others who believe that we all have a duty to contribute to society by paying the "right" amount of tax (whatever that is).

The application of the safeguards will therefore be contested. Many well known companies pay a low effective rate of corporation tax on profits because of the application of tax reliefs and exemptions (such as capital allowances, designed to encourage investment, and the exemption from tax on sale of subsidiaries, designed to encourage the UK as an attractive location for multinational holding companies). Objectively such companies are simply arranging their affairs to rely on reliefs and exemptions for their intended purpose; however it is clear a number of journalists, activists and politicians do not regard such companies as paying the "right" amount of tax. It is easy to see how political pressure could be brought on HMRC to apply the GAAR to such arrangements, even if that was not its authors’ intent.

The temptation may therefore be to apply the GAAR more widely, or to amend it into something that can be applied more widely. That would create significant cost and uncertainty for business.

Even in its current form there is going to be risk of abuse in relation to the application of the GAAR despite Aaronson Report's attempts to give taxpayer safeguards. Some in HMRC may be tempted to apply the GAAR in wider circumstances that the Report intends, and that will damage British business. The proposal is laced with comforting language for taxpayers (what upright citizen would be worried that they were going to enter "abnormal arrangements" or achieve an "abusive tax result"). But behind these comforting words are tests that are much less comforting and which rely on ultimately the subjective judgment of HMRC and the Courts."

Philip Harle, Hogan Lovells International LLP

"If the GAAR works as suggested in the report and only catches the egregious schemes then it should not come onto the radar of law firms very often. Although the "offensive" schemes can generally be spotted, drafting language to capture only these is notoriously hard. I would hope that it works in the way envisaged in the report and that HMRC use it sparingly. It is good news that a broad GAAR has not been suggested as this could harm the competitiveness of the UK."

Jonathan Hornby, Alvarez & Marsal Taxand UK

"Many of the biggest multinationals build tax planning around commercial change and therefore should not be affected by a UK general anti-avoidance rule. The real fear is that those companies whose tax planning may be assessed more subjectively will be put off by the uncertainty. They will simply shift their profits out of the UK to achieve the same savings. This could cost the UK billions in lost investment and will hit UK jobs at a time when unemployment is at its highest level for 17 years."

Stephen Hoyle, DLA Piper LLP

"Graham Aaronson is the leading tax advocate of his generation. He will need those powers of persuasion to explain why the UK tax system needs his new regime for palm tree justice which will override all other laws and tax treaties. It will be discretionary justice resting on the undefined concept of "reasonable tax planning". But then perhaps he will not. Perhaps any doubting voice will be cast aside as an opinion which "just doesn't get it".

There are serious criticisms of the proposals of Graham Aaronson's study group. If enacted, those proposals will mean that tax planning for income tax, corporation tax, capital gains tax and petroleum revenue tax will need to be reasonable to work if the planning affects any aspect of the transaction. Those in the business world who support a GAAR will see the proposals in terms of activities they dislike rather than activities they do. Perhaps they will see it as just for the structured finance divisions in banks or the promoters of tax schemes. They will not judge the proposals by reference to group tax planning such as the ownership of intangibles or the structuring of distribution arrangements. Whether they are right in that will depend upon the establishment figures sitting in the new Tax Star Chamber - the Advisory Panel.

The proposals take the concept of "tax advantage" and dress it up in re-arranged clothing as "an advantageous tax result". This becomes an "abusive tax result" if it is achieved by an arrangement that is not "reasonable tax planning". There is also an exemption for arrangements "without tax intent" but I will assume that the readers of this article do not do mindless tax planning. There are two further steps before the GAAR override applies. The arrangement for the abusive tax planning must be contrived to avoid or exploit legislation by having that as a main purpose. Also, the arrangement must be abnormal which means that it has no purpose other than the abusive tax result or, probably more commonly in practice, has features which would not be there but for a main purpose of achieving an abusive tax result. There is no definition of "main purpose".

Tax planning which has affected the terms or nature of the transaction will only survive if the planning "can reasonably be regarded as a reasonable exercise of choices of conduct afforded by" tax legislation. No standard of comparison has been defined. Effectively, the GAAR will apply to all taxpayers the policy of the Code of Conduct for Banks. It is for the taxpayer to decide whether the planning is consistent with a plausible policy of the legislation had the legislators known of the taxpayer's planned use of the legislation taken in all the circumstances. It is difficult to give any other plausible meaning to "reasonable exercise of choices".

