A Consultation on Tax Management: Analysis of Responses

6. TACKLING TAX AVOIDANCE

Background

6.1 Tax avoidance takes place where an individual or corporate taxpayer seeks to reduce, delay or avoid their liability for tax by taking action which they believe is legal, but which the tax authorities regard as not in keeping with the spirit of or the intention behind the relevant tax legislation. Tax avoidance often involves highly artificial mechanisms for which the sole or main reason, or one of the main reasons, is to reduce tax due. The Scottish Government believes it is in the public interest to tackle tax avoidance because:

• it reduces public revenue, and so will lead either to lower spending on vital public services or to an increase in tax rates generally to recoup tax avoided;
• there is a risk to the tax base if other taxpayers behave in a similar way;
• there may be perceived unfairness to compliant taxpayers who continue to meet their liabilities as intended by the law; and
• it can undermine public confidence in the tax system and lead to reduced rates of compliance.

6.2 Tax avoidance is by definition legal. It is different from tax evasion, which involves fraud, misrepresentation or concealment and can give rise to criminal charges. Tax evasion is generally addressed by tax authorities through risk assessment, intelligence, investigation and, where necessary, criminal prosecution.

6.3 Tax planning takes place when a taxpayer seeks to minimise the tax they are liable to pay by acting within the spirit of the relevant legislation - for example, by using reliefs or allowances provided by Parliament for the purposes intended.

Tackling tax avoidance

6.4 Across tax jurisdictions, the actions to tackle avoidance generally fall into three groups:

• Promote compliance - creating an environment where tax avoidance is difficult, and/or providing disincentives for avoiding tax.
• Notification - identifying as quickly as possible any avoidance schemes through a notification system, together with recognising any weaknesses in the tax legislation that might allow taxpayers to use avoidance schemes. The UK Government's Disclosure of Tax-Avoidance Schemes (DOTAS) legislation is aimed at identifying such schemes.
• Counteract - this includes taking action against known or suspected avoidance schemes so as to stop these schemes working.

6.5 The consultation asked:

Question 17: What are your views on the measures proposed for tackling tax avoidance? What other methods might be employed?

6.6 Eighteen respondents (64% of all respondents) addressed this question.

Table 18: Respondents to Question 17

Category	No.	%
Tax accountants and professional tax bodies	8	44
Public bodies	1	6
Legal professional bodies	3	17
Local authority bodies	3	17
Business	3	17
Total	18	100

NB Percentages may not total 100% exactly due to rounding.

General comments

6.7 There was general agreement that the measures proposed for tackling tax avoidance are appropriate. These were perceived to be consistent with other agencies (LA). One view (Tax) was that as the measures proposed apply to devolved taxes only, measures for tackling tax avoidance should align with those of the rest of the UK to maintain consistency.

6.8 A few respondents (Tax, Tax) expressed concerns over whether Revenue Scotland will have the required skills and resources necessary to tackle tax avoidance successfully. One respondent (Tax) urged that greater distinction is made between tax evasion, which is illegal, and tax avoidance/planning which is not.

Views on promoting compliance

6.9 Eleven respondents gave explicit support to the promotion of compliance as an approach to tackling tax avoidance. The prevailing view was that a clearly drafted and robust legal framework will help to remove opportunity and motivation for tax avoidance. A typical comment was:

"Of the options outlined, the clearest measure appears to relate to establishing a legislative framework that is not open to misinterpretation or abuse" (Scottish Property Federation).

6.10 Four respondents (Bus, Tax, Tax, Tax) considered that transparency in legislative intention will also be crucial, arguing for Policy Memorandum to accompany new legislation.

Views on notification

6.11 Two respondents (Tax, Tax) recommended a disclosure system similar to DOTAS. One view (Leg) was that an effectively targeted GAAR with proportionate DOTAS provisions, should be sufficient to tackle tax avoidance.

