United Kingdom

Abstract

Interpreting tax legislation to determine whether a taxpayer may obtain the tax benefits of an artificial scheme, the UK courts have backed away from the new approach that developed in 1980s case law. That approach employed a type of substance over form or step transaction analysis that allowed the courts to ignore steps taken without a commercial purpose in order to gain a tax advantage. In recent years the courts have denied the existence of a judicial anti-avoidance rule, maintaining that the court’s sole function is one of statutory interpreter that determines whether the relevant statute was intended to apply to the transaction in question when viewed realistically. The legislature has enacted more than 200 TAARs, which are targeted anti-avoidance rules incorporated directly into a specific statute. The courts tend to apply TAARS broadly, resorting to business purpose or economic substance inquiries. The existence of this large number of TAARs explains why the UK presently lacks a GAAR. The UK is actively considering whether there is a GAAR in its future. While no penalties are imposed for anti-avoidance transactions, the UK has introduced a robust disclosure regime. Under the disclosure rules, the promoter or designer of a tax avoidance scheme must disclose it to the taxing authority if certain conditions are met. The obligation to disclose may furnish a disincentive to enter into aggressive transactions. The number of disclosures since adoption of the rules in 2004 has dropped markedly.