Why do we need a General Anti-Avoidance Principle?

Back in 1936 the British House of Lords asserted in the landmark Duke of Westminster Case that

"Every man is entitled to do what he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure that result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax."

It was, in effect, a green light for tax avoidance. Yesterday the UK Trades Union Congress (TUC) published a briefing on what is known as a General Anti-Avoidance Principle (GAntiP), a way to tackle tax avoidance (which, by definition is not illegal, but also by definition, deliberately gets around the spirit of tax legislation). The briefing was written with the UK in mind, but it has global relevance.

Some tax avoidance can be tackled by specific targeted legislation, it notes; but that is not true in all cases. As it says:

Tax avoidance . . . exploits the gaps in UK legislation and that of other territories. We believe this to be a major contributory factor in the loss arising as a result of corporate tax abuse.

Some argue that if there are such gaps and loopholes then this is the fault of government and that if such loopholes exist then the government should expect smart tax lawyers and accountants to exploit them on behalf of their clients. We do not agree. No law can anticipate all circumstances that can arise and no law can be written in such way that there is never any doubt as to its interpretation: the very nature of language ensures that such doubt will always exist. In addition, the sheer complexity of the modern commercial world means that it is inevitable that there will gaps in the legislation that mirrors that complexity.

And this is where the GAntiP comes in.

The idea behind a General Anti-Avoidance Principle is simple: it would say that if one or more steps are added into a series of transactions with the sole or principle aim of securing a tax advantage (which is defined as a saving in tax) then that step in the transaction is ignored when it comes to calculating the tax due on the transaction. In other words, it tackles pre-meditated attempts to subvert the intention of the tax system that might artificially exclude income from account for tax or that provide tax reliefs that do not reflect the substance of the transactions otherwise undertaken.

Such a law can help governments pass legislation seeking to prevent tax avoidance; it can be used to attack existing avoidance arrangements in a way that relies not on legalistic interpretations but by looking at the arrangement on the basis of a just and equitable interpretation of the law; and it puts taxpayers in a better, clearer position because they know that tax avoidance does not pay. And, not least, it would help us overturn the mentality that gripped the corporate world since the Duke of Westminster case.

From Tax Research. And read more about GAntiP, from Judith Freedman, here.