Where the GAAR is in point, the tax advantages are adjusted on a just and reasonable basis.

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2 The General Anti-Abuse Rule (GAAR) The general anti-abuse rule will take effect from the date Finance Act 2013 receives Royal Assent. Further guidance was published on 21 March 2013, and it is anticipated that the legislation now forming part of Finance Bill 2013 with come into effect without any significant changes. The GAAR is not an extension to the normal principles of statutory interpretation, but is a freestanding provision which will come into operation when the application of other rules, for example targeted anti-avoidance, fails to prevent a tax advantage arising from abusive arrangements. Where the GAAR is in point, the tax advantages are adjusted on a just and reasonable basis. This document explains the main provisions and their implications in practice. 2

3 The key provisions The objective of this legislation is to counter tax advantages arising from tax arrangements that are abusive. The GAAR is one strand of HMRC s approach to tackling tax avoidance and is not intended to replace or supersede targeted anti-avoidance rules or any obligations under DOTAS. Furthermore, the purposive interpretation of legislation that has been developed through case law will continue to apply alongside the GAAR. Tax advantage A tax advantage (in relation to taxes covered by the GAAR including inter alia Income Tax, Capital Gains Tax, Inheritance Tax, Corporation Tax and SDLT) 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, Deferral of a payment of tax or advancement of a repayment of tax, and Avoidance of an obligation to deduct or account for tax. Tax arrangements 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. Arrangements include any agreement, understanding, scheme, transaction or series of transactions, whether or not legally enforceable. Arrangements can be wide or narrow, and can be part of wider arrangements. Abusive Tax arrangements are abusive if entering into them including: cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions, having regard to all the circumstances Whether the substantive results of the arrangements are consistent with any principles on which those tax provisions are based (whether express or implied) and the policy objectives of those provisions, 3

4 Whether the means of achieving those results involves one or more contrived or abnormal steps, and Whether the arrangements are intended to exploit shortcomings in the relevant tax provisions. This way of determining whether tax arrangements are abusive is termed the double reasonableness test. Cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions Relevant tax provisions includes both the primary and secondary legislation relevant to determining the tax consequences of the tax arrangements being considered. In order to consider whether the tax arrangements cannot reasonably be regarded as a reasonable course of action a number of factors will need to be looked at. Firstly, can there be a reasonably held view that entering into the arrangements is a reasonable course of action. This is not whether a judge, for example, personally believes this, but whether he considers that such a view may reasonably be held. Secondly, where there are conflicting views as to whether or not something can be regarded as a reasonable course of action, and those views are all reasonable, the tax arrangements will not be regarded as abusive. Thirdly, extreme views cannot be regarded as reasonable for these purposes and must be ruled out. The view, for example, that all tax is theft is an extreme view that would never be applied in applying this reasonableness test. Having regard to all the circumstances All the circumstances have to be taken into account to determine whether a tax arrangement is abusive. Otherwise, it might be possible to argue that it is reasonable to apply the provisions in the Duke of Westminster case, i.e. that it is not unreasonable for a taxpayer to pursue a legal course to improve his economic position by reducing his tax liabilities. The substantive results of arrangements need to be considered in terms of the tax results and the economic results. The principles on which tax provisions are based need to be considered carefully, taking into account both express and implied principles within the legislation. 4

5 The policy background The policy objectives of tax provisions, which are wider than the principles on which tax provisions are based, also need to be considered. In addition the nature of the steps, whether they are normal or contrived, and whether they are normal commercial arrangements for the particular industry may be relevant in looking at all the circumstances to determine whether the arrangements are abusive. Indicators of what is abusive Some indicators that might suggest that tax arrangements are abusive include situations where: 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 deduction 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. However, these situations could only be regarded as abusive if it is reasonable to assume that such a result was not the intended result when the relevant tax provisions were enacted. Indicators that tax arrangements might not be abusive Tax arrangements might not be regarded as abusive if the arrangements accord with established practice that has been accepted by HMRC. Established practice is easier to demonstrate than practice generally prevailing. Indicators are not sufficient on their own to establish whether a tax arrangement is abusive. Conversely, it is not necessary for any of the indicators to be present in order to conclude that arrangements are abusive. 5

6 How will the GAAR be applied? Tax advantages can be counteracted under the GAAR either by the taxpayer making an adjustment under self-assessment (despite not having received a notice to do so by HMRC, and despite the fact that no opinion has been given by the Advisory Panel (see below) on the abusive tax arrangements entered into), or through counteraction by HMRC. If HMRC wish to pursue any counteraction challenge it must follow a detailed procedural schedule whereby the designated HMRC officer (DO) needs to consider all representations and must refer the matter to the Advisory Panel. Only after the Advisory Panel has issued its opinion to both parties can the DO issue a final notice to the taxpayer on whether tax advantages are to be counteracted. The Advisory Panel The Advisory Panel is a committee established by the Commissioners, who appoints its members. The panel will represent a spread of interests including business, tax advisers and wider taxpayer interests. There will be no HMRC officers on the panel, which will provide a view that is independent from HMRC. The panel has two functions: to provide opinions on cases referred to it, and the approve HMRC s guidance on the GAAR. In order to provide its opinion the Chair will select three panel members with relevant expertise, who will form a sub-panel to provide one joint reasoned opinion if they agree, or separate opinions if they disagree. The objective of the sub-panel is to answer a single reasonableness question: in the view of the sub-panel members, is the arrangement a reasonable course of action? This is different to the double reasonableness test used to determine whether the tax arrangements are abusive. The Advisory Panel does not perform a judicial function and does not involve formal hearings where cases are presented and heard. However, a court or tribunal must take into account the opinions of the panel. A digest of anonymised key principles emerging from the Advisory Panel opinions will be published annually, and will be incorporated into the GAAR guidance. What tax arrangements are likely to be caught? Part B of HMRC s guidance sets out detailed examples of how the GAAR applies to a number of tax arrangements. The GAAR analysis of each example looks at a wide range of relevant circumstantial evidence, and addresses the fact that a court or tribunal can take into account any guidance, statement or other material that was in the public domain. This could include Hansard, Explanatory Notes, Written Ministerial Statements, academic literature, external practice, or HMRC guidance, as 6

7 well as evidence as to how particular arrangements are normally structured in the relevant market place. The preface to the examples also points out that it might be possible for the same arrangement carried out in different circumstances to lead to a different GAAR analysis. However, looking at the examples of tax arrangements that HMRC consider to be abusive, some overriding themes seem to emerge. A number of the examples involve schemes that were disclosed under DOTAS and if they were not, they involved an application or interpretation of statute that is unlikely to have been intended. Looking at the facts, it is often clear that one or more of the indicators of abusiveness are present. The examples seem to bear out HMRC s comments in the consultation document published on 12 June 2012: The GAAR aims to target artificial and abusive tax avoidance schemes which, because they are often complex and/or novel, could not have been contemplated directly when formulating the tax legislation. The GAAR should not affect. the centre ground of tax planning. 7

8 Conclusion General practitioners dealing with the routine tax affairs for their clients should not have to be concerned with the new GAAR rules. Furthermore, routine tax planning should not be affected by these rules. However, as planning becomes more complex and moves towards what might be regarded as a scheme, advisers will have to consider the application of the double reasonableness test. It will be interesting to see how these new rules develop, and also how HMRC seek to apply them. Disclaimer Whilst care has been taken to ensure the accuracy of the content of this document, no responsibility for loss occasioned to any person acting or refraining from action as a result of any statement in it can be accepted by the authors and Gabelle LLP. 8