Court Refuses HMRC Right of Appeal in Tax Avoidance Case

The Supreme Court has denied HM Revenue and Customs (HMRC) the right of appeal in a tax case involving a series of transactions that were carried out for no commercial purpose but which led to a tax saving by the taxpayer.

The decision represents a blow for HMRC, who are seeking to establish that a general anti-abuse rule (GAAR) should apply, which would allow them to ignore transactions with no commercial purpose where this would increase the tax payable.

The Court of Appeal had ruled that the essential reason for rejecting HMRC’s claim was that whilst the transactions had no commercial impact, ‘they were genuine legal events with real legal effects’. Accordingly, said Mummery LJ, “The court cannot, as a matter of construction, deprive those events of their fiscal effects under ICTA (the Income and Corporation Taxes Act 1988) because they were self-cancelling events that were commercially unreal and were inserted for a tax avoidance purpose in the pre-ordained programme…”

There was no disagreement that the impact on the taxpaying public was regrettable, and the decision will no doubt increase the pressure for a GAAR to be introduced for the UK tax system. A committee chaired by Graham Aaronson QC has produced a feasibility study on how this could best be achieved. He recommends the introduction of a narrowly focused, rather than a broad spectrum, GAAR as the best way of targeting tax avoidance without affecting responsible tax planning. In his view, a narrowly focused GAAR would:

• deter abusive tax avoidance schemes;
• contribute to providing a more level playing field for business;
• reduce legal uncertainty around tax avoidance schemes;
• help build trust between taxpayers and HMRC; and
• offer opportunities to simplify the tax system.

The Government will consider the report in detail and respond fully in the 2012 Budget, setting out plans for further consultation if necessary. No mention of a GAAR was made in the Chancellor’s Autumn Statement, however.

Click here for information on the rules relating to disclosure of tax avoidance schemes.