The novel aspect of the GAAR will be to allow the Advisory Panel to opine on whether planning is reasonable. This will not be a judicial hearing. The expectation is that the decisions of the Panel will set practical boundaries to tax planning. It would be remarkable if a business's structuring for planning laws, competition law or employment law were made subject to a discretionary override. The GAAR really will take tax law that far out of the legal system."

Mike Lane, Slaughter and May

"Clearly a lot of thought has been put into seeking to draft the recommended GAAR in such a way that it targets the egregious whilst leaving the middle ground of responsible tax planning untouched. So where do we go from here? To my mind there are three steps to go through before I will be able to decide whether I am a supporter or not.

The first is that we need to know whether legislation in the form proposed could ever be enacted in the UK. It marks a departure from traditional statutory drafting in many respects and I have a real concern that, in the hands of the Parliamentary draftsman as instructed by HMRC, it would take on a broader form with fewer taxpayer protections. That is to say, it would start drifting down the sole or main purpose route expressly rejected by Graham in his report. So I will be eagerly awaiting HMRC's comments on the form of the proposed legislation.

Then we need a realistic assessment of the purported benefits the introduction of such a GAAR would bring. Of the benefits suggested by the report, I am not at all convinced that a GAAR in the form proposed would lead to the simplification of tax legislation past or present. If the GAAR succeeds in its aim of leaving the middle ground untouched, I would expect HMRC to want to retain its current arsenal of TAARs. Why would they give those up if the GAAR really is a nuclear weapon only for use in the extremes? And is there really that much egregious planning left which is not deterred by the current hostility of the courts to anything perceived as tax avoidance or which, if it does go ahead, then survives the court process? SHIPS 2 seems to stand as a lone example. Whilst I can see some benefit in avoiding strained interpretations of mainstream law - the interpretation of the loan relationship provisions in DCC Holdings springs to mind - it would have been very helpful if the report had set out examples of recent cases where it was considered the GAAR would have applied so that we could ascertain how material this benefit is likely to be in practice.

The final step is to weigh those benefits against the downsides. The most obvious downside is that this would be yet another layer of complexity and uncertainty in an already complex and uncertain tax code, particularly since there is no proposed clearance mechanism. And anyone who has recent experience of any form of tax dispute and has seen how lightly existing TAARs can be tossed into the ring in the most unexpected circumstances will have a concern as to how a GAAR would be used in the hands of HMRC's foot soldiers. Consequently, for me the jury is still out. Even if it transpires that we could enact a GAAR in the form proposed I am yet to be convinced that the benefits of doing so would outweigh the downsides."

Andrew Loan, Macfarlanes LLP

"Taxpayers and their advisers have long feared the uncertainty that could follow the introduction of a general anti-avoidance rule in the UK. Bitter experience in other jurisdictions demonstrates that a GAAR is not a panacea for tax authorities, and that we are unlikely to see a bonfire of targeted anti-avoidance rules in its wake or indeed the last of the Ramsay caselaw doctrine. Taxpayers who are too aggressive will face an assault from a range of weapons, from snipers to the nuclear deterrent.

Having said that, if a GAAR is on the cards, the proposals in the report of Graham Aaronson's study group achieve a good balance between protecting the right of taxpayers to structure their affairs to minimise their burden of tax and the rights of the tax authorities (and, by extension, other taxpayers) to make sure that no one uses artificial structures to shirk their obligation to pay a fair share towards the public services on which we all depend.

During the study, Graham expressed his view that a GAAR must not create additional uncertainty, widen executive discretion, increase the administrative burden on taxpayers or HMRC, or harm to the UK's tax competitiveness, that the drafting must be clear and understandable, and must not catch "normal tax planning". By and large, the proposals seem to achieve that aim. If and when a GAAR is legislated, let us hope it meets these aspirations.

The report also suggests that the practical impact of the GAAR should be reassessed every five years. If only the existing more burdensome (and less productive) parts of the UK tax code were subject to such a review: perhaps we could start with the disguised remuneration rules and the worldwide debt cap - surely both contenders for the title of "Dangerous Dogs Act" of tax legislation."

David Milne QC, Pump Court Tax Chambers

"I'm strongly supportive of a closely focused General Anti-Abuse Rule of the type proposed by Graham's Committee for all the reasons they give.