Views on counteract

6.12 Three respondents (Tax, Tax, Bus) cautioned that any anti-avoidance measures should not interfere with legitimate, routine and well established tax planning strategies. Another favoured purposive legislation over Targeted anti-avoidance schemes (TAARs), stating that:

"The reason is that extensive, detailed anti-avoidance legislation risks being opaque, uncertain and still leaving gaps: indeed it in many ways promotes the idea that there may be gaps to be found" (Chartered Institute of Taxation and Association of Taxation Technicians).

6.13 One legal professional body advocated deferring the introduction of specific GAAR provisions pending a review of the UK Government's experience. Others agreed that any GAAR should be considered at a later stage (Tax), and following consultation on its wording (Tax).

Views on other methods to be employed

6.14 One respondent (Bus) expressed support for activity which focuses on embedding a cultural change within business and society more generally, in regards to attitudes to tax avoidance.

Notifying tax avoidance

6.15 The Scottish Government supports identifying actual or potential tax-avoidance schemes, including through notification. Early notification and identification will help to reduce costs and uncertainty for both taxpayers and the tax authority. Therefore, as with some other tax jurisdictions, the Scottish Government proposes to introduce an obligation for tax-avoidance schemes to be notified. This would require anyone devising, selling or using such schemes to notify Revenue Scotland and to provide details within a set period of first offering them to a client.

6.16 The consultation asked:

Question 18: If obligatory notification arrangements were included in the proposed Tax Management Bill, what do you think should be the main features? Are there any features of other similar schemes that you think should be avoided?

6.17 Fifteen respondents (54% of all respondents) addressed this question.

Table 19: Respondents to Question 18

Category	No.	%
Tax accountants and professional tax bodies	8	53
Legal professional bodies	3	20
Local authority bodies	1	7
Business	3	20
Total	15	100

6.18 The current UK DOTAS system was referred to by eight respondents who recommended learning lessons from this to apply to the Scottish system. Aligning notification arrangements with the UK regime was advocated to avoid confusion (Tax, Tax). One respondent (Tax) considered that it could be useful in developing a notification system to share knowledge between Revenue Scotland and HMRC.

6.19 A prevailing theme (6 mentions) was the importance of defining clearly what schemes require to be notified, in order to prevent unnecessary work for taxpayers and Revenue Scotland. Two respondents (Tax, Leg) suggested that "white lists" of transactions not considered abusive should be available to assist taxpayers and their agents. Two tax professionals called for defined "listed" schemes along with publication of "hallmarks" of such schemes, as happens in relation to Value Added Tax in the DOTAS rules. According to a business respondent:

"...care should be exercised in how wide the net is cast in order to avoid placing an unnecessary burden on compliant taxpayers and in creating uncertainty in terms of reporting obligations" (British Bankers' Association).

6.20 Another dominant theme was the importance of enforcing any notification system. It was agreed that notification within a set time period was workable but required policing and action taken against those who flout the system (Tax, Tax). Two tax professionals emphasised their view that if it becomes apparent that a scheme has not been notified then efforts must go into tracing the origins of the scheme and the promoter challenged. One legal professional representative advocated suitable, proportionate penalties for failing to disclose in order to ensure compliance.

6.21 One respondent (Tax) recommended less onerous time limits than exist in the UK arrangements in order to facilitate compliance.

General Anti-Avoidance or Anti-Abuse Rule (GAAR)

6.22 The UK Government intends to introduce a UK GAAR in the Finance Bill 2013. As this will not apply to devolved taxes, the Scottish Government needs to consider making a provision for a GAAR in the Tax Management Bill. A key issue is whether to draw a GAAR broadly, to include a wide range of arrangements that could be regarded as reducing or avoiding tax liability, or more narrowly to target schemes that are highly artificial and contrived and consequently are sometimes referred to as "abusive". The proposed UK GAAR is more narrowly focused.

6.23 The consultation asked:

Question 19: Of the two broad approaches - a GAAR targeted at highly artificial and contrived abuse of tax legislation, or a more widely drawn provision, which do you believe is likely to be more effective, and why?

