The Select Committee on Economic Affairs report notes that the GAAR provisions in the bill, as currently proposed, fall short of resolving such problematic issues as the way certain multi-national groups are taxed, and adds: “we recommend that every effort should be made to communicate, particularly to the press and the public, why the GAAR is not an appropriate mechanism to address all problems with the tax system.”
In particular, such public communications should “focus on those issues, such as the taxation of multi-national groups, where the widely-held perception seems to be that the GAAR provides the answer, whereas it is clear that it does not”.
The committee report says the problems with the taxing of these large multi-national companies must be dealt with at the EU, OECD, G8 and G20 level, and urges that a proposed OECD review on the matter "be completed as rapidly as possible".
It concludes that with respect to GAAR, the narrow focus set out in the Draft Finance Bill was "reasonable", given "resource constraints and the need to provide certainty for business and to promote UK competitiveness". However, it adds that the scope of the GAAR should be independently reviewed after five years to ensure that it is working properly, and to determine whether there is "significant evidence that it is deterring abusive transactions".
Other key areas covered in the 83-page report include the Annual Residency Property Tax Package (ARPT) and the government’s proposed cap on certain income tax relief strategies.
The committee found that the ARPT, as envisioned in the Draft Finance Bill, could have" workability" issues, while commending “the Government’s responsiveness to the need to exempt certain businesses and other organisations from the ARPT”.
‘Aimed at abusive schemes’
Gerry Brown, technical manager at Prudential, said the House of Lords Select Committee was correct in its observation that GAAR would not, as many people apparently believe, "combat all tax avoidance schemes".
"GAAR is aimed solely at abusive schemes," he added. "So international transfer pricing arrangements designed to divert profits to low-tax jurisdictions, while complying with current UK tax legislation, will be unaffected."
As for the Draft Finance Bill’s proposals to limit the use fo certain income tax reliefs, Brown said his own interpretation was that it was designed to counter those types of tax avoidance schemes which generate losses in the early years of operation, and profits thereafter.
"The loss [in these arrangements] is, to some extent, artificial," he noted, perhaps due to the way purchases of assets, start-up costs and fees are accounted for. Given that the "users" of such schemes are typically additional rate taxpayers, in the 50%/45% bracket, they normally are seeking to seek to generate a profit at a later date, when their marginal tax rate is lower, such as in retirement or when they are no longer UK resident.
"Such individuals often borrow the capital for use in such schemes, and so get tax relief for losses and interest paid on the loans. The tax relief often funds the schemes."
To read and download the report, click here.