To take just one point, one of the most often repeated arguments I've heard against a GAAR over the years is that - at least without a clearance procedure - we would "lose certainty". Sadly, however, in recent years we have not only lost certainty, we have got to the stage where the success or failure of a tax-avoidance scheme has become a lottery - it seems sometimes that almost everything depends on which judge or judges happen to hear the appeal. Take two recent cases, DCC Holdings and Mayes. In DCC Holdings, Norris J in the High Court and Rimer LJ in the Court of Appeal, both made clear that they would like to have found in favour of the Crown but concluded that was impossible to do so as a matter of legitimate statutory interpretation, however purposive, to do so; however Moses and Rix LJJ managed to find (slightly different) ways! In the Supreme Court, Lord Walker didn't follow either Moses LJ or Rix LJ, but came up with an interpretation of his own which no-one had previously thought possible: the result was the same; the scheme was defeated.

In Mayes, the three judges in the Court of Appeal, Mummery, Thomas and Toulson LJJ, despite being faced with a "pre-ordained, composite, artificial and tax-motivated" scheme which produced a result "which cannot possibly have been intended and which must be paid for by other taxpayers", nevertheless felt that, their duty being only to construe the legislation and not to amend it ["It is not for judges to shoulder the law-making responsibilities of Parliament"], they could not properly defeat the scheme "unattractive as the result is for other taxpayers and the rest of society". Many people, including me, thought however that on immediately previous form (Tower M'Cashback, DCC Holdings) the Supreme Court would "find a way"; but the Appeal Committee (which included Lord Walker) didn't even give the Crown permission to appeal. Faced with such a lottery, a GAAR (especially a GAAR tightly focused like that recommended by Graham's committee) can only help tax advisers to predict how a scheme is going to fare in the Courts."

Matthew Mortimer, Milbank

"If we must have a GAAR, Graham Aaronson's narrowly-honed formulation is obviously better than some of the broader-brush alternatives he might have unveiled.

But the narrowness of the approach does raise the question of whether Mr Aaronson's proposed GAAR is necessary.

In particular, the egregious tax avoidance schemes at which Mr Aaronson has set his sights are routinely counteracted by the courts these days if they are ever litigated; and whilst Mayes is a stand-out exception in this regard, one wonders whether the case should inform policy-making to the extent it impliedly does in Mr Aaronson's report. Of course one understands the importance of deterrence in this area, but is the GAAR that the courts have arguably constructed in recent years any less inhibitive of tax avoidance schemes than a statutory-based one? In fairness, one of Mr Aaronson's justifications for his proposed GAAR is an aspirational one, namely that over time it will dispense with the need to enact the type of complicated TAAR that has proliferated in recent years. The obvious reservation here, however, is whether HMRC will feel comfortable responding to the GAAR in this way, particularly if it is as replete with taxpayer safeguards as Mr Aaronson proposes.

Overall, one wonders whether Mr Aaronson's proposed GAAR will particularly please any faction. Taxpayers will probably dislike it because they will have to consider the GAAR whenever undertaking anything that approximates to aggressive tax planning - the inevitably imprecise defence of "reasonable tax planning", notwithstanding. HMRC may in turn object to the numerous safeguards for taxpayers that Mr Aaronson has proposed. Politicians, meanwhile, may be displeased by the continuing absence of a silver bullet that can be fired whenever taxpayers attempt to reduce their tax bills in ways the government objects to.

Indeed, this latter point may also inform the wider public's perception of the proposed GAAR, particularly after commentators have contributed their sometimes ill-informed opinions. The proposed GAAR could easily be depicted in other words as a relatively toothless measure that misses the bigger picture of the so-called Tax Gap."

Bradley Phillips, Herbert Smith LLP

"The publication of the Study Group's GAAR proposals has prompted wide ranging debate on whether the UK should have a GAAR and if so, what that GAAR should look like. The debate has proved to be a positive discourse on the future of the UK tax system as a whole. However, although there may be a case for another weapon against "egregious" tax schemes, it is of concern if the GAAR does cause additional uncertainty and costs in practice for UK and international business, individuals and advisors.

