Following on from my post on 21/11/11 with my initial thoughts on Graham Aaronson’s report on a possible GAAR, I wanted to take a look the report from a slightly different perspective.  What are the ‘hidden messages’ in that report? Of course, I have to acknowledge upfront that I might have completely misread the report and might be imagining those messages.
The aim of the study, we are told, was to determine whether a GAAR would be beneficial for the UK. Given the ongoing wider debate at the moment about “tax avoidance”, this might have been thought to be a question with a rather obvious answer; certainly some commentators would consider it so. However, Aaronson makes it clear that “[b]eneficial does not mean simply providing another weapon in the armoury to challenge unappealing tax avoidance schemes.” He has looked at the question from a wider perspective and considered how a GAAR might impact on business confidence (regarding certainty around tax planning) and, eventually, the ability to simplify the tax legislation.
He accepts, to a degree, the basic premise that every taxpayer is entitled to use the legislation as enacted to limit the amount of tax arising form any situation. However, he approaches the situation from a starting point that taxation is necessary to fund public services and, therefore, there must be a limit on what is considered acceptable tax planning. However, he is quite clear that any such limit, to be consistent, must be imposed through legislation.
So, having summarised the background, what of those ‘hidden messages’.
The drafting of the UK tax legislation comes in for a bit of a battering throughout the report, with several references to its complexity.  For example:

“The tax rules in many areas have become extremely complex and in practice can give rise to very anomalous results.” 

“The UK’s tax legislation is notoriously long and complex.”

“there are some areas of taxation, such as trusts, where the present statutory rules are extremely complex and can give rise to many anomalous consequences.”

“Such [sensible and responsible] tax planning is an entirely appropriate response to the complexities of a tax system such as the UK’s”

“unintended traps which complex tax rules put in the way of ordinary commercial or personal transactions”

“Complex tax systems such as the UK’s positively invite taxpayers to carry out certain transactions by according them special tax advantages”

However, it is not just the legislation itself that he appears critical of but also the way it is applied in practice. There are several comments that could well be seen as critical of, and demonstrating a lack of confidence in, HMRC’s approach.
Aaronson points out that there is a big responsibility to ensure that HMRC operates the GAAR “in the public interest.” He does not want to see it “wielded as a weapon to intimidate taxpayers in relation to arrangements to which it could not apply.” (Emphasis added)
Further, he doesn’t want to see any GAAR being used as a means for HMRC to increase its “discretionary powers.” Reading through his principles for a GAAR, it is interesting to note how Aaronson reflects the wider concerns of taxpayers and advisers with regard to HMRC’s likely misuse of any GAAR. He is clear that (with one exception) the burden of proof that the GAAR should apply to a transaction/arrangement should lie with HMRC.
He is also clear that there should be statutory Guidance (he recommends that this be included as a Schedule in the relevant Finance Act). That Guidance will need updating from time to time but Aaronson is clear that this should be the responsibility of an independent body, to “avoid the risk of increasing HMRC’s discretionary powers”.
In addition to its role in updating the Guidance, this panel would also serve as a shield against inappropriate application of the GAAR by HMRC. The GAAR could only be applied by designated HMRC officials, and then only after they have obtained the opinion of the Panel that the rule should be applied.
With regard to this Advisory Panel, Aaronson recommends that it be chaired by a non-HMRC person and comprise a majority of non-HMRC personnel.

Maybe I’m being a little too cynical but it does seem to me that Mr Aaronson doesn’t have too much confidence