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Barclays and CBI driving UK GAAR towards reality

28 February 2012

Matthew Gilleard

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The Confederation of British Industry (CBI) has thrown its weight behind the UK’s planned general anti-avoidance rule (GAAR), arguing that corporate tax avoidance schemes are harming the reputation of British industry.

The news that the Treasury yesterday moved to close down tax loopholes by passing legislation to retroactively shut down two aggressive tax avoidance schemes used by Barclays bank will also bring the  the Graham Aaronson GAAR closer to introduction.

Barclays used one scheme which enabled it to repurchase some of its own debt without paying corporate taxes on the profit made from this process. The bank said it complies with the letter and spirit of its obligations under the HMRC Code of Practice.

"This situation arose when Barclays voluntarily disclosed to HMRC in a spirit of full transparency that it had repurchased some of its debt in a tax efficient manner," said a company statement. "This was based on guidance from professional advisers that the treatment was both legal and compliant with the tax code, and given others had used a similar treatment."

The Treasury’s retroactive changes will date back to the start of December.

"Barclays respects the decision of HMRC and the government to adjust the tax laws and will, of course, comply with the modified law once it is in place," said Barclays.

CBI U-turn

The CBI had previously opposed uncontrolled general anti-avoidance rules, on the grounds that such a rule could create uncertainty for businesses over what constitutes abusive tax planning.

"We don’t think business is done any favours by these highly abusive schemes which essentially tar all of us," said Will Morris, chairman of the CBI tax committee.

"Therefore if we can come up with a GAAR which walls those things off and makes it clear that, whatever the words of the legislation are, HMRC can prevent them from happening, then we’re all going to be better off. If that’s the case, then yes, we’re for it," added Morris.

The reason for such a u-turn from the CBI could be a realisation that some form of GAAR is unavoidable.

"I think it is inevitable, in the current economic climate, that some sort of GAAR will be introduced soon," said Robert Gaut, partner at Fried, Frank, Harris, Shriver & Jacobson. "The Graham Aaronson proposal is aimed at "abusive", "egregious" and "abnormal" tax planning. Most people I’m sure would agree that a scheme fitting those adjectives should be stopped."

While one might find universal agreement with that statement, there are difficulties associated with the introduction of any GAAR, as Gaut identifies. Chief among these is the fact that it could breed uncertainty and therefore cloud businesses’ decision-making.

"The difficulty I see, of course, is that there is no bright line test that can be objectively applied. All tax avoidance is legal; otherwise it becomes tax evasion. The position of the GAAR is that there is a type of extreme, highly artificial tax avoidance that must be stopped," said Gaut. "However, the uncertainty that the GAAR will lead to, in the absence of a clearance process, may be bad for business. The advisory panel proposed may be somewhat helpful, but that is unlikely to be available to taxpayers in time to allow specific planned transactions to complete in required timeframes."

Gaut believes the GAAR could successfully stamp out abusive tax avoidance schemes, though he points out where the lines may potentially be blurred.

"Yes, but the difficulty is knowing what "abusive" means. Maybe, as the CBI suggest, it is those sorts of "black box" schemes where, essentially, there is no underlying commercial rationale for the transaction," said Gaut. "However, there are parts of Aaronson’s report which suggest that commercial transactions can be combined with abusive tax results (which would still be the subject of the GAAR), so the line is obviously not that clear."

The CBI’s director general John Cridland said that while traditionally there have been two categories – legitimate tax management which HMRC accepts is legal, and tax evasion – there is a middle ground too. The CBI is saying those sort of arrangements may technically be legal, but that they do not support black box type arrangements which are strictly non-commercial.

"It’s the first time we’ve said it directly. It’s quite a statement by the CBI," said Cridland.

Implementation inevitable

Some observers, including the Tax Justice Network’s Richard Murphy, are suggesting that the CBI is now supporting Aaronson’s proposal purely because they do not believe it will work as effectively as intended, instead providing mere window-dressing.

However, Gaut proposed that in the face of inevitable implementation of a GAAR in some form, the CBI might be backing the Aaronson report to avoid the uncertainty that could come from a separate GAAR proposal.

"I think the CBI recognises that we are going to have a GAAR of some sort imposed by the government, and cases like HMRC v Mayes (the SHIPS2 scheme) make that ever more likely – this is the case Aaronson refers to in his report, and where courts were unable to undo its complex tax structuring, said Gaut. "That being the case, the Aaronson GAAR is, on its face, very narrowly focused, so it may be perceived as better to campaign in favour of this for fear that the alternative may be something more broadly focused and still more uncertain."

Chancellor George Osborne will give his verdict on Aaronson’s GAAR when he delivers the budget on March 21. Government has been pressured to do something about tax avoidance, and recent news headlines referring to deals with big companies have exacerbated this. But the Public Accounts Committee (PAC) has moved quickly to censure the handling of certain tax settlements.

"The PAC has expressed considerable concern about the way in which tax settlements have been made with large corporates," said Dave Jennings, tax investigations at Grant Thornton. "Complex legislation means that negotiated settlements are often inevitable, but the move to appoint another commissioner so cases over £100 million are approved by all three commissioners is a sensible move to ensure that proper controls are in place to protect the public purse."

Regardless, the latest controversies surrounding Barclays could well force Osborne’s hand and certainly make the prospects of a UK GAAR being contained in the March budget even more likely.

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