New tax avoidance rule is a recipe for chaos and disorder

THIS week’s draft Finance Bill gave a number of revealing insights into the mind of the chancellor and the direction the 2013 Budget will likely take. Among its contents was a long-overdue update on the general anti-abuse rule (GAAR) – the government’s much-hyped silver bullet for the scourge of tax avoidance.

Over the past year, intense focus on tax avoidance – by both companies and individuals – has turned the practice into a deadly sin in the minds of many. It is therefore reasonable that something is being done, and the GAAR certainly presents a worthy ideal. But how does it fare in reality?

One welcome development is that the rule will target not only indiviaul tax avoiders, but the companies that promote aggressive schemes. This willingness to confront both the practice and the enablers should be applauded, as the problem is systemic.

However, the government’s wording could prove problematic. A GAAR is an incredibly tricky piece of legislation, as catching “abusive” or “aggressive” acts of tax avoidance first requires defining them. This is no easy task, and one pen stroke here or there could spell the difference between a flexible and effective tool against tax dodgers and a draconian clampdown on almost any form of tax planning.

Unfortunately, the wording included in this week’s Finance Bill does not deliver. Schemes and arrangements that result in a lower tax bill will have to be reconciled on a “just and reasonable” basis. This is semantic wrangling of the first order. The breadth of the wording does a poor job of covering up a deficit in any actual meaning, which could be a real sticking point when it comes to implementation.

Without stamping a real definition on what counts as tax abuse and what doesn’t, the GAAR will never be fool-proof. The problem is subjectivity. What is “just” and “reasonable” in a tax situation? How is this decided and who decides it?

The GAAR in its current form may well end up causing more problems for HMRC than it solves. Without injecting more certainty, the tax authorities will be locked in litigation with taxpayers over the validity of their tax arrangements until the cows come home. This is not good news for an institution short on both time and money, and it’s not good news for taxpayers mitigating their tax exposure in a legitimate fashion.

George Osborne recently announced a £154m boost to HMRC and the hiring of a further 2,500 tax inspectors. Resources are certainly needed, but they won’t fix the fundamental problem at the heart of GAAR. In its current form, 2,500 more inspectors will simply translate into 2,500 more interpretations of what is fair and what is abusive.

Britain had a £32bn shortfall in tax collections last year, so a better means of tackling avoidance is certainly needed. Unfortunately, A GAAR in this form will do little to close this gap.

Ronnie Ludwig is a partner in the private wealth team at Saffery Champness, and a former tax inspector.