HMRC have released two more opinions in their favour from the GAAR advisory panel (GAP) in quick succession; about disguised remuneration, loans to participators, and employee rewards using second hand bonds and gilt options.

The GAAR is structured in the form of a “double-reasonable test”:

  • It only bites if the arrangements “cannot reasonably be regarded as a reasonable course of action”. 
  • Where the GAAR does apply, Penalties of up to 60% of the counteracted tax can be levied over and above any penalties due under the normal rules.

In both cases the planning which was notified to HMRC under DOTAS, was complex and involved:

  • the establishment of and investment into an insurance bond by a promotor which was subsequently acquired by a company and its director shareholder(s) and which included “cooling off rights”.
  • a loan from a partnership, liability which was assumed by a Company and satisfied by the individual(s) using steps involving the novation of a gilts option (taken out by the individual) into the insurance bond arrangements and the exercise of the cooling off rights.

The overall outcome was that:

  • The Individual had paid a nominal amount to acquire his interest in the bond. In the first case he had then received a substantial sum from the company which he claimed was not taxable as earnings, and in the second case he had benefitted from a credit to his loan account which he claimed was not taxable.
  • In the first case the company had claimed a corporation tax deduction, in the second it had not.
  • The partnership who had made a loan of that same amount had been repaid in Full.
  • The individual had no exposure to loss under the gilts option.

On instructing an IFA to handle the arrangements, the individual involved in one of the cases said “I should re-iterate that I am acquiring my interest in the Bond and entering into the Option primarily for fiscal rather than investment purposes.”

As in all of its previous cases, the GAP found that in both of these cases the double reasonableness test was not met and the transactions involved “contrived and abnormal” steps.

The GAP said that the most likely comparable commercial transaction to the arrangements was that in the first case the company would have paid a cash bonus to the individual as remuneration, and in the second case the company would have paid dividend or other cash distribution.

In both cases the panel said that the transactions appeared to be without any commercial purpose other than to secure a beneficial tax treatment for the individual in comparison with receiving remuneration or dividends in cash, whilst (in the first case only) enabling the Company to claim a corporation tax deduction.

These opinions bring the total from the GAP to twelve in less than two years with the results being 12:0 to HMRC. 

Links to our guides:

General Anti-Abuse Rule – GAAR (subscriber version) 

Penalties: GAAR

Disguised Remuneration zone 

External links:

First case: GAAR Advisory Panel opinion of 11 April 2019: employee rewards using a second hand bond, gilt options, additional contributions and 'cooling off rights'

Second case: GAAR Advisory Panel opinion of 12 April 2019: extraction of value using a second hand bond, gilt options, additional contributions and 'cooling off rights'

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