One of the key points is to better understand how the proposed safeguards will work and to ascertain when an arrangement "can reasonably be regarded as a reasonable exercise of choices of conduct afforded by legislation". There is a real risk that the GAAR (as proposed) is likely to create another boundary of uncertainty. It is vital that some "flesh be put on the bones" of the safeguard tests as they represent the main taxpayer protection under the proposals. It is also imperative that the concept of "a reasonable exercise of choices" does not become in substance a choice that HMRC considers to be reasonable or that taxpayers will become embroiled in a potentially costly "opinion hunting" exercise.

The Study Group hopes that the proposed GAAR will reduce the volume and complexity of specific anti avoidance rules and will enable future primary tax legislation to be drafted more "simply and clearly". Whilst this goal is certainly desirable, it seems to us unlikely.

The extension of the GAAR to relevant double tax treaties throws up a range of issues around, for example, territoriality. Again, we need to better understand how this will be applied in practice.

Further, we suggest that the existence of the GAAR and the Advisory Panel will only act to increase the costs of tax disputes which may be good for advisers but adds to the unattractiveness of the UK tax system for taxpayers."

Yash Rupal, Linklaters

"Graham Aaronson and his group should be complimented on producing a very high quality report. The challenge is to define the elephant, the boundary between the centre ground of "responsible" tax planning and unacceptable tax avoidance without creating too much uncertainty. In practice, there will be some clear cut cases where the illustrative GAAR, rightly, will apply but there will be many normal commercial transactions where doubts as to its applicability will linger. Mr Mayes has not received much sympathy. But if this proposal is enacted, he can console himself that he will have contributed significantly to a fundamental change to the UK tax system that, like in other jurisdictions with a GAAR, will keep tax practitioners occupied in ascertaining its limits for years to come.

The notion of a reasonable exercise of choices of conduct afforded by the legislation to define the safeguard for reasonable tax planning will be difficult to apply. Invariably, tax legislation does not provide that a taxpayer may do A or B. In many cases whether or not a choice is available and the parameters within which it may legitimately be exercised will be subtle matters of inference and judgement. The report proposes that the burden of proof that this safeguard is not met should be borne by HMRC. This will assuage some fears.

The report recognises the obvious danger of conferring discretionary power on HMRC and concludes that this would be wrong as a constitutional matter. The proposal that a Guidance Note amplifying the GAAR should form part of the GAAR and that responsibility for updating this guidance would fall upon the Advisory Panel is a sensible suggestion. This will avoid the unwelcome feature of "legislation by guidance", an unfortunate but common approach taken by HMRC in other areas. The Advisory Panel is an astute move. Even if one member of the panel considers a transaction to be reasonable tax planning, that would seem to preclude the GAAR because by definition under an objective standard the arrangement can reasonably be regarded as a reasonable exercise of a choice afforded by the relevant legislation. But does this not usurp the role of the courts? The report purports to rule out a clearance system. But the proposals do not rule out "non-statutory clearances" and other "confirmations" or "concessions" which presumably HMRC will continue to entertain for the "right" taxpayer. This back-door clearance system will give HMRC wide discretion on how the GAAR is applied in practice and well before the Advisory Panel will be involved - the very thing that the report seeks to avoid. We should either have a proper clearance system for the GAAR available to all with all rulings published in anonymised form or we need to ensure that no one benefits from a clearance or concession, whether official or unofficial, from HMRC on the GAAR. That it is the only way to achieve fairness amongst taxpayers and preserve transparency and consistency. Otherwise, Margaret Hodge, the PAC and the National Audit Office better remain on standby."

Tom Scott, Chairman of the UK Branch of the International Fiscal Association

"As one would expect given its authorship, the Report is well reasoned and articulately expressed. There are perhaps two underlying, and connected, questions which merit further debate.

First, does the test to be applied in determining the first safeguard, for "reasonable tax planning", involve too great a value judgement? The Report describes the first reason weighing in favour of the proposed GAAR as its deterrent effect on schemes which are "widely regarded as an intolerable attack on the integrity of the UK’s tax regime", or, more pithily, are "egregious". This terminology carries worrying echoes of Milliband’s categorisation of companies as either "predators" or "producers", in the sense that it relies too heavily on the eye of the beholder. If a scheme is regarded by HMRC, the Guardian and the Tax Justice Network as egregious, but is (widely) used by a number of companies and regarded as "fair game" by a number of advisers, how is the scheme to be badged? The Report’s suggestion of an Advisory Panel is helpful on this front but does not remove the problem. And is the first adopter of a scheme at an advantage (because at that stage there is insufficient awareness of the scheme for it be "widely regarded" as anything)? Or is it better to wait until the scheme is being widely adopted in the marketplace, so the scheme is demonstrably regarded, at least by its adopters, as a reasonable "choice of conduct"?

