There has been much written about the new GAAR legislation since it came into force in July 2013 and the majority of articles are extremely technical and very lengthy. I thought it would be helpful to provide a summary of GAAR and how this may impact you.
The General Anti-Abuse Rule (GAAR), has been introduced in the UK as part of the governments endeavours to combat tax avoidance and evasion. Essentially the GAAR legislation defines what would be considered an ‘abusive tax arrangement’ and aims to counter tax avoidance. GAAR will apply to any arrangements entered into on or after 17 July 2013 and will have important impacts on tax planning arrangements going forward.
In brief, GAAR was first introduced through a report published in November 2011. During the Budget 2012, the government announced they would implement the recommendations for introducing a specific and targeted GAAR. The aim was to deter and counter tax avoidance, while retaining a tax regime that continues to be attractive to businesses and HM Revenue & Customs (HMRC). This was followed by period of consultation, during which the report was met with mixed responses. Concerns were raised that the GAAR as it stood then, was too broad and could result in uncertainties for the taxpayer.
In December 2012, the HMRC published the summary of responses to the consultation as well as the proposed changes to the draft GAAR. These draft clauses have formed part of the Finance Bill 2013. Overall the legislation is broadly in line with what was published in June 2012, with the HMRC providing additional detailed guidance and a number of examples which illustrate if GAAR would or would not apply in specific circumstances.
GAAR came into force from July 2013 and applies to any tax arrangements entered into on or after 17 July 2013.
The scope of GAAR:
The main aim of the GAAR legislation is to target tax avoidance and those attempting to evade taxes through artificial or abusive schemes, while still allowing for responsible tax planning. It is therefore essential that GAAR can clearly differentiate between acceptable tax planning and abusive schemes, where planning was intended to exploit shortcomings.
The new GAAR rules will apply in any instance where the HMRC judges that taxpayers have entered into a contrived arrangement with the specific aim to obtain relief without equivalent economic risk. GAAR will apply to numerous taxes, including income, corporation and capital gains tax and also covers a number of the levies that are likely to affect limited companies and contractors working through umbrella companies, as well as sole traders.
Under the new GAAR legislation, all tax planning arrangements need to pass a ‘double reasonableness test’ to determine whether they will be judged as abusive or not. This ‘double reasonableness test’ is the main provision to test whether GAAR applies and states that schemes will be considered abusive if they “cannot reasonably be regarded as a reasonable course of action”. This means that the HMRC must show that the tax arrangement could not possibly be considered as a reasonable course of action. In addition, the tax authorities will need to obtain an independent second opinion to confirm that arrangements went against the spirit of the law and were intentionally designed to exploit a loophole.
In practise, if any tax planning arrangements are found to be abusive, then GAAR will come into force to compensate for the revenue that would have been lost by adjusting the individual’s tax liability.
Taxes affected by GAAR:
The taxes that will be affected by GAAR are currently the following:
- Income Tax
- Corporation Tax
- Capital Gains Tax
- Inheritance Tax
- Petroleum Revenue Tax
- Stamp Duty Land Tax
- Annual Residential Property Tax
It is also planned that National Insurance Contributions will be included at a future date, subject to new legislation being passed.
HMRC has published detailed GAAR guidance to assist with the interpretation of GAAR. This guidance has been developed by an independent advisory panel including lawyers, accountants and business representatives.
According to the guidance, GAAR will apply to any tax arrangement which could be considered ‘abusive’. This would include “any arrangement which, viewed objectively, has the obtaining of a tax advantage as its main purpose or one of its main purposes”.
The guidance confirms that the key provision to determine if an arrangement is to be considered abusive is the double reasonableness test and indicates that the following factors should be taken into consideration:
- If results are consistent with the policy objectives of the tax legislation;
- If the means of achieving the results involved contrived or abnormal steps; and
- If the arrangements are intended to exploit shortcomings or loopholes in the provision.
The guidance also includes numerous examples of GAAR in action which provides further direction on how HMRC would apply GAAR and when GAAR may or may not apply in specific circumstances. This aims to clarify and set out HMRC’s views on GAAR and avoid any uncertainty for taxpayers. The guidance is divided into three sections as follows:
- The scope of GAAR legislation
- Examples of how GAAR applies to tax arrangements
- GAAR procedure
This GAAR guidance has also been subject to consultation and approval by an independent advisory panel.
Although GAAR does cover many instances and examples of tax avoidance, the HMRC have stated that it is not all encompassing and rather forms part of their wider tax avoidance strategy. In other words, if an arrangement is not covered by GAAR, it may still be tackled using existing anti-avoidance methods.
For full details of the GAAR guidance, please see the HMRC website.
How GAAR may impact you:
Any tax arrangement that has been entered into from 17 July 2013 will come under the scope of the new GAAR legislation. It is therefore essential that you and your advisors take GAAR into consideration when conducting any tax planning.
If you would like any further information or to discuss how GAAR may impact you, we would be happy to meet and assess your individual circumstances in light of the new GAAR legislation.
Please contact us on 020 8780 2349 for further information.
This blog is a general summary. It should not replace professional advice tailored to your specific circumstances.