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Article contributed by ACCA

The long-awaited general anti-abuse rule will take a targeted rather than blanket approach.

In 2010 Graham Aaronson QC was asked by the government to report on whether the introduction of a general anti-avoidance rule (GAAR) would be beneficial to the UK tax system. The report that followed in November 2011 concluded that a wide-ranging anti-avoidance rule would not be beneficial to the UK and recommended the introduction of a rule that targeted abusive arrangements.

In the Budget 2012 the government announced acceptance of the recommendation and, following preliminary consultation in 2012, it published proposed legislation on a general anti-abuse rule – also known as GAAR – for the Finance Bill 2013.

The operative date is set to be the date of the bill’s Royal Assent. The GAAR will have effect in respect of any tax arrangements entered into on or after that date.

Scope

The new legislation introduced in the Finance Bill 2013 will not alter current tax rules except to the extent needed to fit the GAAR into the existing framework.

The new measure will counteract tax advantages arising from abusive tax avoidance arrangements and will apply to income tax, corporation tax, capital gains tax, inheritance tax, petroleum revenue tax, stamp duty land tax and the impending annual residential property tax. New legislation will be introduced at a later stage to apply the GAAR to National Insurance Contributions (NICs).

The new measure targets tax advantages derived from abusive tax arrangements by allowing HMRC to make adjustments that are just and reasonable in order to reduce such tax advantages. Tax arrangements are defined in the draft legislation as those that could be reasonably considered as having as their main purpose, or one of their main purposes, that of obtaining a tax advantage.

Only ‘abusive’ tax arrangements are caught by the GAAR and they are defined as those whose setting up and execution cannot be reasonably regarded as a reasonable course of action in relation to the relevant tax provisions.

What is a ‘reasonable’ arrangement?

In considering whether tax arrangements could be deemed to be reasonable in respect of tax provisions, all circumstances should be taken into account, 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
  • whether the arrangements are intended to exploit any shortcomings in those provisions.

The draft legislation indicates as examples of abusive tax arrangements:

  • those that result in an amount of income, profits or gains for tax purposes that is significantly less than the amount for economic purposes
  • arrangements resulting in deductions or losses of an amount for tax purposes that are significantly greater than the amount for economic purposes
  • those that result in a claim for the repayment or crediting of tax that has not been, and is unlikely to be, paid.

However, if the tax arrangements are in line with established practice and HMRC had indicated acceptance of that practice at the time they were entered into, the arrangements are likely not to be abusive.

Counteracting tax advantages

The tax advantages that the GAAR is capable of counteracting include:

  • 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
  • avoidance of an obligation to deduct or account for tax.

The adjustments to counteract tax advantages may be made by way of an assessment, the modification of an assessment, amendment or disallowance of a claim.

HMRC may only seek GAAR adjustments by following detailed procedural requirements. In particular, the anti-abuse action must first be notified by a designated HMRC officer and, unless having considered representations made by the taxpayer the officer decides that the GAAR should not be applied, the arrangements must be referred to an advisory panel established by the Commissioners for HMRC for the purpose of the GAAR.

Where the anti-abuse provisions have been applied, the taxpayer will be able to claim consequential relieving adjustments that are just and reasonable within 12 months of the GAAR adjustment becoming final.

Additionally, in case of proceedings before a court or tribunal in respect of the application of the GAAR, HMRC must show the existence of abusive tax arrangements and that the adjustments are just and reasonable. In such respect a court or tribunal will take into account HMRC’s guidance on the GAAR that was approved by the advisory panel at the time the arrangements were entered into and any opinion of the panel about the arrangements.