This note looks at the key features of the General Anti-Abuse Rule (GAAR) contained within the Finance Act 2013 and the basics of what you need to know about the provisions it contains when considering tax planning.

See  General Anti-Abuse Rule - GAAR (Subscriber version) for a more indepth review of the GAAR.

At a glance

  • The GAAR took effect from 17 July 2013 and is intended to counteract ‘tax advantages arising from tax arrangements that are abusive’.
  • Tax arrangements exist where obtaining a tax advantage is ‘one of the main purposes’ of the arrangements, which clearly gives potentially wide scope to the legislation and the need to consider its provisions when undertaking tax planning.
  • The rule applies across a number of taxes.
  • The first opinions have been given by the GAAR advisory panel; all twelve have been in HMRC's favour.
  • For more detail on this topic see GAAR: adviser briefing.

Finance Act 2016 

A number of new measures were introduced, including

  • Allowing HMRC to issue provisional counteraction notices within normal assessment time limits to protect against loss of tax.
  • Allowing HMRC to issue pooling notices and notices of binding so that taxpayers with equivalent arrangements can be counteracted by a single GAAR Advisory Panel decision.
  • The introduction of GAAR penalties of 60% of counteracted tax.
  • The introduction of sanctions for serial tax avoiders, including penalties, publication of names and withdrawal of access to certain reliefs.
  • See Penalties: GAAR and Penalties: serial tax scheme use

HMRC’s GAAR Guidance

In addition to the legislation, HMRC published guidance in April 2013 which expressly states that the GAAR is an intended departure from the previous situation where routinely cited court decisions such as the judgment of Lord Clyde, ‘every man is entitled if he can to order his affairs so that the tax attracted under the appropriate act is less than it otherwise would be’ are now rejected.

The guidance sets out the Parliamentary intention that the statutory limit on reducing tax liabilities is reached when arrangements are put in place which go ‘beyond anything which could reasonably be regarded as a reasonable course of action’.

Tax arrangements

A ‘tax arrangement’ is any arrangement which when viewed objectively has the effect of obtaining a tax advantage as its main purpose or one of its main purposes. Clearly this sets a low threshold for considering the possible application of the GAAR, but for any arrangement to be caught it must also be ‘abusive’.

‘Abusive’

Abusive tax arrangements are ‘arrangements the entering into or carrying out of which cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions, having regard to all the circumstances…’

The ‘double reasonableness’ test

The main safeguard for the taxpayer and one of the key principles of the GAAR is the ‘double reasonableness test’. This requires HMRC to be able to show that the arrangements entered into ‘cannot reasonably be regarded as a reasonable course of action’.

Counteraction

Where tax arrangements are found to be abusive, the tax advantages are counteracted by the making of adjustments which ‘are just and reasonable’.

Examples

Part D of the guidance contains numerous examples of when an arrangement might, or might not, applying the double reasonableness test, be treated as abusive in the context of the GAAR.

Practical points

The GAAR forms part of the tax laws of each of the taxes to which it applies and under self-assessment, it is the taxpayer who must decide whether the GAAR applies when completing returns.

Where it is uncertain whether an arrangement would be caught, the guidance recommends full disclosure in the ‘white space’ indicating the uncertainty to provide protection against the imposition of penalties if the transaction is later found to be within the scope of the GAAR.

Updates

21/06/2016 Finance Bill 2016 proposals section added