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GAAR is coming - get busy

Companies need to stop wondering what might be coming and begin preparing for what will inevitably come into force, writes Kevin Hindley

25 Oct 2012

By Kevin Hindley, Alvarez & Marsal

A woman buried by paper work

SINCE GRAHAM AARONSON QC recommended that a general anti-abuse rule (GAAR) should be introduced in the UK, the debate about the associated rights and wrongs has raged hotly on both sides of the fence. To briefly quote Aaronson himself, the GAAR aims to target “artificial and abusive tax avoidance schemes” and “improve the UK’s ability to tackle tax avoidance”.

Aaronson is convinced that a “narrowly focused” GAAR will deter abusive tax avoidance schemes, contribute to providing a level playing field for business, reduce legal uncertainty about tax avoidance schemes, help build trust between taxpayers and HM Revenue and Customs (HMRC), and offer opportunities to simplify the tax system.

During the consultation period, which came to an end in October, many people waded into the debate on the introduction of the GAAR, which is proposed for implementation in the Finance Bill 2013.

While some unions and campaign groups criticised the rule for not going far enough to combat the problems of tax avoidance, the Confederation of British Industry (CBI) voiced its strong opposition to its introduction. The CBI said that, while plans to outlaw abusive tax schemes are to be applauded, the GAAR’s drafting could hit “straightforward tax management”.

This, in turn, undermines the UK’s ability to attract investment by attempting to become the most competitive corporate tax regime in the G20. The Association of Corporate Treasurers (ACT) takes this criticism even further, suggesting that, in the current economic climate, the GAAR will damage any prospect of recovery as it “chills growth and investment from not only indigenous but also foreign firms”.

While Aaronson has advised against a “broad spectrum” rule, it seems many of the GAAR’s critics consider it already too broad, thus compromising the certainty and stability so vital for securing inward business investment into the UK. Opponents argue that the GAAR will remove any grey areas which surround tax avoidance and will simplify the highly complex UK tax regime.

Pointless debate

However, frankly speaking, the debates about pros and cons are fast becoming redundant and increasingly pointless. The truth is that the GAAR is coming whether we like it or not. Therefore, it is crucial that companies stop wondering what might be coming and begin preparing for what will inevitably come into force.

What is true is that company directors have a duty to shareholders, which the implementation of the GAAR will not diminish. Therefore, it is vital that companies are fully prepared for this legislative change so that they can continue to optimise the effective rate of tax and maximise returns for their shareholders. Tax planning has developed significantly in recent years, with the centre of gravity moving to substance-based planning rather than aggressive financing schemes.

But what does this mean in practical terms for finance directors as the GAAR approaches? Put simply, tax is a cost to the business and, like any other cost, it should be managed. Finance directors should be looking at the supply chain, both from a tax and commercial perspective, with a view to moving people, assets and risks in order to maximise supply chain efficiencies and therefore shareholder returns.

As boards turn away from aggressive financing schemes as a way to manage the effective rate of tax, finance directors are increasingly finding themselves at the centre of a movement to unite and integrate tax and operational management. The use of substance-based tax planning will ensure that finance directors are able to strike the difficult balance between their obligations to their company and its shareholders and complying with the GAAR as it is introduced. Forward-looking finance directors will be preparing now for its implementation, which will lessen the inevitable impact next year.

With so many people still asking questions and arguing over the rights and wrongs, the GAAR will remain an emotional subject. To stir things up further, the chancellor is also expected to make an announcement on the conclusions of the consultation period in the coming weeks. However, this is not a moment to sit back and observe - the prudent finance director will be on the front foot by identifying the most effective ways to prepare. As the saying goes: “Fail to prepare, prepare to fail.”

Kevin Hindley is a managing director at Alvarez & Marsal

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