6.24 Eighteen respondents (64% of all respondents) addressed this question.

Table 20: Respondents to Question 19

Category	No.	%
Tax accountants and professional tax bodies	9	50
Public bodies	1	6
Legal professional bodies	3	17
Local authority bodies	3	17
Business	2	11
Total	18	100

NB Percentages may not total 100% exactly due to rounding.

6.25 Amongst respondents, three local authorities provided very general welcome and support for the proposal to develop a Scottish GAAR. One remarked:

"Whatever approach is taken it must be easily communicated, understood and pass the test of public acceptance" (East Ayrshire Council).

6.26 The imminence of implementation of the UK GAAR was acknowledged in many responses, with a recurring view that consistency with this approach would be beneficial, particularly in avoiding confusion. It was felt that lessons could be learned by observing the impact and effectiveness of the UK GAAR, before finalising the Scottish approach. A typical view was:

"Adopting the same approach as the UK will ensure that a transaction which involves both a devolved tax and a UK tax should not have the potential for being subject to two different GAARs" (ICAEW).

6.27 One respondent considered that further consultation on a Scottish GAAR would be unnecessary:

"...as far as possible ...build on the detailed work already undertaken - rather than invent the wheel which has been through a considerable consultation process already undertaken and where a repeat exercise may be considered a waste of time and effort" (ICAS).

6.28 Another suggested that with sufficiently accurate and clear legislation, a Scottish GAAR may be unnecessary (Tax).

6.29 Three respondents (Leg, Leg, Bus) called for any GAAR to be supported by clear legislation and an advance clearance system, in order to maximise its effectiveness.

Views on a narrowly targeted GAAR

6.30 In total, 13 respondents provided explicit support for a narrowly-targeted Scottish GAAR. There was no support expressed for a more widely drawn provision. The merits of a narrowly targeted GAAR were documented as:

• contributes to certainty, with businesses knowing the tax consequences of their actions (9 mentions)
• a more widely drawn provision could reduce Scotland's attractiveness as a location for business and employment (6 mentions)
• fairer if it is consistent with the rest of the UK (2 mentions)
• easier to understand if consistent with the rest of the UK (2 mentions)
• will improve economic stability as it will not interfere with legitimate and well established tax planning strategies (1 mention)
• acts as a deterrent (1 mention)
• robust (1 mention)
• a wider GAAR could encourage imprecise or even incomplete drafting of legislative measures (1 mention)
• provides a balance of the twin objectives of protecting the tax base and limiting uncertainty (1 mention).

Prior clearance rule

6.31 Some jurisdictions require a taxpayer to seek and obtain prior clearance for unconventional arrangements designed to achieve a tax result, or accept the risk that the tax authority will find that these unconventional arrangements are unacceptable and can be set aside for the purposes of working out tax due. It can be argued that prior clearance is helpful in reducing uncertainty. However, it would probably be necessary to put in place appeals procedures, which might take time and reintroduce uncertainty. This could lead to significant administrative costs.

6.32 The consultation asked:

Question 20: What advantages might a prior clearance rule offer? How might it be designed to provide maximum certainty at least cost?

6.33 Seventeen respondents (61% of all respondents) addressed this question (see Table 21).

Table 21: Respondents to Question 20

Category	No.	%
Tax accountants and professional tax bodies	8	47
Public bodies	1	6
Legal professional bodies	3	18
Local authority bodies	3	18
Business	2	12
Total	17	100

NB Percentages may not total 100% exactly due to rounding.

Views on the advantages of a prior clearance rule

6.34 A common view was that a prior clearance rule will be helpful in reducing uncertainty (13 mentions). Other advantages highlighted were:

• provides clarity
• will give Scotland a competitive edge
• contributes to consistency of outcome.

Views on challenges of a prior clearance rule

6.35 Three main challenges were identified by respondents:

• costs of operation
• speed of operation
• volume of prior clearances sought.

6.36 Several respondents expressed concern over likely costs relating to the administration of the system and any appeals process. Four respondents (Tax, Tax, Leg, Leg) recommended charging a fee for clearance applications, possibly at a "modest" level, to offset the costs incurred. However, two respondents (Tax, Tax) cautioned that the size of fee should not result in discrimination against small businesses and ordinary taxpayers.

