UK: The Arrival Of The GAAR And The Concept Of Abuse

Last Updated: 9 August 2013
Article by Michael Cant

Summary and implications

The General Anti-Abuse Rule (GAAR) was introduced in the Finance Act 2013 to counteract "tax advantages arising from tax arrangements that are abusive". The GAAR specifically aims to combat arrangements which are demonstrably contrary to the spirit of the law, seek to exploit shortcomings in legislation or are contrived or abnormal and produce tax results that are inconsistent with the economic effect of the underlying transactions.

The key points to note are as follows:

  • The GAAR is HMRC's big stick and should only be deployed against "egregious" tax planning.
  • The GAAR works alongside existing anti-avoidance legislation, it does not replace it.
  • The drafting of the GAAR is obscure and difficult to interpret. In particular the "double reasonableness" test of abuse has attracted much criticism as meaningless.

Abuse not avoidance

What is in a word? Originally the second "A" of GAAR stood for avoidance. Since the 2012 Budget the term "abuse" has been used and avoidance dropped. It is widely suggested that the reason for this is to link the concept to that of abuse of rights in EU law. Whilst cosmetically this may be the intention, no lessons can be learned from the abuse of rights principle in seeking to interpret the GAAR, a purely domestic concept.

The mechanics of the GAAR

The legislation provides for the formation of an advisory panel. The panel has two main functions: to provide reasoned opinions as to whether or not specific tax arrangements are abusive, and to approve HMRC's guidance on the application of the GAAR. When matters are referred to it the chair of the panel will select members with relevant expertise to make up a sub-panel which will consider individual cases. HMRC will not be represented on the panel.

The panel will not perform a judicial function and will consider only written representations. A court or tribunal must have regard to the panel's opinion in determining any issue in connection with the GAAR. This does not mean that they will necessarily follow the panel's opinion.

The GAAR guidance is extensive and runs to three parts and 136 pages of examples.

The procedure under which HMRC can use the GAAR involves the following:

  • A designated officer, being a senior HMRC officer, gives a notice to the taxpayer setting out why HMRC think the GAAR applies.
  • The taxpayer can make written representations.
  • The designated officer provides the advisory panel with the initial notice served on the taxpayer together with any representations made by the taxpayer and any comments made by the designated officer on the representations.
  • The taxpayer has the opportunity to make further representations to the panel.
  • The sub-panel issues an opinion as to whether entering into the arrangement was reasonable.
  • Finally, the designated officer having considered the opinions of the panel, must give the taxpayer a written notice stating whether the tax advantages arising from the arrangements are to be counteracted. The taxpayer can then appeal against such counteraction to the courts.

When is the GAAR engaged?

The GAAR is engaged if the answer to each of the following four questions is yes:

Is there an arrangement that gives rise to a tax advantage?

"Arrangements" include any agreement, understanding, scheme, transaction or series of transactions. "Tax advantage" includes relief or increased relief from tax, repayment or increased repayment of tax, avoidance or reduction of a charge to tax avoidance of a possible assessment to tax, a deferral of a payment of tax or an advancement of a repayment of tax.

Does the tax advantage relate to one of the taxes to which the GAAR applies?

The GAAR applies to income tax, corporate tax, capital gains tax, the annual tax on enveloped dwellings (ATED), inheritance tax, petroleum revenue tax and stamp duty land tax.

Does the arrangement satisfy the "main tax purpose" test?

Having regard to all the circumstances, would it be reasonable to conclude that obtaining a tax advantage was the main purpose, or one of the main purposes, of the arrangement? This is a familiar concept used in stamp duty land tax and capital gains tax.

Evidence of abusiveness include if:

  • the arrangements result in an amount of income, profit or gains for tax purposes that is significantly less than the amount for economic purposes, anticipated result when the relevant tax provisions were enacted; the arrangements result in deductions or losses of an amount for tax purposes that is significantly greater than the amount for economic purposes; or
  • the arrangements result in a claim for the repayment or crediting of tax (including foreign tax) that has not been, and is unlikely to be paid, but in each case only if it is reasonable to assume that such a result was not the anticipated result when the relevant tax provisions were enacted.

Is the tax arrangement abusive under the double reasonableness test?

Tax arrangements are abusive "if they 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. Ever since the introduction of the "double reasonableness" test by Graham Aaronson QC in the original report on the idea in November 2011 it has attracted criticism. Mr Aaronson QC has strongly defended its use suggesting it represents a high hurdle to the application of the GAAR. This has not stopped the suggestion that the concept is meaningless and needlessly confusing. It will take many years and a Supreme Court judgment to stop this debate.

The GAAR is not retrospective. It only applies to tax arrangements entered into on or after 17 July 2013.

Criticisms and comments

The GAAR does not replace any laws such as TAARs, but is meant to be used in conjunction with them. The GAAR could therefore be said to add further complication to an already complicated and confusing situation.

The "double reasonableness" test is a terrible piece of legislative drafting. What happened to HMRC's stated goals of simplification and the use of plain English?

There is no penalty regime enacted within the legislation, the taxpayer has the duty of submitting correct tax returns. Unless the examples given in the guidance are developed a lot further it will be very difficult for anyone to say whether a particular transaction falls foul of the GAAR.

The GAAR was intended to be used against only the most "egregious" tax planning. How long will it take before HMRC routinely resort to its use when they simply don't like a legislative result or lack the resources to engage in reasoned debate?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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