Secondly, picking up a concern which is well identified and discussed in the Report, will adding one more weapon to HMRC’s armoury (a GAAR) produce advantages which outweigh the disadvantages, given the weapons already at hand? The Report is accurate in identifying as existing weapons in the war on tax avoidance the courts’ purposive approach to legislation, specific anti-avoidance legislation, and the disclosure regime. But it fails adequately to acknowledge the effect of what might be termed self-regulation—namely the increased and increasing reluctance of several large companies to adopt "egregious" schemes because of corporate governance codes and/or pressure from external stakeholders (be they shareholders, large customers or indeed HMRC, the Guardian and the Tax Justice Network). Doubtless such self-regulation is partly a response to the recent success of the existing weapons, but it should still be weighed in determining the cost/benefit analysis of a GAAR. As the Report itself recognises, cumulative restrictions in a tax code are always tempting - think of the UK regime for tax deductions on debt, where one now has to consider a plethora of restrictions from unallowable purpose to the debt cap, but in practice the deduction remains generous compared to other regimes. This is what the report describes as "a sort of fiscal chess game". More importantly, given the proposed absence of a specific clearance mechanism unless some other clearance process is in point, why are HMRC and the proposed Advisory Panel the right people to control a new weapon given the changing picture on self-regulation?"

Greg Sinfield, Hogan Lovells International LLP

"It is a pity that the Aaronson proposal is much longer and appears to be much more complex than its EU indirect tax equivalent, the Halifax principle of abuse, but the GAAR probably provides more certainty about when it does and does not apply as a result."

James Smith, Baker & McKenzie LLP

"It is essential that a GAAR does not add to the uncertainties faced by businesses as to the consequences of any particular transaction. If a GAAR is to be introduced, even with the narrow focus proposed in the report, it is likely to increase uncertainty in the immediate term. However if it ultimately achieves the longer term aims of (a) making tax legislation simpler (including getting rid of the many TAARs currently scattered throughout the tax code) and (b) not needing to continually change tax legislation to deal with abuse or exploitation of loopholes, this will be a good thing, but that will take time (and may not happen). If it does happen, we will end up with a shorter, simpler tax code which should create greater certainty for businesses but this will require careful implementation and operation and adherence to the proposed safeguards which will be an essential part of the GAAR."

David Taylor, Freshfields Bruckhaus Deringer

"Coalition policies and the general political climate, as well as the talents brought together for the GAAR report, have already led us to assume that this time it’s serious. And on a more technical level the timing of the Supreme Court’s refusal to take the appeal in Mayes, just before publication of the report, is remarkable. Much is made of Mayes to support the case for a GAAR and for this writer, at least, an appeal would have been valuable. The Supreme Court has been robust in dealing with tax avoidance and it would have been a good test of how far we have really departed, in the search for principle, from the 1980s (and 90s) attitudes to self-cancelling and preordained steps inserted for tax avoidance reasons only.

There is much that is elegant and innovative in the proposals, and they should involve a real opportunity to provide acceptability to both business (given what is targeted and the number of safeguards) and HMRC (given that no other weapons are lost, for now at least, and that resourcing issues are manageable). But some of the traditional areas of uncertainty relating to the scope and application of GAARs don’t seem likely to go away just because of new forms of words or because of the different construct, even though they may in practice be debated in a fairly limited area (although the writer is yet to be entirely convinced by this). One is the relevance and identification of comparators (abnormal arrangements and features, advantageous tax results, relevant counteraction, etc). Another is the key borderline between the acceptable and the unacceptable. "Reasonable exercise of choices of conduct", without statutory elaboration or context, is hardly an easy concept to pin down. If this is where things end up, the new approach to balanced and authoritative guidance will be of great importance.

