Tax GAAR – general anti-abuse rule

Following a number of high profile tax avoidance schemes, Karl Pocock outlines the proposed general anti-abuse rule that is included in the 2013 Finance Bill.

Artificial schemes to reduce the income tax bills of the rich and famous have become front page headlines, as have exposés of large corporations which only pay a small amount of tax in the UK.

Against this backdrop, the UK is currently preparing to introduce a general anti-abuse rule (GAAR) to combat artificial and abusive tax avoidance schemes. Karl Pocock explains what the GAAR is, how it will work and, most importantly, how it will affect taxpayers.

Note: this article is based on the draft provisions in Finance Bill 2013 published on 28 March 2013 and the draft guidance published on 11 December 2012, which may be amended prior to coming into force.

What is the GAAR?

The GAAR is designed to target abusive anti-avoidance schemes that are not contemplated when the underlying legislation is drafted. The GAAR is not aimed at thwarting responsible tax planning and is perhaps best described as a last resort when the current anti-avoidance rules and statutory interpretation fail to prevent an abusive tax advantage.

The GAAR applies to, amongst others, income tax, capital gains tax, corporation tax, inheritance tax and stamp duty land tax. A similar rule will also be introduced to cover national insurance contributions.

Arrangements to mitigate taxes to which the GAAR applies, that come into effect on or after the date when the Finance Bill 2013 receives Royal Assent (which is likely to be in July this year), may be affected by the GAAR. If the GAAR applies to an arrangement, the tax advantages arising from the arrangement are counteracted on a just and reasonable basis.

When will an arrangement fall within the ambit of the GAAR?

An arrangement may fall within the ambit of the GAAR if it is a “tax arrangement” that is “abusive”.

“Tax arrangement” is widely defined and is in keeping with other similar definitions used for tax purposes. An arrangement is a tax arrangement if, having regard to all the circumstances, it would be reasonable to conclude that the obtaining of a tax advantage was the main purpose, or one of the main purposes, of the arrangement.

Tax arrangements are “abusive” if entering into or carrying out the arrangements

“cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions, having regard to all the circumstances including:

• whether the substantive results of the arrangements are consistent with any principles on which those provisions are based (whether express or implied) and the policy objectives of those provisions,
• whether the means of achieving those results involves one or more contrived or abnormal steps, and
• whether the arrangements are intended to exploit any shortcomings in those provisions.”

(Section 204 (2) of the Finance Bill 2013).

The key to falling within the ambit of the GAAR is whether or not the arrangements are held to be abusive. This uses the double reasonableness test stated above to determine whether or not it is reasonable to consider that the actions taken are themselves reasonable.

According to the draft guidance, the GAAR will only catch arrangements where there is no reasonably held view that the arrangements are not abusive. If there are conflicting views that the arrangements are and are not abusive and both views are reasonably held, the GAAR should not apply.

The draft legislation does provide some examples of abusive indicators to assist in deciding whether or not an arrangement is abusive. These include:

• “the arrangements result in an amount of income, profits or gains for tax purposes that is significantly less than the amount for economic purposes;
• the arrangements result in deduction or losses of an amount for tax purposes that is significantly greater than the amount for economic purposes; and
• the arrangements result in a claim for the repayment or crediting of tax (including foreign tax) that has not been, and is unlikely to be, paid;

but in each case only if it is reasonable to assume that such a result was not the intended result when the relevant tax provisions were enacted.”

(section 204 (4) of the Finance Bill 2013).

In contrast, if the tax arrangements accord with established practice, and HMRC had indicated its acceptance of this practice at the time they were entered into, then this would point towards the arrangements not being abusive.

The indicators mentioned above are relatively straightforward and the real difficulty will involve situations which fall into the “grey” area of uncertainty.

How will it work?

Assuming that a taxpayer has not voluntarily counteracted a tax advantage themselves in their self-assessment return, the most likely initial step is that a designated HMRC officer (an officer specifically trained to deal with the GAAR on a consistent basis) will notify the taxpayer in writing to inform them that they consider that the GAAR may apply to an arrangement. The taxpayer will be invited to provide written representations.

If the taxpayer wishes to provide a written response they must do so within 45 days of the date of the written notification from HMRC. The taxpayer is entitled to request in writing an extension of this period if required.

