GENERAL ANTI-AVOIDANCE RULE (GAAR)

Until 2013, there was no general anti-avoidance rule in United Kingdom statute tax law, although there was some case law to not entirely dissimilar effect; but a statutory rule was proposed by the present Government and after lengthy consultation and discussion was introduced in the Finance Act 2013.

The UK Government proposed enacting a general anti-avoidance rule for tax law.

Previously, the courts were able to look at schemes as a whole for the purposes of detecting and invalidating “sham” arrangements designed only for purposes of tax avoidance – WT Ramsay Ltd v Inland Revenue Commissioners [1982] A.C. 300.

But there was no general rule of statute prohibiting avoidance per se, and each area of tax has to include a wide range of individual anti-avoidance provisions aimed at specific potential sources of avoidance.

The Government proposed a general anti-avoidance rule (GAAR) following a report by a tax lawyer, Graham Aaronson QC. In December 2010, Graham Aaronson QC was asked by the Government to report on the possible benefits of a general anti-avoidance rule. His report recommended the introduction of a rule “which is targeted at abusive arrangements”.

The consultation was followed by a policy decision as follows:

” At Budget 2012 we announced new guidance on the General Anti-Abuse Rule (GAAR) … The guidance will come into affect with the Finance Act 2013, due to be published in summer 2013. “

The Government announced at Budget 2012 that it accepted this recommendation and would consult with a view to bringing forward legislation in the Finance Bill 2013.

The Government announced their intention to consider responses to the consultation in autumn 2012 and to hold a further consultation on draft legislation with a view to introducing legislation in the Finance Bill 2013. The 2013 Finance Bill introduced the new GAAR, and it was enacted on 17 July 2013.

The HM Treasury consultation paper said that:

” The Government agrees with the Report's conclusion that a “broad spectrum” general anti-avoidance rule would not be beneficial for the UK. The Government has been clear that any GAAR must ensure that sufficient certainty about the tax treatment of transactions could be provided without undue costs for businesses, individuals and HMRC. A broad rule risks compromising the certainty that is vital to provide the confidence to do business in the UK. “

Despite that, the draft GAAR proposed in the consultation paper appeared to many commentators to introduce a good deal of uncertainty and to have other difficulties as well. See, for example, Accountancy Age – GAAR proposals could be unconstitutional.

Finance Act 2013: Part 5 of the Finance Act 2013 makes provision for a “General anti-abuse rule”.

The rule applies to:

  • income tax;
  • corporation tax, including any amount chargeable as if it were corporation tax or treated as if it were corporation tax;
  • capital gains tax;
  • petroleum revenue tax;
  • inheritance tax;
  • stamp duty land tax;
  • annual tax on enveloped dwellings; and

As from the commencement of the National Insurance Contributions Act 2014 s.10, national insurance contributions.

The key propositions of the rule are that:

” Arrangements are “tax arrangements” if, having regard to all the circumstances, it would be reasonable to conclude that the obtaining of a tax advantage was the main purpose, or one of the main purposes, of the arrangements; and 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 including-

  • whether the substantive results of the arrangements are consistent with any principles on which those provisions are based (whether express or implied) and the policy objectives of those provisions,
  • whether the means of achieving those results involves one or more contrived or abnormal steps, and
  • whether the arrangements are intended to exploit any shortcomings in those provisions.

Clearly, those concepts are so vague and fact-specific (particularly with the 3-fold dependency on reasonableness) as to make it difficult or impossible for the reader to know what is and is not lawful under the new rule; and although some guidance will be given under the new legislation, there are objections to the practicality and constitutional propriety of those – see Accountancy Age – GAAR proposals could be unconstitutional. Given that one of the stated purposes of the GAAR was to introduce new clarity and certainty, it may be thought unlikely to succeed.

The legislation gives express examples of its own application: “Each of the following is an example of something which might indicate that tax arrangements are abusive-

  • the arrangements result in an amount of income, profits or gains for tax purposes that is significantly less than the amount for economic purposes,
  • the arrangements result in deductions or losses of an amount for tax purposes that is significantly greater than the amount for economic purposes, and
  • 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.”;

again, the examples raise as many questions as they resolve.

The rules include provision that: “The fact that tax arrangements accord with established practice, and HMRC had, at the time the arrangements were entered into, indicated its acceptance of that practice, is an example of something which might indicate that the arrangements are not abusive.” This appears to go some way towards reintroducing the kind of HMRC discretion in the application of tax law found in the old extra-statutory concessions that were found by the courts to be unlawful.