One of the problems with a GAAR is that it can take many years for case law to develop as an aid to an understanding of its scope. The authoritative guidance might usefully seek to address this point at the outset by considering what the application of the GAAR would be to cases that have gone before. So for example: the taxpayer in Mayes would lose (for reasons that would be explained) but the taxpayer in BMBF v Mawson would still win (for reasons that would also be explained). Of course, once you start doing this many cases can be considered. The most useful approach is perhaps to address some of the modern taxpayer successes (e.g. consider First Nationwide, if it is then final, or Bank of Ireland, rather than Duke of Westminster). There aren’t that many recent taxpayer successes to work through…"

Eloise Walker, Pinsent Masons LLP

"Beautiful prose, shame about the content. So many points to take issue with, so little space, but the real killer for me (with the failure to recommend scrapping the TAARs simultaneously with introducing a GAAR a close second, and the lack of a clearance procedure a closer third) is the idea that some triumvirate advisory panel on which HMRC and an industry specialist sits should pronounce aye or nay. The phrases “conflict of interest”, “chance to stick the knife into your competition” and “nice little earner” spring to mind. How is this supposed to sit beside the usual Tribunal process? Even if it is just labelled an advisory panel it’s almost bound to usurp or pervert or interfere with the judgment of the courts, and I’m not sure I like the sound of that."

Martin Walker, Deloitte

The proposed GAAR: general by name but targeted by nature?

"We already have in the UK numerous targeted anti-avoidance provisions including unallowable purpose rules, the disclosure of tax avoidance schemes regime, purposive interpretation of statute resulting in a recent line of case law on avoidance which more often than not seems to result in victory for HMRC, the code of practice for banks, plus an increased focus on real-time conversations between taxpayers and their CRMs.

The GAAR Study concludes that all of this is insufficient to deal with "the most egregious tax avoidance schemes". The proposed GAAR is therefore designed to sit on top of HMRC’s existing armoury. It aims to prevent such schemes without impacting sensible tax planning: an anti-avoidance rule which is general by name but targeted by nature. It is to be hoped that it is used, by HMRC and the judiciary, in such a targeted manner in practice.

In terms of the clarity and simplicity of the UK’s tax regime, the proposed GAAR would undoubtedly add to the complexity as one further rule for taxpayers and their advisers to consider. If indeed it is the case that fewer specific anti-avoidance rules are introduced in the future, then this would be laudable and help to redress the balance back towards simplicity. It would also be (as the report mentions) a real opportunity to sweep away the complexity of many of the existing specific anti-avoidance rules – although unfortunately one which I doubt will be taken any time soon."

Neil Woodgate, White & Case LLP

"Targeted Hurrah! for a Targeted GAAR! - the report is to be much commended for its refreshed, new approach to a tired, old problem; a clear, workable roadmap expressly to articulate generally accepted principles and legitimately apply them to the application of tax law to tax avoidance. Implementation could enable the simplification of overly complex legislation and purposive statutory construction and so facilitate the removal of the attendant damaging uncertainty in a measured, responsible way. I hope the Government will take this opportunity to initiate this new approach and invent a better acronym."

Simon Yates, Travers Smith LLP

"As an initial sceptic, I became a convert to the idea of a GAAR in the course of the Aaronson committee's consultations. The proposal is ingenious in the way that it has the potential to increase rather than reduce certainty, when as a starting point one might expect a GAAR to have the opposite effect. The opportunity to simplify the tax system by reducing the amount of targeted anti-avoidance rules is a more predictable though equally valuable prize, even if perhaps one less likely to be delivered in practice. What seems to me the key safeguard – that the GAAR cannot be invoked if a case can reasonably be regarded as a reasonable exercise of choices of conduct offered by the legislation – is fundamentally well constructed, even if one foresees significant debate around the meaning of "can".

Aspects of the proposals will require some fine tuning in practice: in particular, the question of membership of the proposed Advisory Panel will be very ticklish. The extra weight given to HMRC guidance in determining what is normal planning may also be problematic – whilst it is in theory helpful, it may prove counter-productive if HMRC responds by clamming up for fear of legitimising arrangements it may later want to attack.

The greatest fear arising out of the report is that its recommendations may be cherry picked. It could be disastrous if, for example, the Government were to note that a GAAR had been recommended, but implement a very different one with fewer safeguards, whilst going back to the report to conclude a clearance system was unnecessary. Equally it would be wrong for a GAAR to be enacted in the form envisaged, but progressively amended over the years until it became something very different. Whilst inevitably aspects of the proposal might be tweaked, it is absolutely clear that the recommendation to proceed holds good only in relation to a GAAR fundamentally of the type discussed, and with safeguards of the type outlined.

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Pragmatism, politics and principle: tax practitioners consider the GAAR | Practical Law