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Government to consult further on introducing a general tax avoidance prohibition in 2013

The Government has accepted that the introduction of a general anti-avoidance rule (GAAR) will improve the UK's tax avoidance strategy whilst maintaining competitiveness, and will consult further with business on introducing a GAAR into the UK tax system, the Chancellor confirmed in today's Budget.

The consultation, to take place over Summer 2012 with a view to legislation in 2013, will cover new legislation to be based on a report (77-page / 244KB PDF), published in November 2011 by Graham Aaronson QC recommending the introduction of a GAAR. The consultation will also consider the extension of the GAAR to stamp duty land tax.

Aaronson's report recommended that a GAAR should initially apply to the main direct taxes including income tax, capital gains tax, corporation tax and petroleum revenue tax, as well as to national insurance contributions (NICs).

The report included a draft rule, as well as safeguards to protect reasonable tax planning from being caught within its operation.

"Artificial and abusive tax avoidance schemes are widely regarded as an intolerable assault on the integrity of the tax regime. A general anti-abuse rule narrowly targeted to deter such schemes, while not affecting responsible tax planning, should lead to a fairer, more principled and ultimately simpler tax system; and I strongly recommend that such a rule should be introduced into our tax laws," Aaronson said.

It would also lead to a more level playing field for business, as "enterprises which conduct responsible tax planning would no longer have their competitiveness undermined by others which seek to reduce their tax burden" by using such schemes, the report said.

The new rule would also make the tax system more certain, as judges would no longer be "faced with the temptation to stretch the interpretation" of existing laws to achieve sensible results, it said.

However a broad spectrum GAAR would risk "undermining the ability of business and individuals to carry out sensible and responsible tax planning", which is "an entirely appropriate response to the complexities of a tax system such as the UK's", the report said.

It recommended a series of safeguards, including an explicit protection for reasonable tax planning and arrangements which are entered into without any intent to reduce tax, and an Advisory Panel to consider whether cases may fall within its scope.

It also said that HM Revenue and Customs (HMRC) would have the responsibility of proving that an arrangement should be caught by the legislation.

HMRC currently catches tax avoidance arrangements through anti-avoidance legislation and disclosure rules. However, this system requires specific action as new schemes appear.

"Whilst the announcement of a GAAR has been expected and can be viewed as broadly good news for business overall, it is disappointing to hear that it will be based on the recommendations of the Aaronson Report, which have been considered flawed in some significant respects," said Eloise Walker, a tax expert at Pinsent Masons, the law firm behind Out-Law.com. "It is to be hoped that the consultation results in better legislation, coupled hopefully with abolition of some of the targeted anti-avoidance rules."

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