14 August 2013

Tax avoidance continues to make the headlines, and the Treasury's latest addition to its armoury is a General Anti-Abuse Rule ('GAAR'), aimed at countering the most abusive tax schemes.  Whether it will change the headlines is a different matter.  John Barnett (who was a member of the GAAR interim advisory panel) and Ian Carnochan give their views on the GAAR and what it may mean in practice.

The GAAR - an overview

The GAAR will apply to schemes entered into after the Finance Bill 2013, expected to be in force in July 2013. Its purpose is to tackle tax advantages arising from 'abusive tax arrangements'.  A tax arrangement is something which has a main purpose of obtaining a tax advantage, and so the main focus is whether or not the arrangement is 'abusive'. 

Arrangements are abusive if they 'cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions'.  The legislation does give some help in trying to work out what this means - regard is to be had to any principles or policy behind the tax legislation, whether the arrangements include contrived or abnormal steps or seek to exploit shortcomings in the legislation, and whether the tax result is significantly different from the economics of the transaction.  However, if the arrangements are consistent with established practice accepted by HMRC at the time, they should not be abusive. 

Safeguards for the taxpayer

The GAAR is a fundamentally different approach to tackling tax avoidance.  Potentially, it allows a court to override specific tax rules where it finds an arrangement to be abusive. However, there are a number of safeguards for the taxpayer:

  • HMRC must show that the arrangements are abusive, rather than the taxpayer show that they are not.
  • If there is a reasonable view that an arrangement was a reasonable course of action (even if there are reasonable views to the contrary), the GAAR cannot apply. 
  • Before HMRC can apply the GAAR, an independent advisory panel has to give its opinion as to whether the arrangement is a reasonable course of action. 
  • If the matter gets to court, the advisory panel's opinion must be taken into account, as well as official guidance sanctioned by the panel.    

What will it mean in practice?

We expect that the GAAR will have limited practical impact for most taxpayers, and is unlikely to affect mainstream tax planning.  However, it is also unlikely to deal with many of the tax arrangements that have made the headlines in recent years.  

Though apparently capable of countering the most egregious schemes, of equal significance is the added uncertainty the GAAR will bring for tax planners: contrived and aggressive avoidance schemes are high risk already, and the new climate may mean that fewer promoters (and customers) will have the appetite for such schemes.

The precise scope of the GAAR will become clearer over time, especially as the advisory panel starts to give opinions, and the guidance is updated - but the grey area is likely to remain the borderline between what is avoidance and what is abusive. 

For further information please contact John Barnett  or Ian Carnochan.

Key contact

Headshot John Barnett

John Barnett Partner

  • Head of Partnerships
  • Private Client Services
  • Tax

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