It comes as no surprise that the UK Government has accepted the recommendation of Graham Aaronson QC that a General Anti-abuse Rule (GAAR) should be introduced into the UK tax system to tackle what it sees as misinterpretation of legislation.

The aim of the GAAR is to allow tax avoidance to be tackled without making the UK unattractive to business and so the proposal is for an anti-abuse rule as opposed to a wider anti-avoidance rule which in any event many see as being overkill.

Many countries, including the United States (since 2010) Canada, Australia, New Zealand, South Africa, Norway and Hong Kong have General Anti-Avoidance Rule statutes which prohibit “tax aggressive” avoidance but which often struggle to define what that means. Such uncertainly can affect business confidence.

In the UK, judicial rulings have accomplished a similar purpose by applying “business purpose” or “economic substance” doctrines, such as that established in the case of Ramsay –v- the IRC. This decision invalidates tax avoidance which is technically legal but which is not undertaken for a genuine commercial reason. However, rather than use the sledgehammer of an Anti-Avoidance Rule, which would mean in practice that the burden of proof that the actions were for a commercial reason would fall on the taxpayer, the Ant-Abuse Rule requires the tax authorities to prove that it wasn’t. Innocent until proven guilty, rather than the reverse.

A consultation is expected to begin in summer 2012, with legislation to follow in Finance Bill 2013. In addition to the proposal made by Graham Aaronson QC, it is now proposed that the GAAR will extend to Stamp Duty Land Tax (SDLT). 

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