6.37 One suggestion to address costs was to operate the clearance system for a limited period only, perhaps four years, whilst new legislation bedded in (Tax).

6.38 Six respondents emphasised that any prior clearance system needs to operate to a tight transaction timetable, with quick turnarounds in decision-making. Two (Tax, Tax) expressed doubts as to whether Revenue Scotland or HMRC will be able to deliver clearance systems within the commercial timescales required.

6.39 There was concern that practitioners, for risk management purposes, may overuse the prior clearance system, in order to provide reassurance to their clients. Suggestions were made on ways to contain the number of applications made:

• stipulate that the rule applies only where a minimum level of tax is at stake (2 mentions)
• publish examples of general clearances for information (2 mentions)
• establish a narrowly drawn GAAR (1 mention)
• provide clear guidance on the circumstances in which prior clearance should be sought (1 mention)
• charge a fee for each application (1 mention).

6.40 One comment was that businesses may become reluctant to enter into certain transactions if these become compulsory or 'preferred' candidates for seeking prior clearance (Tax).

Views on an associated appeals procedure

6.41 Two respondents (PB, LA) expressed clear support for introducing an appeals procedure to support the prior clearance rule. However, a different view from a legal professional body was that there was no absolute need for an appeals procedure, as disputes could be addressed through routine channels, or an internal review mechanism could be implemented within Revenue Scotland to deal with challenges to clearance decisions.

Intimation of policy intent

6.42 A key feature of tackling avoidance is to make clear the policy intentions behind the relevant legislation, to make this information available in a way that is accessible to taxpayers and the tax authority, and also so that those adjudicating on disputes and appeals are able to refer to the information and to use it in forming conclusions.

6.43 The consultation asked:

Question 21: How can the intentions of those drafting and passing the relevant legislation best be set out in a way that is useful to taxpayers, Revenue Scotland and those adjudicating on disputes and appeals?

6.44 Sixteen respondents (57% of all respondents) addressed this question.

Table 22: Respondents to Question 21

Category	No.	%
Tax accountants and professional tax bodies	8	50
Public bodies	1	6
Legal professional bodies	3	19
Local authority bodies	2	12
Business	2	12
Total	16	100

NB Percentages may not total 100% exactly due to rounding.

6.45 A recurring theme was that clear, unambiguous legislative drafting will provide the basis for communicating the intentions of those drafting and passing legislation. A typical view was:

"Legislation should, as far as possible, be self-contained and fully comprehensible" (Faculty of Advocates).

6.46 Other recommendations made by respondents for setting out intentions were:

• explanatory notes and guidance accompanying new legislation (10 mentions)
• policy memorandum accompanying the Bill (8 mentions - it was remarked that this had been very helpful in relation to the LBTT Bill)
• notes of Parliamentary debates (5 mentions - the rule established by Pepper v Hart (1993) AC 593 was referenced in this regard)
• engaging stakeholders in the key stages of design of the policy objectives and legislative drafting (3 mentions)
• guidance on the Revenue Scotland website (1 mention).

Tests to determine transactions outwith the intention of legislation

6.47 An important element in the design of a GAAR is the nature of the test to be applied in deciding whether a transaction or series of transactions (an "arrangement") is "caught" by the provision. The Scottish Government takes the view that an arrangement that has as a main or sole purpose, the achievement of a reduction in tax due should entitle Revenue Scotland to set aside such arrangements for the purpose of deciding the tax due and therefore apply the relevant tax legislation to the circumstances as though the arrangements had not been made.

6.48 The consultation asked:

Question 22: What tests do you think should be used to decide whether an arrangement is wholly or mainly intended to achieve a reduction in tax due?

6.49 Thirteen respondents (46% of all respondents) addressed this question.

Table 23: Respondents to Question 22

Category	No.	%
Tax accountants and professional tax bodies	8	62
Legal professional bodies	3	23
Business	2	15
Total	13	100

6.50 The proposal that an arrangement that has as a main or sole purpose the achievement of a reduction in tax due was viewed as a reasonable criterion by several respondents. However, the semantics of the criterion were key to a few, who identified the difference between "a main or sole purpose" and "the main or sole purpose" as crucial in determining whether or not arrangements should be caught by the provision. One respondent (Tax) pointed out that most business planning will involve a consideration of tax consequences, so it will be almost inevitable that tax advantages will be one of the main purposes.

