On 12 June 2012 the Government launched a formal consultation on a new general anti-abuse rule (GAAR) to tackle 'artificial and abusive tax avoidance schemes'.This followed the announcement at Budget 2012 that such a rule will be introduced in 2013.The proposed GAAR illustrates the ever-closing gap between tax evasion and what the Government regards as unacceptable tax avoidance.

The consultation proposes the establishment of an advisory panel (as recommended in the November 2011 report by Graham Aaronson QC), members of which will come from both HMRC and business, to give opinions on cases where HMRC believes the GAAR should apply.

The advisory panel is intended to help identify the boundaries of the GAAR application; its opinions, however, will not be binding. Many are unhappy with the panel's lack of authority over HMRC, believing that the panel will simply act as additional administration. The consultation document does, however, state that it is the courts' responsibility to deliver binding decisions and it would be inappropriate for the panel to have such power.

The main criticism of the GAAR and the consultation document has been the lack of clarity on the boundary between abusive and non-abusive arrangements that is ultimately essential for its success. In particular, the inclusion of subjective language, such as the overuse of the word 'reasonable' when defining whether tax arrangements are abusive, has been highlighted as a possible point of contention. The definition of 'reasonable' will undoubtedly vary from one person to another.

The Government states that the purpose of the GAAR is to counteract tax advantages arising from abusive arrangements and has introduced three concepts that are key to its operation: 'tax arrangements', 'abusive' and 'tax advantage'. 'Tax arrangements' and 'abusive' have been defined as follows:

Tax arrangements – if "it would be reasonable to conclude that the obtaining of a tax advantage was the main purpose, or one of the main purposes, of the arrangements".

Abusive – if it is an arrangement "the entering into or carrying out of which cannot reasonably be regarded as a reasonable course of action".

The consultation document clarifies that in court proceedings or tribunals the burden of proof to show that the GAAR applies will fall on HMRC. It will have to show that there are tax arrangements that are abusive, and that it is just and reasonable to disallow the tax advantages arising from them.

The Government has further work to do to convince us that this draft GAAR legislation is workable in practice. Considering the GAARs in operation around the world (for example Australia and Ireland), there have been issues with the clarity and complexity of their implementation. The UK consultation period is due to close 14 September 2012.

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