SME Tax News

The GAAR (general anti-abuse rule) now applies following Royal Assent to the Finance Bill 2013.  The idea of introducing an anti-abuse rule has been debated extensively. This new law is a product of its time – marking public and government concern that some schemes have managed to conjure tax savings out of nowhere.  The approach of the courts to aggressive tax avoidance has meant that few such schemes actually work.  However, the GAAR should make it clear that abusive planning simply will not work. 

The GAAR applies to abusive tax arrangements that do not pass what has become known as ‘the double reasonableness test’ having regard to all thecircumstances, including the principles on which the legislation was based and whether the planning was intended to exploit any shortcomings. Those advising on or deciding a case may need to refer not just to the legislation but to explanatory notes, ministerial statements and other evidence.

Stephen Coleclough, President of the Chartered Institute of Taxation (CIOT), commented:

“The message for individuals tempted, for example, by schemes that promise more in tax refunds than the original investment is clear.  Don’t do it.  The tax refund won’t materialise and you may well lose your investment.

“The message for businesses in more nuanced.  Abusive planning won’t work, but the complexity of business transactions and our existing law will produce an element of uncertainty.  Businesses and their advisers will need to assess whether planning is reasonable in the context of the legislation and their commercial position.  The GAAR Guidance should help define what is, and what is not, acceptable.  We hope that HMRC and the independent GAAR Advisory Panel will continue to work on helping taxpayers and advisers understand where the GAAR applies and where it does not.

“Tax agents will need to start considering whether the GAAR applies when they complete a client’s self-assessment return.  The GAAR guidance makes it clear that much commonplace planning will be unaffected, which is helpful for many taxpayers and advisers alike. However, there is likely to be a long period of uncertainty whilst the GAAR matures. 

“The CIOT will be issuing guidance to its members to ensure that they have appropriate processes in place. Where a client has entered into a particular transaction, often on the advice of another party, it will be necessary to consider whether the GAAR applies. Sometimes specialist help will be required to help determine this.  The forthcoming revision of the tax profession’s code ‘Professional conduct in relation to taxation’ will include advice about the GAAR.

“Ultimately, the success of the GAAR will be judged on whether the marketing of abusive schemes is reduced and far fewer taxpayers choose to enter into them. A sustained review of the GAAR’s effectiveness will be crucial.”

In this time's web-update we have a new general income tax disclosure opportunity from HMRC, news of another consultation on a proposed reform of the Close Company Loans to Participators rules and a new Close Company Loans Toolkit. My pick of this time's 'Essential reading'.

This consultation has lapsed: HMRC decided not to take this any further at present.

HM Revenue & Customs have launched a new consultation on a proposed reform to the close company loans to participators rules. These proposals come on top of changes already made in Finance Act 2013.

The National Audit Office has finally published its report on Rural Broadband.

In GR Solutions v HMRC [2013] UKUT 0278 (TCC) a car is treated as “made available" for the purposes of the benefits rules even when it is the employee who purchases the car and then sells an interest in it to his employer but continues to have private use of the car following that transfer.

HMRC’s Tax Assurance Commissioner, Edward Troup has made his first report outlining HMRC's performance in resolving disputes with taxpayers since Dave Hartnett stepped down as HMRC permanent secretary in July 2012.

Mr Troup says that there is "of course, plenty of room for improvement. For example, more needs to be done to ensure that the overall governance framework for tax decisions is well understood, particularly in the more specialist areas of the department; I want our review of settled cases to have a broader range this year and for lessons to continue to be effectively learned; and I want to make sure that, while the confidentiality of taxpayers’ affairs is maintained, there is a better public understanding of how we resolve tax disputes. This report is a first step in that wider process of enhancing transparency."

Annex 2 of the report contains some data which will interest advisers.

In 2011/12 there were 56,228 reviews of HMRC decisions, in over 25% of direct tax penalty and non-penalty cases HMRC's decision was either cancelled or varied. However in VAT 60% of HMRC's decisions was cancelled and 7% varied.

HMRC's dispute resolution stratagy has come under close scrutiny since Mr Hartnett was accused of making "sweetheart deals" with large companies and together with HMRC's solicitor was accused of lying to the House of Commons Public Accounts Committee. In June 2012 the National Audit Office recommended that HMRC should:

  • Update the Litigation and Settlement Strategy, or the guidance accompanying it, to make clear how cases involving controlled foreign companies are compatible with the Litigation and Settlement Strategy.
  • Ensure that lawyers are always consulted before finalising settlements on issues that are in litigation.
  • Explain more clearly to its specialist staff how settlements are reached, including, where appropriate, the rationale for the settlement terms on individual issues.
  • Ensure that it makes clear to taxpayers that settlements agreed in principle should not be considered final until they have been through all relevant approval processes.

In May 2013 the High Court held in UK Uncut Legal Action Ltd v Commissioners for HMRC that although Mr Hartnett and HMRC had made errors
in settling one dispute, there were significant and substantial reasons for HMRC’s decision in relation to it and that the decision was lawful.

Links: First Tax Assurance Commissioner's Report