Any written response from the taxpayer will be considered by the designated officer and, if the officer is still of the view that the GAAR applies then the matter is referred to the advisory panel. The designated officer must notify the taxpayer of the referral in writing. At this stage the taxpayer has 21 days from the date of the notice to make written representations to the advisory panel (with a copy sent to HMRC). The taxpayer is entitled to request in writing an extension of this period if required. The advisory panel is an independent panel appointed by the Commissioners of HMRC on the advice of the chairperson of the advisory panel (who is not part of HMRC). No HMRC officer will be a member of the advisory panel.

Three members of the advisory panel will review the matter and will give an opinion (or opinions) to HMRC and the taxpayer.

Once the designated HMRC officer has received a copy of the opinion they shall consider this and decide whether or not, in light of the advisory panel’s opinion, to counteract the tax advantage in question. Once a decision has been made this is communicated to the taxpayer.

If the arrangements are deemed to be abusive then the designated HMRC officer will counteract the arrangements by making just and reasonable adjustments following specified procedures. Once the counteraction becomes final, the taxpayer has twelve months to make a claim for one or more consequential adjustments to be made in respect of any tax to which the general anti-abuse rule applies.

As can be seen from the description above, the taxpayer’s rights are safeguarded to some extent by ensuring that specially trained designated officers are involved in applying the GAAR and, more importantly, that an independent body is involved to review the matter and give an opinion. It is, of course, quite possible that the opinion of the advisory panel could be ignored by HMRC, however such an opinion must be taken into account by a court or tribunal and one would think, unless the advisory panel has erred in judgment, that the advisory panel’s opinion would hold a reasonable amount of weight in judicial proceedings.

In addition, the GAAR guidance has special legislative status but only if it has been approved by the advisory panel who will be free to review and amend parts A and B of the guidance before it is approved. This should ensure that the guidance is balanced in its approach. The current guidance does provide a variety of examples that may be useful, however those matters that may fall on the boundary of reasonableness are not considered – the examples tend to be fairly obvious. It is hoped that as time passes and the GAAR is applied, the list of examples will grow to reflect what is happening in practice.

This is of particular importance as there is no clearance procedure to allow a taxpayer to confirm whether or not certain actions fall within the GAAR. As stated above, many arrangements will not be problematic but those taxpayers who may be considering an aggressive arrangement will have to rely on their advisors to guide them in relation to the application of the GAAR.

How will it affect you?

The GAAR is targeted at abusive tax arrangements. As such, it is unlikely to be relevant to many tax payers who either do not engage in any tax planning or simply undertake recognised tax planning strategies that are unlikely to be considered to be abusive. However, it is important to remember that the GAAR can impact on tax structuring and should be considered; particularly if you are offered aggressive tax planning solutions.

If you enter into an abusive arrangement that falls foul of the GAAR you will be required to counteract the tax advantage in your self-assessment tax return.We think it is reasonable to assume that, in most cases, the types of arrangement that are likely to fall foul of the GAAR are aggressive tax schemes promoted by tax specialists. Therefore, if you are engaging an experienced tax advisor to arrange your affairs, they should explain how to deal with the outcome of any structuring in your tax returns. However, you are highly unlikely to pay to implement a structure that has to be immediately counteracted in your tax return! It is therefore likely to be the case that you will only implement structuring having received professional advice that the GAAR does not apply. If it later transpires that the GAAR does apply, your self-assessment return will therefore be incorrect and you may be liable for interest and penalties.

Tax advisors will have to consider the potential application of the GAAR and may have to warn you that there is a risk of it applying. This is particularly the case in the early days of the GAAR before the practical application of the rules has been properly tested. Every taxpayer is different and has different priorities – however it is quite possible that some will simply be dissuaded from pursuing what they perceive to be a risky strategy, which is quite possibly the reaction that HMRC are looking to encourage.

Other taxpayers, alternatively, will be keen to proceed with the tax structuring but will look to minimise their risk by making the fees payable for the advice conditional on some form of “success” and or looking to take out insurance. In such a situation, care should be taken to fully understand the structuring advice and any counsel’s opinion which supports the tax treatment, the potential costs of interest and penalties arising and, in addition, the potential cost of appealing any decision (which may be required under the insurance policy). Taxpayers should always understand the structuring implemented and the potential consequences of such structuring irrespective of the GAAR and, once the GAAR is in place, it is simply another potential issue to take into account.