General anti-abuse rule – updating your tax strategy

On 12 June 2012 the Government published a consultation document with draft legislation for a UK general anti-abuse rule (GAAR). Our specialists explored the impact of the proposals in a webcast. View the webcast.

The proposal confirms the intention to target the GAAR carefully so that it counteracts or deters abusive arrangements while ensuring normal business transactions are unaffected. The genuine intent to minimise the impact on the vast majority of compliant taxpayers who operate within the centre ground of acceptable tax planning is stated clearly and is welcomed. Questions and concerns remain however, given that the central concepts of the proposed GAAR are inherently subjective.

Countering abusive tax arrangements

The GAAR is intended only to counteract tax advantages arising from tax arrangements that are abusive. The proposed draft wording for the GAAR retains Graham Aaronson's double reasonableness test. The meaning of tax advantage and tax arrangement are as we would expect very broad; eg tax advantage includes repayments, reliefs, avoidance of tax etc and tax arrangement is any arrangement where it is reasonable to conclude that the main purpose or one of the main purposes is to obtain a tax advantage. A key element of the test then is focused on what constitutes abusive arrangements. These are arrangements that cannot reasonably be regarded as a reasonable course of action having regard to the relevant provisions, their policy objectives and any shortcomings they may have (which the arrangement seeks to exploit). The legislation also specifically identifies features that might indicate the existence of abusive arrangements as being situations where the tax result doesn't follow the economics but it makes it clear that this is neither a necessary nor sufficient condition for the GAAR to apply.

The guidance notes are not to be incorporated into legislation but the legislation does make it clear that a court or tribunal must take the guidance into account. There is no clearance system (and you can't get a clearance through the back door by applying for a statutory clearance such as under the transactions in securities rules).

Making sure you are kept up to date

There will be an advisory panel who will issue non-binding opinions to HMRC or the Taxpayer on the application of the GAAR to a particular set of circumstances. These opinions wont be published but the panel will produce periodic reports setting out principles emerging from their opinions. They will also be responsible for approving the guidance notes. But it's unclear as to how and when the panel will be appointed. Legislation relating to the advisory panel is expected to be included in a schedule to the legislation which HMRC only intends to publish later in the year.

HMRC guidance

The consultative document contains example of situations where HMRC believe a GAAR would apply. The examples comprise of a number of cases which are basically situations where the tax result doesnt follow the true economic of the arrangement.

When it will all begin

The exact commencement provisions are still the subject of consultation. The effective date will be 1 April 2013. It's clear that the GAAR won't apply to tax advantages obtained from arrangements completed before this date. It’s also clear that the GAAR will apply to tax advantages obtained from arrangements entered into after that date. What is not clear is what will happen to arrangements that span the effective date; will they be exempt or will there be some transitional rules. Views are sought on this.

The consultation period ends 14 September. HMRC then plan to produce revised legislation in the autumn which will be the subject of further consultation with a view to including final legislation in the Finance Bill 2013.