The concept of “tax advantage” is defined as follows: “A “tax advantage” includes-

  • relief or increased relief from tax,
  • repayment or increased repayment of tax,
  • avoidance or reduction of a charge to tax or an assessment to tax,
  • avoidance of a possible assessment to tax,
  • deferral of a payment of tax or advancement of a repayment of tax, and
  • avoidance of an obligation to deduct or account for tax”.

The definition is inclusive and not exhaustive, so readers will not be able to rely upon it with any confidence in the sense of reassuring themselves that a particular matter will not be treated as a tax advantage.

The effect of the application of the rules is as follows:

  • ” If there are tax arrangements that are abusive, the tax advantages that would (ignoring this Part) arise from the arrangements are to be counteracted by the making of adjustments.
  • The adjustments required to be made to counteract the tax advantages are such as are just and reasonable.
  • The adjustments may be made in respect of the tax in question or any other tax to which the general anti-abuse rule applies. “

Again, since everything depends on what is considered “just and reasonable”, there is no certainty or predictability about the operation of the rules.

In the application of the rules:

” a court or tribunal must take into account-

  • HMRC's guidance about the general anti-abuse rule that was approved by the GAAR Advisory Panel at the time the tax arrangements were entered into, and
  • any opinion of the GAAR Advisory Panel about the arrangements (see paragraph 11 of Schedule 41). “

The constitutionality of this has been questioned, as referred to above.

HMRC Guidance: HMRC have issued statutory guidance about the GAAR – HMRC- Tax avoidance: General Anti-Abuse Rule.

The guidance states that:

” The GAAR Study Group Report was based on the premise that the levying of tax is the principal mechanism by which the state pays for the services and facilities that it provides for its citizens, and that all taxpayers should pay their fair contribution. This same premise underlies the GAAR. It therefore rejects the approach taken by the Courts in a number of old cases to the effect that taxpayers are free to use their ingenuity to reduce their tax bills by any lawful means, however contrived those means might be and however far the tax consequences might diverge from the real economic position. “

The guidance states the fundamental purpose of the GAAR in the following terms:

” The primary policy objective of the GAAR is to deter taxpayers from entering into abusive arrangements, and to deter would-be promoters from promoting such arrangements. There may be tax avoidance arrangements that are challenged by HMRC using other parts of the tax code, but if they are not abusive they are not within the scope of the GAAR. B3.2 If a taxpayer is undeterred, and goes ahead with an abusive arrangement, then the GAAR operates so as to counteract the abusive tax advantage which he or she is trying to achieve. The counteraction that the GAAR permits will be a tax adjustment which is just and reasonable in all the circumstances. The appropriate tax adjustment is not necessarily the one that raises the most tax. “

In an attempt to reassure those who are worried about the likely uses of the GAAR by the Government, the Guidance states:

” Underlying the GAAR legislation is the recognition that, under the UK's tax code, in many circumstances there are different courses of action that a taxpayer can quite properly choose between. The GAAR is carefully constructed to include a number of safeguards that ensure that any reasonable choice of a course of action is kept outside the target area of the GAAR. B4.3 To take an obvious example, a taxpayer deciding to carry on a trade can do so either as a sole trader or through a limited company whose shares he or she owns and where he or she works as an employee. Such a choice is completely outside the target area of the GAAR, and once such a company starts to earn profits a decision to accumulate most of the profits to be paid out in the future by way of dividend, rather than immediately paying a larger salary, is again something that should in any normal trading circumstances be outside the target area of the GAAR. Similarly, decisions to invest in an ISA in order to take advantage of the income tax relief which such investments carry, or to give away assets to a son or daughter without retaining a benefit in the gifted asset, with a view to reducing the amount of inheritance tax payable on the transferor's death, clearly fall outside the target area of the GAAR. Using statutory incentives and reliefs to support business activity and investment in a straightforward way (for example business property relief, EIS, capital allowances, patent box) are also not caught by the GAAR. However, experience has shown that incentives and reliefs can be abused. Where taxpayers set out to exploit some loophole in the tax laws e.g. by entering into contrived arrangements to obtain a relief but incurring no equivalent economic risk then they will bring themselves into the target area of the GAAR. “

Commencement: Section 215 of the Finance Act 2013 makes provision for commencement of the provisions of the GAAR from Royal Assent (17 July 2013).

The general anti-abuse rule has effect in relation to any tax arrangements entered into on or after the day of Royal Assent.

Where the tax arrangements form part of any other arrangements entered into before that day those other arrangements are to be ignored, unless, as a result, the tax arrangements would not be abusive.

The effect of this last provision is in practice to ensure that retrospection of the rule is only beneficial.

Compliance Guidance: In November 2016 HMRC issued a Guidance Note entitled Compliance checks: general anti-abuse rule and provisional counteraction notices.