6.51 One respondent (Tax) considered that the criterion may be appropriate in business contexts, but may not be appropriate if the scope of a GAAR is wider, personal and family company situations.

6.51 Alternative wording was suggested along the following lines:

"...whether an arrangement, when looked at in the round, is wholly or mainly intended to achieve an artificial reduction in tax due which is beyond the intended scope of the underlying legislation" (ICAEW).

6.52 The first test proposed by the Scottish Government that any arrangement such as would not normally be employed for bona fide business purposes was queried on account of word, "normally":

"...this suggests arrangements which do not follow market practice could fall foul of the GAAR despite there being a genuine commercial rationale for pursuing a certain route. In the current financial climate many transactions are being carried out in a way which would not have been "normal" even a few years ago" (Brodies LLP).

6.53 The second test proposed of assessing whether the arrangement or part of it lacks commercial substance, for example, does it have elements which cancel each other out, attracted some support. It was suggested that checks could be done to see whether the taxpayer had suffered real, economic consequences of their actions, such as having spent money and acquired plant and machinery, suggesting that they should indeed have a valid claim to plant and machinery allowances (Tax, Tax).

6.54 One respondent (Tax) commented that whatever tests are used will be determined by the form of any GAAR to be adopted in Scotland. It was argued that if the GAAR is targeted at highly artificial and contrived abuse of tax legislation, then it should be relatively straightforward to identify cases that fail (Tax).

6.55 The consultation asked:

Question 23: Do you see a role for external expertise in assessing tax arrangements to see whether they are "caught" by a GAAR, and if so what might that role be? What arrangements do you think should be put into place for appeals?

6.56 Seventeen respondents (57% of all respondents) addressed this question.

Table 24: Respondents to Question 23

Category	No.	%
Tax accountants and professional tax bodies	8	47
Public bodies	1	6
Legal professional bodies	3	18
Local authority bodies	3	18
Business	2	12
Total	17	100

NB Percentages may not total 100% exactly due to rounding.

Views on role for external expertise

6.57 Of the 17 respondents who provided a view, 15 envisaged a role for external experts in assessing tax arrangements to see whether they fall within the ambit of a GAAR. Indeed, a few considered this to be "essential". It was clear from responses that it was generally accepted that any external expertise will be independent of Revenue Scotland, although two respondents (Tax, Leg) emphasised the need to ensure this was case. One local authority outlined the rationale behind their support:

• will ensure transparency in the tax system
• will aid public confidence in fairness and impartiality of the system
• assures the public that the system is not driven entirely by revenue maximisation.

6.58 Another respondent (Tax) added that external expertise will provide an appropriate balance to any lack of expertise within the tax authority which could lead to overly aggressive approaches by the authority.

6.59 Two tax professionals identified the ideal candidates for providing such expertise as people with commercial and professional experience.

6.60 The Advisory Panel being set up to assist with the running of the UK GAAR was referred to by five respondents who recommended a similar arrangement for Scotland.

Concerns regarding the proposal for a role for external expertise

6.61 One respondent (Leg) argued against the proposal on the grounds that:

• This will create difficulties for any tribunal or court in determining what weight to attach to the view of any "external expertise" especially where there is a dissenting voice.
• A tribunal or court should not be bound by what such "external experts" consider should or should not be caught within the GAAR, since that would give judicial weight to the opinion of those who are not judges.
• The role of external expertise is "controversial and plays a political, rather than a legal or juristic role" (Faculty of Advocates).

6.62 Another respondent (Bus) considered it difficult to comment on the proposal until the UK GAAR system is up and running.

Views on what arrangements should be put in place for appeals

6.63 Four tax professionals commented all with the same view, that appeals should be dealt with no differently to the process for any other appeals.